If a recent appeals court decision holds up, many middle-class families will lose federal subsidies to buy insurance. But high-income families can still get help.
A recent decision by a federal appeals court has put an essential feature of the Affordable Care Act, better known as Obamacare, in danger. That ruling may not stand up in the next round of appeal. But if the court’s decision survives, it will create a troubling—and, I would argue, outright perverse—inequality.
The quick backstory: Opponents of the new health care law argued in court that a strict reading of the law doesn’t allow the federal government to subsidize individual insurance premiums in states that have not set up their own “exchanges,” online marketplaces where people can go to buy coverage. The D.C. circuit court agreed, while another court the same day reached the opposite conclusion, setting up a likely showdown in the Supreme Court next year. If the ruling stands, millions of people in up to 36 states could lose federal tax credits that helped make insurance affordable.
What’s so perverse about this is that while many low-income and middle-income people would no longer get help from the federal government to buy insurance, loads of affluent people still will.
Here’s why: Even before Obamacare, the federal government played a big, but hidden, role in funding the private health insurance of most working-age people. When you get insurance at work, the money your employer pays for your premiums isn’t included in your taxable compensation. That’s a valuable tax benefit to you, but that lost revenue costs the government just as much as if was cutting a check.
This system has done a lot to encourage companies to offer health insurance, which is a good thing. But it also had a surprisingly backwards effect. Affluent people are more likely to have coverage (and costlier coverage, too). And because they face higher tax rates, they benefit more from tax breaks. As a result, you get more from this hidden subsidy the more you earn. The Tax Policy Center recently estimated that the average benefit of the health-insurance tax break is about $800 for a household in the middle 20% of earners. For people in the top 20%, it’s $3,400.
Prior to the Affordable Care Act, tax subsidies for health care you bought for yourself were much stingier. One of the points of the law was to address this gap. Families earning less than 400% of the poverty line—as high as about $95,000 for a family of four—currently get a tax credit when they buy coverage on a state exchange or the federal Healthcare.gov. Now that particular subsidy is under threat in some states. But the tax break for employer insurance will still be around for those fortunate enough to have an employer who pays up for premiums.
Of course, if this happens—and I should stress if—it wouldn’t exactly be new. This is how health insurance worked everywhere in the country before the ACA. But people on both sides of the political spectrum knew that was a crazy system. And now, the difference would be all the more glaring, since some Americans buying their own insurance would still get help, and others wouldn’t—all based on the technicality of whether their state set up a website.