The Schumer-Manchin deal’s ACA provision creates another budgetary ‘cliff’

While the drug pricing provisions of the Schumer-Manchin deal have gotten significant attention in the media, there has been less focus on the measure's highest cost non-climate provision: a three-year extension of enhanced premium subsidies under the Affordable Care Act (ACA). Continuing these subsidies through 2025 would signal a major entitlement expansion, and also create the kind of "benefit cliff" that Senator Manchin had previously vowed to oppose.

In section 12001 of the draft Schumer-Manchin bill (which may undergo more changes in the coming days), the higher subsidies for insurance enrollment created in the American Rescue Plan (ARP), which was passed by Congress in early 2021, would be continued through 2025 instead of terminating at the end of 2022. The Congressional Budget Office (CBO) estimates the extension will cost a total of $64.1 billion (through a combination of higher spending and lower tax receipts).

The enhanced subsidies are based on the ARP's revised schedule for calculating maximum premiums, as restated in a recent CBO analysis and replicated here:

Under the original ACA, premium subsidization was tied to household income and the cost of a benchmark plan, which was specified as the second-lowest cost silver plan in a consumer's market area. The law then stipulated a schedule of the maximum premium households would pay for such coverage based on their incomes (measured relative to the federal poverty line, or FPL). So, for instance, in 2023, under the original ACA schedule, a household with an income of 150 percent of the poverty line would pay a maximum premium of 4.08 percent of its income when enrolling in the benchmark plan. If the benchmark plan charges a premium above that maximum household premium, the federal government would cover the added cost. Households are allowed to take this premium credit and use it to offset the cost of any plan sold through the ACA exchange.

The percentages used to calculate the maximums also were adjusted over time to hit the original budgetary goals of the ACA. For instance, in 2014, the maximum premium for households with incomes between 300 and 400 percent of the FPL was 9.5 percent of their incomes. Subsequent adjustments have steadily increased the percentage to the point where it will be 9.7 percent in 2023 if the original ACA schedule becomes operative again.

For 2021 and 2022, the ARP specified a different, and more generous, schedule of subsidization. All households with incomes between 100 and 150 percent of the FPL can enroll in a benchmark plan without paying any premium. Further, households with incomes above 400 percent of the FPL are now, for the first time, eligible for premium assistance, with the maximum premium set at 8.5 percent of their incomes.

Under the Schumer-Manchin bill, this schedule would continue through 2025, and the ACA's original system of annual adjustments would be suspended too.

The higher subsidies provided by the ARP schedule has induced higher enrollment in health insurance, and CBO expects that would continue if the subsidies were extended beyond 2022. However, because the higher subsidies are paid both to those who are currently insured and to the otherwise uninsured, the spending per newly insured is high. According to CBO, if the ARP schedule of subsidies were made permanent, the average annual cost would be $24.8 billion, or more than $11,200 per newly insured individual.

The ARP's higher schedule of subsidies also provides the highest bump-up in support, measured in nominal dollars, to households with higher incomes. According to the Kaiser Family Foundation, the average annual subsidy increase for households with incomes between 400 and 600 percent of the FPL is more than $2,500 under the ARP. For households with incomes between 150 and 250 percent of the FPL, it is $540. The average annual support for those with incomes above 600 percent of the FPL is $960.

Senator Manchin insisted on deficit reduction when negotiating this deal with Senator Schumer. And, on paper, CBO says it will lower future deficits.

But that is only the case because of some questionable assumptions, including the termination of the ARP's schedule of higher ACA subsidies after 2025. CBO estimates that a permanent extension would cost an additional $184 billion through 2032. If the higher funding for the Internal Revenue Service is less effective than CBO assumes in producing new revenue (which is entirely possible), the Schumer-Manchin deal could easily add to future deficits rather than reduce them.

Senator Manchin deserves real credit for rejecting the much more costly measures that many in his caucus supported. The deal he struck with Senator Schumer, by comparison, is a modest piece of legislation.

However, the claim that it represents real progress in addressing the nation's fiscal challenge is false. The bill would vastly expand the cost structure of the ACA, with offsets that are much less likely to produce what has been promised.

Learn more: Updating Medicare's Physician Fees Is a Challenge Again | Mini-BBB's Shaky Deficit Reduction | The Public Option Debate Moves to Colorado

The post The Schumer-Manchin Deal's ACA Provision Creates Another Budgetary "Cliff" appeared first on American Enterprise Institute - AEI.