Having a degree in mechanical engineering has come in handy in my law practice more often than I thought it would.  For example, it came in very handy over the last few weeks, as I translated the language of sections 1401 and 1402 of the Affordable Care Act (and the associated Federal Register publications) into a series of Microsoft Excel formulas to calculate estimates of the individual subsidies that one might expect to receive for buying health insurance coverage through an ACA Exchange starting on October 1 of this year.

There are two main kinds of subsidies that eligible individuals and families can receive for buying health insurance through an Exchange: (1) the “premium assistance credit” (a refundable tax credit); and (2) the “cost sharing reduction” (a fancy way of saying the policy has to have a lower out-of-pocket limit).  Both subsidies depend on the taxpayer’s family income:  the premium assistance tax credit is available to taxpayers with family income between 100% and 400% of the federal poverty level, and the cost sharing reductions apply to families between 100% and 250% of the poverty line.  The cost sharing reductions apply only to “Silver” level plans, while the tax credit is at least theoretically available for the purchase of any metallic level of coverage.

Disclaimers: The formulas and regulations are fairly complex, we are neither accountants nor actuaries, and our information isn’t complete.  Our biggest blind spot is that we do not yet know what the premiums will be for health insurance policies purchased through an Exchange.  That makes a huge difference in the size of the premium assistance tax credit.  Also, it’s hard to put a dollar value on the cost sharing reduction, because that reduction only has value to an individual or family whose out-of-pocket spending would exceed the cap.  But we do know exactly what the maximum cost sharing amounts for “Silver” plans on the Exchange will be in 2014 for families in certain income categories, and we can put a maximum potential value on the reduced cost sharing cap by comparing that value to the maximum cost sharing that would otherwise be allowed.

For purposes of the following hypotheticals, we’ve used the same projected premiums as the Kaiser Family Foundation calculator.  We’ve further assumed in each case that the person or family enrolls in the second least expensive “Silver” level plan, because that decision maximizes the available tax credit, and that the family would have high out-of-pocket medical expenses, because that maximizes the value of the cost sharing reduction.  (And yes, we deliberately contrived factual scenarios to illustrate the broad range of potential outcomes.)

Individual, Age 21, No Tobacco, Earning $26,000 Annually

Annual Premium

Refundable Tax   Credit

Maximum Cost   Sharing for Silver Plan

Maximum Potential   Value of Reduced Cost Sharing Subsidy

Total Subsidy

$3,018.00

$1,140.82

$5,200.00

$1,150.00

$2,290.00

 

Individual, Age 40, No Tobacco, Earning $34,000 Annually

Annual Premium

Refundable Tax   Credit

Maximum Cost   Sharing for Silver Plan

Maximum Potential   Value of Reduced Cost Sharing Subsidy

Total Subsidy

$3,857.00

$667.37

$6,350.00

$0.00

$667.37

 

Family of 4, Age 40, No Tobacco, Earning $65,000 Annually

Annual Premium

Refundable Tax   Credit

Maximum Cost   Sharing for Silver Plan

Maximum Potential   Value of Reduced Cost Sharing Subsidy

Total Subsidy

$11,547.00

$5,824.24

$12,700.00

$0.00

$5,824.24

 

Family of 6, Age 45, No Tobacco, Earning $50,000 Annually

Annual Premium

Refundable Tax   Credit

Maximum Cost   Sharing for Silver Plan

Maximum Potential   Value of Reduced Cost Sharing Subsidy

Total Subsidy

$14,466.00

$12,275.61

$4,500.00

$8,200.00

$20,475.61

 

Family of 6, Age 45, No Tobacco, Earning $95,000 Annually

Annual   Premium

Refundable Tax   Credit

Maximum Cost   Sharing for Silver Plan

Maximum Potential   Value of Reduced Cost Sharing Subsidy

Total Subsidy

$14,466

$5,441.00

$12,700.00

$0.00

$5,441.00

While the Kaiser Family Foundation calculator is useful, it only allows the user to review the numbers for one scenario at a time.  Our calculator allows us to visualize how the subsidies change with changes in inputs and over income ranges.  And, it allows us to generate demonstratives like this:

A quick gander at the chart above makes it clear that for some families (particularly for larger families with low-to-middle incomes), the combined value of the available subsidy package can be significant.  Indeed, at least in the early years of ACA implementation, some employees will actually be better off buying government-subsidized coverage through the Exchange than if they had received employment-based health insurance.  An employer may be able to use information about Exchange subsidies to its competitive advantage by optimizing their employee compensation systems around the availability of Exchange subsidies.  Providers, too, should inform themselves of the subsidies available through Exchanges and should be using that information to help enroll uninsured patients starting October 1, 2013.