Inviting Everyone to the ACA (Risk) Pool Party: Using Advanceable, Income-Based Tax Credits to Subsidize Purchases

The year 2014 marked the first opportunity for American taxpayers to receive subsidized health insurance through the Affordable Care Act’s (ACA) new Premium Tax Credit (PTC). About 4.8 million people enrolled in an ACA plan in 2014 were eligible, and nearly 97% of these claimants were approved for advance payments of the PTC. The year 2015 marked the first tax return where taxpayers received the unpleasant surprise that they must repay excess credits due to reconciliation. Advance PTC estimates turned out to be highly inaccurate, with only 8% of claimants receiving accurate advance payments. A majority, 51%, had to repay some or all of the advance payments. These figures reveal systemic problems in the PTC’s design. While the PTC’s function is to entice the uninsured to purchase insurance (and dive into insurance risk pools), reconciliation lurks as a financial danger for those who make the plunge. A shark is swimming in the pool. While many taxpayers will continue to buy insurance and claim advance PTCs, others may limit financial uncertainty by buying meager coverage and foregoing advance payments, and others may not buy any insurance. Those opting out or choosing to be underinsured are likely to be healthier. Such adverse selection is devastating to an efficient insurance market. This Article examines the PTC’s provisions and compares them with other social welfare benefits to glean lessons from their successes and failures. The Article uses those lessons to develop design goals for making the PTC a more effective program. The Article finishes with a series of concrete legislative and administrative reform proposals that could boost participation and reduce overpayments. This Article is of interest to anyone interested in health insurance reform and those interested in mechanisms for delivering targeted subsidies