Key provisions of the 2010 Affordable Care Act (ACA) create new Marketplaces for people who purchase insurance directly and provide new premium tax credits to help people with low or moderate incomes afford that coverage. We estimate that about 17 million people who are now uninsured or who buy insurance on their own (“nongroup purchasers”) will be eligible for premium tax credits in 2014. This issue brief provides national and state estimates for tax credit eligibility for people in these groups. We also estimate that about 29 million people nationally could look to new Marketplaces as a place to purchase coverage.

Eligibility for Premium Tax Credits

A key focus of the ACA is to reduce the number of uninsured by expanding the number of people who buy nongroup coverage. It does this by removing existing barriers that keep people with health problems from obtaining coverage, and by providing financial assistance through premium tax credits for low and moderate income people who purchase coverage through new state Marketplaces operated by states or the federal government. The Congressional Budget Office estimates that by 2018 around 20 million people covered in marketplaces will receive premium tax credits to assist them with their premium costs.

Under the law, people with incomes between 100 percent and 400 percent of the federal poverty level may be eligible for premium tax credits when they purchase coverage in a Marketplace. People who are eligible for other types of public or private coverage, for example Medicaid or coverage through an employer-provided plan, generally cannot claim a premium tax credit. These tax credits also are not available to people who are not lawfully present in the country or who are incarcerated. Legally residing immigrants who recently arrived in the country are eligible for premium tax credits despite being ineligible for Medicaid; they may qualify if their income does not exceed 400 percent of the federal poverty level.

The amount of tax credit that a person receives depends on their family income and the cost of health insurance where they live. The law establishes a maximum percentage of income that people within the 100 to 400 percent of poverty income range must pay for a benchmark plan where they live. The percentages range from 2% of income for people with income at the federal poverty line to 9.5% of income for people with incomes at four times federal poverty. If the premium that a person or family faces for the benchmark plan in their area is higher than the maximum percent of income defined in the law for their income, they are eligible for a tax credit and the tax credit is equal to the difference between the premium for the benchmark plan and the defined percent of their income. The benchmark plan is the second-lowest-cost plan in the silver cost-sharing tier offered through the marketplace for the area where they live. Additional explanations and examples are available by using the Kaiser Premium Subsidy Calculator.

People who are eligible for a premium tax credit can apply it to reduce the premium for any plan (other than catastrophic plans) offered in the marketplace. Their cost will be the actual premium for the plan that they enroll in minus the value of the premium tax credit they receive. One thing to note is that because marketplace premiums vary by age in most states, people with the same income but different ages will qualify for different premium tax credit amounts. In some cases, the premium for a benchmark plan for people at younger ages will be less than the defined percentage of income specified in the law; in this case the person would not receive a premium tax credit and would have to pay the full premium for any plan that they choose. However, they would still be able to purchase coverage, and their cost as a share of income will match the cost for others with comparable incomes. Premiums also vary by geographic area, which means that premium tax credits may differ for otherwise similar people if they live in different places.

How Many People are Eligible for Premium Tax Credits

We used data from the 2012 and 2013 Current Population Survey (CPS) Annual Social and Economic Supplement (ASEC) to estimate the number of people eligible for premium tax credits for marketplace coverage. The ASEC provides detailed information on family composition, income and insurance status for national and state samples of residents. We use that information to determine whether each individual would be eligible to purchase coverage through a marketplace and whether they would be eligible to receive a premium tax credit.

The analysis starts with a pool of people who have no insurance or who purchase nongroup insurance. People who are covered by a public program or by employer-based coverage are assumed to retain that coverage and would not be eligible for premium tax credits. Two other groups of people were then removed from this potential pool of tax-credit eligible individuals: uninsured adults and children whose incomes would make them eligible for Medicaid or CHIP and people who are not legally residing in the United States. Neither group is eligible for premium tax credits under the ACA. For those remaining in the pool, we looked at their family incomes under ACA rules and the premiums that they would face for benchmark coverage to determine whether they would qualify for a premium tax credit. The vast majority of potential eligibles with incomes between 100 percent and 400 percent of poverty would qualify for a tax credits; those who do not qualify in this income range are younger people who face a premium that is lower than the defined percent of income under the law. As a final step, we removed approximately 16 percent of potential eligibles because research shows that some people who are uninsured or have nongroup coverage have access to employer-based coverage, either through an offer from their own employer or through an offer through a spouse or parent. Those that remain in the potential pool constitute our estimate of tax-credit eligible individuals. A more complete description of this data and our methods is provided in the methods section below.

We estimate that over 17 million people nationally will be eligible for tax credits in 2014. The national and state totals are shown in Table 1. Three states (Texas, California, and Florida) each have more than 1 million tax-credit-eligible residents, and another seven states have more than 500,000 tax-credit-eligible residents. At the lower end, seven states have fewer than 50,000 tax-credit-eligible residents, with the District of Columbia (9,500) and Vermont (27,000) having the fewest. The five states with the most tax-credit-eligible individuals account for about 40 percent of all such individuals nationally.

How Many People Might Look to State Marketplaces for Coverage?

People eligible for premium tax credits are likely to look to new marketplaces when they want coverage because tax credits are only available to marketplace enrollees. Others looking to purchase coverage on their own also might want to purchase in new marketplaces, although nongroup policies will be available outside of marketplaces as well. Generally, nongroup policies written inside and outside of marketplaces will provide the same benefits, have the same cost-sharing tiers, and be subject to the same market rules.

We estimate the potential market for coverage in marketplaces by starting with current nongroup purchasers and uninsured people who are legally residing in the United States and who are not eligible for Medicaid or CHIP. We then excluded two groups from among the current uninsured. The first group is people with incomes above Medicaid eligibility levels but below poverty, referred to as the gap group. Because they are not eligible for financial assistance, few will have the means to afford nongroup coverage. We also excluded current uninsured people who are in a household of a full-time worker who either has or is offered employer-based insurance. As noted above, these people would be ineligible for premium tax credits, so we assume that they would choose employer-based coverage rather than nongroup coverage if they choose to become insured.

This calculation leaves about 29 million people nationally who might look to the new marketplaces. The largest potential markets are in the states with the largest tax-credit eligible population: California, Texas, and Florida. Six states have a potential market of more than 1 million people, and another 12 have a potential market of more than 500,000 people.

Discussion

The Congressional Budget Office (CBO) projects that 7 million people will enroll in health insurance exchanges in 2014, including 6 million who will be receiving tax credits to subsidize their premiums. Based on our analysis above, these enrollment levels would mean that 25% of potential exchange enrollees would choose to participate in year one of the ACA, with a slightly higher proportion of people eligible for tax credits (35%) buying coverage in an exchange.

From the perspective of delivering assistance to people eligible for it, enrollment in exchanges is a key measure, since tax credits are only available to those who buy coverage on their own in an exchange. It often takes time for enrollment in a new program to ramp up, and consistent with this view, CBO projects the number of people receiving tax credits in exchanges to triple by 2016.

The take-up of tax credits may vary significantly across states, for a variety of reasons. In the early stages of open enrollment, it’s clear that the enrollment process is working more smoothly in some state-based exchanges than in others, and the difficulties with the federal marketplace have been widely reported. In addition, significantly greater outreach and consumer assistance resources are available in state-based exchanges due to the availability of federal grants under the ACA and limited budget for implementation of the federal marketplace. Our estimates of the number of people eligible for tax credits by state can serve as a barometer for tracking the success of enrollment efforts.

The overall enrollment in Marketplace coverage is likely to be a metric that is watched closely. While it is not, in fact, the most relevant measure for assessing the stability of the individual insurance market, it may provide some signals as to the health of the market and where premiums may be heading in 2015.

More important than how many enroll is who enrolls – Are they disproportionately younger and healthier or older and sicker? And, it is the composition of the entire individual market that is important, not just who enrolls in exchanges. That is because insurers are required to set premiums for individual insurance market coverage across all plans they offer, inside and outside of exchanges. Also, the risk adjustment system – which will redistribute money from plans that serve disproportionately healthy enrollees to those that enroll a disproportionately sick population – applies to plans inside and outside exchanges as well.

However, the likelihood of getting a balanced mix of enrollees in the individual market is related to the total number of new signups. It is expected that people who have a pre-existing condition and have been excluded from the individual insurance market previously will likely be among the early entrants. In addition, many people in state-based high risk pools will likely switch over to the individual market as well. Therefore, low enrollment levels may indicate a disproportionately sick risk pool, while higher enrollment levels may suggest a more balanced pool. And, it is likely that many new entrants to the individual market will enter through Marketplaces, so the number and composition of Marketplace enrollment may be suggestive of how the market is doing overall. Because insurance pools operate at the state level, the composition of enrollment state-by-state will be what drives the stability of insurance markets. Enrolling a large number of young and healthy people in California, for example, would not offset low take-up in Texas.