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Report: Obamacare Subsidies Not as Broad as Advertised

Obamacare’s subsidies may not reach the level the law intended, which could discourage many young people from buying health insurance, according to a study released Monday by the National Center for Public Policy Research.

Obamacare provides a federal subsidy for everyone who buys insurance on the federal exchanges and who makes between 100 (or 138 in some states) and 400 percent of the federal poverty level—between $11,940 and $45,960 per year. This subsidy is graduated so that people earning more receive a smaller subsidy than those earning less.

However, the new study found that many people making well below 400 percent of the poverty line will not receive any subsidy because of the way in which the subsidy’s amount will be calculated.

This will hit younger people harder than older people, said David Hogberg, a health care policy analyst at the National Center for Public Policy Research and a coauthor of the report. Hogberg wrote the report with Sean Parnell, president of the public policy research group Impact Policy Management.

The subsidy is calculated in two steps.

First, the federal government determines how much an individual should contribute toward health insurance based on a federally set "applicable percentage." Then, this amount is subtracted from the cost of the "silver level" insurance plan (insurance plans are grouped into four tiers, with silver being the second lowest). The remaining amount is the size of the subsidy.

However, the amount that an individual has to contribute will match or exceed the cost of health insurance for many people, especially younger people, who make under 400 percent of the federal poverty line, according to the study.

Hogberg and Parnell looked at 15 different exchanges that have released age-specific insurance premium rates. The sample varies geographically and includes both states that are running their own exchange, such as Oregon and California, and states for whom the federal government is running the exchange, such as Georgia and Montana.

The level at which people will stop being eligible for a subsidy shifts based on the state and the age of those buying insurance, the study shows. The cost of insurance is lower for younger people than older people because younger people tend to be healthier and need heath care services less often, meaning their expected contribution is more likely to cover the whole cost of insurance.

The income level at which individuals will no longer receive a subsidy ranges for 18-20 year olds from 177 percent of the federal poverty level (in Minnesota) to 230 percent (in Maine). For a 34 year-old, the range is 236 to 340 percent (in Minnesota and Maine again, respectively).

A 45 year-old making 400 percent of the poverty line will be eligible for a subsidy in only two of the exchanges.

The study shows that the exchanges will not provide as robust financial support to young people, the demographic the exchanges must enroll to be economically viable, as the law initially promised.

"Any insurance pool that attracts not younger, healthier people but older, sicker people is headed for trouble," Hogberg said.

The insurance exchanges need a certain amount of young people to sign up to make them viable. Seven million people nationally are expected to sign up for insurance, and 2.7 million of them need to be younger to keep the exchanges viable financially.

Because younger people cost insurance companies less, their premiums subsidize the higher costs of older and more costly people and help the insurance companies stay afloat.

The purpose of the law was to increase insurance coverage by insuring those who are uninsured, many of whom are young. However, the subsidy structure could backfire, Hogberg argued.

"The way the exchanges are set up, and the subsidy structure is part of that, you’re more likely to end up with more, possibly even larger, numbers of people 18-34 who are uninsured," Hogberg said.

Other provisions of the law have raised the cost of health insurance for young people in many states. Oklahoma, Georgia, and many other states have announced significantly higher rates, especially for young men.

"It’s another example of why you don’t want the government designing the healthcare system," Hogberg argued.

Hogberg predicted that the coverage cut-offs could trigger a "death spiral," where too few young people sign up, leading premiums to rise, causing more young people to drop out, causing premiums to rise further, until the system is completely unaffordable and unsustainable.

A spokeswoman for Oregon’s exchange agreed with the report’s description of the subsidies’ structure but expressed confidence in the structure’s effectiveness.

"It makes insurance affordable for all people," said Ariane Holm, a public relations official with Cover Oregon. "The rules set up a threshold maximum premium (as a percent of income) an individual will pay by FPL (Federal Poverty Level). Given age rating, younger individuals have cheaper insurance premiums and therefore will likely have lower subsidy amounts."

The Department of Health and Human Services, which is implementing the exchanges in 34 states, did not return a request to comment on the report.