What’s at Stake in the Shutdown Fight: Enhanced Premium Tax Credits, Explained

At the heart of the current federal budget standoff lies an esoteric but consequential policy choice: whether to extend the enhanced premium tax credits (EPTCs) that help millions afford health coverage. But what exactly are EPTCs, and what would letting them expire mean? 

The Affordable Care Act (ACA) marketplace was set up to provide individuals the ability to purchase health insurance for themselves and their families. It was part of the ACA’s larger strategy to extend health insurance coverage to as many as possible: expand Medicaid eligibility, require employers of 50 or more to provide adequate and affordable coverage through employer-sponsored insurance (ESI), and provide an individual market option for those not eligible under other categories (e.g., independent contractors, self-employed workers, and employees of small businesses). 

The ACA also made important changes to the way insurance companies were allowed to do business. They were no longer allowed to deny health insurance to individuals because of “preexisting conditions,” and they could not charge people more for having those conditions or for “lifestyle” factors like obesity. Of course, insurance companies only make money if they take in more than they pay out, and that is harder to do when they are required to cover everyone and to do so at the same price regardless of risk. So the ACA included a variety of sticks and carrots to encourage younger and relatively healthier people to obtain health insurance. This included the “individual mandate”—a tax imposed on individuals who did not purchase insurance coverage—and the “premium tax credits.”

The premium tax credits are meant to subsidize the cost of purchasing an insurance plan on the ACA marketplace. They are available to people who do not already have adequate and affordable health insurance coverage offered through their employer (whether or not the employer is subject to the mandate). They are fully refundable and in many cases can be claimed in advance and paid by the government directly to the insurer at the time of purchasing insurance on the marketplace. In theory, they should have made quality health insurance affordable for consumers and profitable for insurers to offer. However, things didn’t go as planned for the ACA.

The Supreme Court made the Medicaid expansion optional for states, and several states have refused to implement it. That means millions are trapped in the “Medicaid gap”: too poor to qualify for the ACA marketplace and not poor enough to qualify for legacy Medicaid.

The Supreme Court made the Medicaid expansion optional for states, and several states have refused to implement it. That means millions are trapped in the “Medicaid gap”: too poor to qualify for the ACA marketplace and not poor enough to qualify for legacy Medicaid. And those who did qualify for the marketplace in these states often found insurance too expensive to purchase even with the subsidy support. On top of this, Congress, as part of the Tax Cuts and Jobs Act of 2017, set the individual mandate penalty to $0, effectively ending it. 

Meanwhile, the premium tax credits proved to be inadequate more generally. Individuals were expected to contribute to their premiums on a sliding scale according to their household income. For example, those between 100 and 133 percent of the federal poverty line (FPL) were expected to contribute 2.1 percent of their income to premiums each year. This percentage rose and the subsidy fell as income rose until the household reached 400 percent of the FPL, at which point the subsidy abruptly ended in a cliff. 

There was no theory behind these numbers or this range. They were merely what could be offered given the politically feasible revenue structure available when the ACA was first passed. This meant that the marketplace was unaffordable for millions of American families—a problem that, when combined with the end of the individual mandate, threatened the health of the marketplace. When insurance becomes too expensive and there is no penalty for remaining uninsured, those who opt out tend to be younger and healthier, while those who stay enrolled are generally older or have greater health needs. Economists call this “adverse selection.” This dynamic has led some insurers to leave the marketplace and others to raise premiums to offset the higher costs of a poor “risk pool.”

When the Biden administration took office, it introduced a series of measures to strengthen and improve the ACA marketplace. The Internal Revenue Service (IRS), for example, addressed the long-standing “family glitch,” which had created problems in how employer-sponsored insurance affordability standards interacted with premium tax credit eligibility. Most significantly, the American Rescue Plan Act “enhanced” the premium tax credits, making them more generous and expanding eligibility by removing the 400 percent FPL subsidy cliff. Under these changes, families below 150 percent of the federal poverty line no longer have to contribute anything toward premiums for a benchmark silver plan, and families at higher income levels pay substantially less than they would have before.

The result has been tens of millions of new marketplace users, over 4 million people no longer uninsured, a healthier marketplace with more options, and many millions of dollars in savings for millions of American families. Sounds good, right? Unfortunately, despite a previous extension as part of the Inflation Reduction Act, these enhanced premium tax credits are set to expire at the end of the year. As with many initiatives passed through budget reconciliation, the EPTCs were not made permanent. And the most recent reconciliation package did not include an extension of the EPTCs, leaving their future uncertain. So what will happen if there isn’t a deal before then?

The premium tax credits won’t go away entirely, but they would default back to their original inadequate levels. Some families will no longer be eligible for the tax credits at all. Those still eligible will see their total subsidy drop considerably. Experts expect almost 5 million people to lose their health insurance as a result. This will hit rural communities and people in states, mostly in the South, that have not expanded Medicaid particularly hard. Millions more will only be able to maintain health insurance coverage by downgrading their plan to one with higher deductibles and more limited coverage, a recipe for more medical debt in a country that already has a medical debt crisis. The marketplace will become more expensive, not just because of the lost subsidies but because of another factor: Remember adverse selection and the risk pools? The first people to leave will be relatively younger and healthier. Those who stay behind will be relatively sick. As a result, insurers will have to raise their premiums because the average cost of insuring sicker people is higher (which can set off further cycles of pool shrinking and cost increases). In fact, in anticipation of the expiration of the enhanced tax credits, insurers are already promising enormous increases in premiums. And others may throw in the towel altogether. 

So there will be fewer, more expensive options. And there will be less aid to cover these more expensive options . . . a “double whammy” that will subject millions of families to truly shocking costs at a time when they are already struggling with rising prices.

So there will be fewer, more expensive options. And there will be less aid to cover these more expensive options . . . a “double whammy” that will subject millions of families to truly shocking costs at a time when they are already struggling with rising prices. In the long run, reverting to the pre-2020 status quo may even call into question the continued viability of the marketplaces. It’s a disaster dwarfed in impact only by the Medicaid cuts recently set in motion through the 2025 budget reconciliation bill.

For all its inadequacies and for all the legislative and legal setbacks, the ACA represented a huge improvement over the situation before, a world where becoming sick or injured could mean becoming permanently uninsurable. It created a framework that could be built upon to make health insurance more affordable and a better shield against the vicissitudes of life. The enhanced premium tax credits were an important step in that effort. They are worth defending.