Policy Reasons to Not Extend Covid-Era Enhanced ACA Subsidies

The recent lengthy federal government shutdown was caused by demands to extend COVID-era enhanced subsidies for Affordable Care Act (ACA) health insurance policies. In its discussions of the subsequent congressional votes, the media has focused on the increase in premiums and potential loss in coverage that would result for current enrollees from a non-extension, often expressing exasperation that Congress has not passed the extension. Relatively little attention has been paid, however, to the merits of the policy itself. In this blog post, I briefly discuss its direct costs, its fairness, the fraud it engenders, and its adverse consequences for work incentives and for the cost and functioning of the health care system.

Although the legislative proposals to extend the enhanced subsidies range from one to three years, once extended they would likely be extended again, as the losses from expiration would be visible while the policy arguments have not mattered. Attention should therefore focus on the cost of a permanent extension. The Congressional Budget Office estimates it would increase the deficit by $350 billion from 2026 to 2035. The proposals include no offsets for this cost, despite unprecedented deficits currently and projected into the future.

The COVID-era enhancements reduced what households with income between 100 and 400 percent of the federal poverty level (FPL) must pay for a benchmark plan, including eliminating premiums for those below 150 percent of FPL, and removed the prior subsidy cap at 400 percent of FPL. Exchange enrollment rose sharply from previously stagnant and below-projected levels. In high-premium areas, owing to limited insurer competition or provider consolidation, older and affluent households now receive substantial subsidies. For example, in Prescott, Arizona, a family of five with a 60-year-old household head faces a $52,176 premium in 2025. With an income of $350,000, the family receives a $22,426 subsidy because premium payments are capped at 8.5 percent of income and does not disappear until income exceeds $614,000, within the top one percent of earners. By contrast, workers with employer-provided insurance receive only the tax exclusion for employer-paid premiums from income and payroll taxes. For example, a family with two 35-year-old parents, two young children, and income of $64,300, or 200 percent FPL, receives $22,017 in exchange credits, compared with a tax break of $5,904 under employer coverage, according to calculations by Brian Blasé and John Graham.

These examples demonstrate several important effects of ACA subsidies, particularly the enhancements. Because the subsidies are not tied to employment, they discourage work. They also encourage early retirement, as retirement income becomes available, and the government subsidizes health insurance. Relatedly, the subsidies incentivize employers to drop health coverage for workers and retirees. Data from the Kaiser Employer Survey show that among firms with 25 to 49 employees, which are not subject to the ACA employer mandate, the share offering health insurance fell from 92 percent in 2010 to 70 percent in 2020 and to 64 percent in 2025. Recent reporting indicates that several large cities eliminated retiree health plans and moved pre-Medicare retirees to subsidized exchanges. The subsidies are also quite unfair to those low-income workers covered by large employers compared to high-income workers at small firms not offering coverage or early retirees.

Large subsidies with few restrictions and limited oversight invite fraud. The Government Accountability Office (GAO) found that exchanges enrolled 23 of 24 fictitious applicants using fake Social Security numbers (SSNs) and did not require documentation to verify citizenship or reported income. GAO also reported no evidence of tax reconciliation for more than $21 billion in subsidies for 2023, as the Biden Administration paused reconciliation enforcement from 2021 through 2024. GAO identified more than 66,000 SSNs showing over 366 days of coverage in 2024, including one SSN with 26,000 days of coverage. Blasé also found evidence consistent with fraud and waste arising from the enhanced subsidies. In 2025, 55 percent of exchange enrollees were classified below 150 percent of FPL, up from 40 percent in 2021. Within this group, 40 percent filed no claims, up from 20 percent, despite coverage of free preventive services.

Even aside from higher demand arising from comprehensive third-party coverage, the ACA subsidy structure itself may raise health care costs and create a cycle of pressure for continually larger subsidies. The enrollee's premium contribution is capped, unlike most health insurance, including Medicare, where enrollees pay a percentage of the premium. This structure weakens incentives for insurers to compete on greater value in their products. Taxpayers' share of exchange premiums rose from 68 percent in 2014 to 93 percent in 2025, according to Blase.

These points argue against extending the enhanced subsidies. They also support pursuing policies that slow the growth of health care prices, including incentives to use AI to improve productivity and market-based reforms such as price transparency, increased competition, and greater consumer choice.

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