Week 6: ACA Market Turbulence – Subsidy Fights & Government Shutdown

The majority of people in the United States get their health insurance coverage via an employer or a government program like Medicare or Medicaid.

For those without access to job-based coverage and who do not otherwise qualify for a government program, there’s what we call the individual market.

People shop and enroll in health insurance on their own, often with the help of licensed agents.

The Patient Protection and Affordable Care Act (ACA or “Obamacare”) passed in 2010 and, beginning in 2014, made sweeping changes to how the individual market operates. We’ll focus on the subsidies here, but if you want to learn more about how it changed things, check out this great overview from KFF.

Why subsidies? Two reasons. 

1. Insurance is expensive. Many lower-income households simply could not afford the monthly premiums and/or made the hard choice to forgo coverage to spend on other household essentials. Some version of, “Well, if I get sick the ER has to see me…”
2. Insurance would get more expensive. The ACA included popular provisions meant to improve the availability and underlying quality of health insurance coverage. Examples include things like coverage for pre-existing conditions, establishing a set of essential health benefits all plans must cover, removing benefit caps, and eliminating medical underwriting – a fancy way of saying premiums (costs) would no longer be determined based on your health status. BUT, this also meant higher costs for this “better” health insurance coverage. There’s no free lunch + now more unhealthy people with high costs would be in the insurance risk pool, driving up costs across the board.

Want everyone to get covered? Then the government needed to step in and help pay for the cost of these insurance plans.

The ACA created two types of subsidies:

1. Premium Tax Credits (PTCs):

This is a monthly amount based on your household income, age and location. Available to people between 100-400% of the federal poverty level (FPL), these subsidies are paid in advance directly to the insurance carriers by the government with the policyholder only paying the net premium (total premium – tax credit) each month. Since they’re paid in advance, they’re supposed to be reconciled via tax filings with some people paying $$ back to the Feds and vice versa.

Example: Jon Doe goes on the marketplace (aka “exchange”) website for his state. He enters his expected household income for the year and his age. The calculator says he’s eligible for $400 / month in premium tax credits. He goes through the health plans on the exchange website and sees each one discounted by $400. He enrolls in a Blue Cross plan with a total premium of $500. Each month Jon pays Blue Cross $100 (the net premium). The government forks over the other $400 in Advanced Premium Tax Credits (APTCs) on Jon’s behalf directly to Blue Cross. At the end of the year Jon files his taxes. Turns out he underestimated his household earnings so he owes some extra money back to the government. D’oh!

2. Cost Sharing Reductions (CSRs):

For people between 100-250% FPL, if they enroll in a Silver tier plan, then the cost shares are reduced (i.e., lower deductibles, copays, etc.). Generally speaking, it means that for lower income people the Silver plans are cheaper and better than the Gold & Platinum plans. Yea, I agree… as if health insurance wasn’t confusing enough, what were the lawmakers thinking here?!

For our purposes, let’s ignore the CSR subsidies. This current drama is all about the premium tax credits (PTC) as these subsidies are what everyone is talking about. Want to understand how PTC subsidy amounts get determined? There’s calculation formulas running in the background on the exchanges based on age, household income and location. The age and location is because insurance premiums vary by age and geography. As for household income, the formula says the lower your income, the higher the subsidy. I’ll spare you the wonky details. The easiest way to quickly grasp how these work in practice is to just poke around on the public exchange websites. For example, here’s a helpful link for Healthcare.gov – experiment with different inputs.

Shortly after Joe Biden took office as the 46th President and the world was one year into the pandemic, the Democrats pushed through the American Rescue Plan Act (ARPA) in March 2021. Like most things in Washington, it was incredibly partisan without a single Republican voting for it in either chamber. We’re no experts on ARPA and its many provisions, but the high-level summary is that it was a $1.9 trillion economic stimulus package.

Among many other things to spend money on, ARPA increased the subsidies for people getting covered through the individual market exchanges. the center of a big debate.

ARPA made two big changes to the ACA Subsidies:

1. New Formula for Premium Tax Credits

For calculating PTCs, a sliding scale formula is used that looks at the price of a silver plan in the person’s local market vs. their expected household income. The new formula moved this sliding scale down so that people were expected to pay less for insurance and thus receive more $$ via ‘enhanced subsidies.’

2. Removing the 400% FPL Barrier

Prior to 2021, there was a hard “subsidy cliff” if people made $1 more than 400% FPL. For example, back in 2020 a single person making $51,000 (or roughly 4x$12,760) could qualify for some premium support but someone making $51,050 could not. Note: This is not to say that now everyone qualifies for a subsidy. There’s still a formula operating in the background looking at household income, age and geography to determine eligibility. There’s just no hard cutoff point.

Do we think most Democrats understood the detailed mechanics here?

Absolutely not. But, this was part of a broader theme in government they pushed at the time to ensure people had access to care and coverage. Looking for another example? Around the same time, the federal government required states to stop checking if people on Medicaid still qualified for coverage via periodic eligibility checks. Our nation’s uninsured rate never looked so good. 

These changes to the subsidies were initially only slated to run through 2022 via ARPA. But, the also partisan Inflation Reduction Act (IRA) of 2022 extended the enhanced subsidies through the end of 2025. Hence now here we sit at the end of 2025 amidst a Republican administration in DC with the issue at the center of a big debate.

Thanks to the enhanced subsidies, the net monthly premiums most people had to pay decreased quite a bit.

Make something cheaper and people will consume more of it.

In fact, for millions of people the health plans available through the exchanges did not just get cheaper, they became altogether “free.” How? For many the new subsidy formula meant the PTCs would fully cover the monthly premiums of the plans they chose. They could sign up for $0 premium coverage and sit back while the federal government paid the full premium to the insurance company each month.

Health insurance agents across the country drove awareness along with government and private sector funded marketing campaigns. The result? From 2021 – 2025 the ACA individual market doubled in size from 12 to 24 million covered lives. See KFF chart.

Source Link: https://www.kff.org/affordable-care-act/enrollment-growth-in-the-aca-marketplaces/

An additional market level benefit of these lower consumer costs is that it can entice more healthy people to get covered. Healthy people naturally have a lower willingness-to-pay for insurance. Make it close to or actually free and more healthy people with low claims (i.e., costs) will sign up for coverage.

This created a ballast effect on the market, keeping premiums in the individual market stable as it grew – resulting in lower year-over-year premium increases relative to the employer-sponsored group health insurance market. Ideon has created data map visualizations that show these relative changes in action from 2017-2025. Here’s the link. Notice how the map gets more green in regions over time.

When Donald Trump won re-election and the Republicans took control of both chambers in Congress, the enhanced subsidies were already a hot topic in health policy circles. Now it was en fuego.

Everyone correctly presumed the Republican party in DC would have zero natural inclination to keep the enhanced subsidies in place.

So… what happens when they expire at the end of 2025? A few things. 

• People will get lower subsidy amounts in 2026, increasing net monthly premiums
• Higher monthly premiums mean fewer people will sign up and the market shrinks
• The people who remain are likely, on average, to be less healthy – increasing costs
• These higher expected costs create a worsening risk pool and drive up premiums
• Thus… even if you do not receive a government subsidy, your premiums are increasing

How much will the market shrink?

No one knows for sure, but Wakely issued a report estimating it’d be cut in half – essentially back to the size it was prior to 2021. This uncertainty and the expected shrinkage in the market has led to much higher insurance premiums for next year. Charles Gaba at ACASignups.net has tracked this closely and calculated a nationwide average increase of 23% on unsubsidized premiums. 

It’s worth noting the ACA individual market is also poised to shrink due to some regulatory changes in how the exchanges are administered.

We’re all adults. We know the inherent and important balance in the phrase “trust but verify.” To over-simplify things, under the Biden-led Democratic administration the exchanges were operated in a way where “trust” was emphasized. This opened them up for potential fraud. Right-leaning health policy think tanks like the Paragon Health Institute have been all over this. The real question no one knows for sure… how much of the growth on the exchanges is “fraudulent?”

The new administration has made it clear there’s a new sheriff in town.

While we’ll spare you the wonky details, the program integrity rule issued in Summer 2025 by CMS reverses many policies enacted during the Biden era and introduces new administrative red tape that swings the pendulum back to “verify.” These efforts are meant to and likely will root out bad actors. However, it’s also true that when there’s more administrative burden on people, some are likely to say, “why bother?,” thus leading to fewer people enrolling in coverage.

Recognizing the renewed enthusiasm for cost-cutting in the current administration, nearly the entire healthcare industry has lined up to lobby for extending the enhanced premium tax credits.

From an industry perspective, it’s not just the insurers and insureds here who stand to lose. Per the ACA, 80% of every premium dollar must go towards medical costs. Thus, the majority of the funds in these enhanced subsidies end up in the hands of healthcare providers. Hospitals and doctors across the country face potential revenue headwinds if they now have to provide more care to uninsured patients who may have previously been on an ACA individual plan.

As we write this, it’s early October 2025 and the US federal government has shut down.

DEMOCRATS: The Democrats have decided they do not want to play ball with the Republicans in power and fund the government. Why? They are pointing out concerns about the end of enhanced premium tax credits in the exchanges. This issue has become the hill they’ve decided to take a stand on. The political bet is that the heat on Republicans will get turned up once people start seeing their health insurance premiums spike for 2026. 

FISCAL CONSERVATIVES: Some fiscal hawks on the Republican side have made it clear they will not support an extension of the “Covid subsidies” that should naturally expire alongside many other temporary provisions put in place during the pandemic. In addition, conservative stalwarts like the Wall Street Journal editorial board have lined up against extending the subsidies.

ROOM FOR NEGOTIATION? Others have expressed openness to negotiating a bipartisan resolution of some kind. But, importantly, the Republicans want this negotiation to happen outside of the government funding discussions while the government is shut down.

Republicans claim there’s a few months still to get it sorted ahead of 2026. This may technically be true but this view ignores reality.

Time is working against the Legislators here as health insurance carriers have already had to file and get approval for 2026 premiums. In addition, Open Enrollment on the exchanges begins November 1st. When people shop for 2026 coverage in a few weeks, will they know how much PTC subsidy they can expect each month to help with the costs? Of course this impacts decision-making. Consumers and the licensed insurance agents helping them are navigating a lot of uncertainty…

The clock is ticking. We’ll see what happens.