Private Health Insurance: Expiration of the Health Coverage Tax Credit Will Affect Participants' Costs and Coverage Choices as Health Reform Provisions Are Implemented
Released: 2013-01-28T00:00:00

Letter

Background

The HCTC, which pays a portion of health plan premiums for certain eligible workers and retirees, is set to expire at the end of 2013 when certain PPACA provisions, including PPACA premium tax credits, cost- sharing subsidies, and expansion of Medicaid eligibility, are implemented.

The HCTC program is administered by the IRS and currently pays for 72.5 percent of health plan premiums for HCTC participants. The amount of the credit is based solely on the participant’s health plan premium amount and is not based on other factors, such as the participant’s income. As an example of the credit, an HCTC participant with an annual premium of $10,000 would receive a credit of $7,250. Individuals potentially eligible for the HCTC include manufacturing and service workers who lost their jobs due to foreign import competition and were eligible for TAA benefits (representing about 51 percent of all potentially eligible individuals), and certain retirees between the ages of 55 and 64 whose pensions from a former employer were terminated and are now paid by the PBGC (representing about 47 percent of all potentially eligible individuals).

We have previously reported that many potentially eligible individuals do not participate in the HCTC program. In 2010, less than 10 percent of those potentially eligible for the program participated in the HCTC (see table 1). Some of the potentially eligible individuals may in fact not be eligible for the HCTC, for example if they are eligible for Medicare or Medicaid, or if they are covered by their spouse’s employer-sponsored health plan under certain conditions. Others may choose not to participate, for example if even with the HCTC they still cannot afford the cost of their share of health plan premiums.

HCTC participants obtain coverage from HCTC-qualified health plans, which include COBRA plans, HCTC state-qualified plans, VEBA plans, and individual market plans. In 2011, the majority of HCTC participants received coverage from COBRA plans (46 percent) or HCTC state-qualified plans (37 percent). A smaller proportion of HCTC participants received coverage from VEBA plans (10 percent) or individual market plans (1 percent).

Selected PPACA Provisions

Beginning on January 1, 2014, a premium tax credit will be available to help eligible tax filers and their dependents pay for qualified health plans purchased through the PPACA exchanges, to be administered by the IRS. PPACA premium tax credits will be calculated using income reported on tax returns.tax filers and their dependents who are (1) enrolled in one or more qualified health plans through a PPACA exchange, and (2) not eligible for minimum essential coverage other than coverage in the individual The credits will generally be available to eligible market. For example, individuals would not be eligible if they had coverage in a government program, such as Medicare or Medicaid, or certain employer-sponsored coverage.

Tax filers eligible for PPACA premium tax credits will be those with household incomes from 100 percent to 400 percent of the federal poverty level (FPL) for the tax year in which they are receiving the PPACA premium tax credit. The amount of the PPACA premium tax credit will vary by household income level, family size, and other factors. It will subsidize a portion of the tax filer’s health insurance premiums. The tax filer’s contribution to premiums will be based on their household income relative to the FPL, and will range from 2 percent of their household income for those with household incomes from 100 percent to less than133 percent of the FPL, to 9.5 percent of household income for those with household incomes from 300 percent up to 400 percent of the FPL (see table 2).

Eligibility for PPACA premium tax credits by household income level based on the FPL may vary by state because states may choose not to expand eligibility for Medicaid to nonelderly individuals whose household income does not exceed 133 percent of the FPL.rule, tax filers with household incomes from 100 percent of the FPL and up to 400 percent of the FPL will be eligible for PPACA premium tax credits. However, also under the PPACA rule, in states that expand Medicaid, individuals with household incomes from 100 percent and up to 138 percent of the FPL will be eligible for Medicaid and therefore ineligible for PPACA premium tax credits. Further, in states that do not expand Medicaid, individuals with household incomes from 100 percent and up to 400 percent of the FPL will be eligible for PPACA premium tax credits, and individuals with household incomes less than 100 percent of the FPL will not be eligible for PPACA premium tax credits and may not Under the PPACA be eligible for Medicaid, depending on their states’ Medicaid eligibility criteria.

The applicable household income level expressed as a percent of the FPL determines an individual’s share of his or her annual premium. The amount of the premium for the second-lowest-cost silver plan in the PPACA exchange available in the state where the eligible individual resides will be the reference for calculating the amount of the PPACA premium tax credit. tax credit for two different people, both in a family of four, one with a household income at 150 percent of the FPL, and the other with a household income at 300 percent of the FPL, using a hypothetical annual premium of $10,000 for the second-lowest-cost silver plan (reference plan) in the PPACA exchange available in the state where they reside.

When the HCTC Expires Most HCTC Participants Will Likely Be Ineligible for a PPACA Premium Tax Credit or Eligible for a Credit Less Generous Than the HCTC

The expiration of the HCTC and implementation of the PPACA premium tax credits and Medicaid expansion will affect HCTC participants’ costs for health plans in multiple ways. Projections from our analysis of 2010 IRS data show that about 69 percent of HCTC participants will likely either be ineligible for a PPACA premium tax credit or Medicaid, or will be eligible for a PPACA premium tax credit that is less generous than the HCTC. These projections show that about 37 percent of HCTC participants will likely be ineligible for either a PPACA premium tax credit or Medicaid because their incomes are too high, and 32 percent will be eligible for a PPACA premium tax credit less generous than the HCTC. On the other hand, at least 27 percent of HCTC participants will be eligible for a PPACA premium tax credit more generous than the HCTC or be eligible for Medicaid. An additional 3 percent of all participants will likely be ineligible for a PPACA premium tax credit because their incomes are too low, and their eligibility for Medicaid will depend in part on their state’s decision on Medicaid expansion (see table 4).

For the HCTC participants who will likely be eligible for a PPACA premium tax credit in 2014, projections from our analysis of 2010 IRS data show that there will be variation in the extent to which their credit differs from the HCTC. For example, of the total 39,464 HCTC participants in our analysis, 6,492 will likely receive a PPACA premium tax credit at least 25 percent less than the HCTC. However, up to 12,141 participants will likely receive a credit similar to or greater than the HCTC. For example, 2,922 participants will likely receive a PPACA premium tax credit of about the same value as the HCTC (within 5 percentage points above or below the HCTC). In addition, depending in part on whether or not their state expands Medicaid, between 1,823 and 3,217 participants will likely receive a credit more than 25 percent higher than the HCTC (see fig. 1).

The PPACA premium tax credit was designed to provide a larger subsidy amount to lower-income tax filers than to higher-income tax filers. Thus, lower-income HCTC participants who will likely be eligible for a PPACA will pay a smaller share of their incomes for premium tax creditpremiums under PPACA in 2014 than they did under the HCTC.

For example, projections from our analysis of 2010 IRS data show that while all 2,488 HCTC participants with incomes from 100 percent to 150 percent of the FPL will likely pay between 2 percent and 4 percent of their incomes for health plan premiums under the PPACA rule, 1,456 HCTC participants—close to 60 percent of participants in the same income range—paid 9.5 percent or more of their incomes for health plan premiums under the HCTC. In contrast, while all 7,658 HCTC participants with incomes from 300 percent to 400 percent of the FPL will likely pay 9.5 percent of their household income for premiums under the PPACA rule, 2,391—over 30 percent of participants in the same income range— paid less than 4 percent of their household income for premiums under the HCTC (see fig. 2). Unlike the HCTC that pays 72.5 percent of health plan premiums, individuals eligible for a PPACA premium tax credit will continue to pay that set percentage even if premiums increase because PPACA rules limit the amount individuals will pay for premiums to a set percentage of their incomes.

The expiration of the HCTC and implementation of PPACA cost-sharing subsidies will also affect HCTC participants’ out-of-pocket costs for health plans. Projections from our analysis of 2010 IRS data show that up to 28 percent of all HCTC participants who are eligible for the PPACA premium tax credit will likely also be eligible for a PPACA cost-sharing subsidy in 2014 to help pay for deductibles and copays, depending in part on whether or not their state expands Medicaid. Similar cost-sharing subsidies are not available for the HCTC, therefore, this would be an additional financial benefit for those who qualify.

The effect of the expiration of the HCTC and implementation of certain PPACA provisions will likely be different for nonparticipants—individuals who were potentially eligible for the HCTC in 2010 but did not participate in it—than it will be for participants. First, nonparticipants who may not be eligible for PPACA premium tax credits or who may be eligible for tax credits less generous than the HCTC will not be losing any benefits because they are not receiving the HCTC. Our projections show that 70 percent of nonparticipants fall into this category. Second, because some individuals do not participate in the HCTC since they cannot afford to do so, some nonparticipants who will be eligible for PPACA premium tax credits that are more generous than the HCTC or who are eligible for Medicaid coverage under PPACA may choose to use these options and receive benefits they do not receive under the HCTC. Our projections show that up to 30 percent of nonparticipants fall into this category, depending in part on whether or not their state expands Medicaid and whether they meet all other eligibility criteria for the PPACA premium tax credits.

In addition to being eligible for the PPACA premium tax credit, based on projections from our analysis of 2010 IRS data, up to 30 percent of all HCTC nonparticipants may also be eligible for a PPACA cost-sharing subsidy in 2014 to help pay for deductibles and copays, depending in part on whether or not their state expands Medicaid and whether they meet all other eligibility criteria for the PPACA premium tax credits.

See appendix I for details on characteristics of 2010 HCTC participants and nonparticipants.

Health Plan Coverage under PPACA Will Be Comparable to HCTC Plans, but Participants May Have an Incentive to Change Their Level of Coverage

The health plan coverage available under PPACA will be comparable to coverage in current HCTC-qualified health plans. Specifically, the categories of services that plans purchased through the PPACA exchanges will be required to cover are comparable to those currently covered by most HCTC plans, and the actuarial values of HCTC plans are likely above the minimum level of coverage that will be required in PPACA exchange plans. However, under PPACA, HCTC participants may have an incentive to choose plans through the exchanges that have different levels of coverage than their HCTC plans.

The Categories of Services That Will Be Required for Plans Purchased through the PPACA Exchanges Are Comparable to the Categories of Services Currently Covered by HCTC Plans

The EHB categories that will be required for plans purchased through the PPACA exchanges are comparable to the categories of services covered in almost all of the health plans used now by HCTC participants. Specifically, the categories covered by COBRA plans as well as the four HCTC state-qualified plans and the VEBA plan that we reviewed are comparable to the EHB categories. Collectively, at least 93 percent of HCTC participants in 2011 were enrolled in these three types of HCTC plans. However, for two of the EHB categories—”rehabilitative and habilitative services and devices” and “pediatric services, including oral and vision care”—more services may be covered by the plans purchased through the PPACA exchanges than are covered by the COBRA, HCTC state-qualified, and VEBA plans. This is because many health plans, whether HCTC or other, do not currently cover habilitative services or pediatric dental and vision services. While not all of the EHB categories are covered by individual market plans, only about 1 percent of HCTC participants are covered by individual market plans.

COBRA plans (46 percent of HCTC participants). COBRA plans are an extension of employer-sponsored health plans, and our analysis of data reported in a 2011 Department of Labor report found that employer- sponsored health plans generally covered services in the EHB categories. For example, in the EHB category of ambulatory care, 100 percent of employer-sponsored health plans cover physician office visits; 98 percent of plans cover outpatient surgery; and 73 percent of plans cover home health care services. In addition, the report indicated that the majority of employer-sponsored health plans cover services in the EHB categories of hospitalization, emergency services, maternity care, mental health and substance abuse disorders, and prescription drugs. Although COBRA plans generally cover services in the EHB categories, it is possible that coverage of habilitative services and pediatric dental and vision services will be more generous in plans purchased through the PPACA exchanges than in COBRA plans. According to CCIIO, the EHB categories that are commonly not covered among typical employer plans are habilitative services, pediatric oral services, and pediatric vision services.

HCTC state-qualified plans (37 percent of HCTC participants). Our analysis of four 2012 HCTC state-qualified plans found that they also generally covered services in all of the EHB categories. Specifically, all of the plans we reviewed—including both the four potential exchange benchmark plans and the four HCTC state-qualified plans—covered services in the same EHB categories, such as ambulatory care, preventive care, laboratory services, hospitalization, and emergency services. In addition, all of the plans covered prescription drugs to some extent; although one of the HCTC state-qualified plans that we reviewed covered generic prescriptions but did not cover brand-name prescriptions. Among some of the HCTC state-qualified plans and the potential benchmark plans there was an absence of coverage for subsets of services in certain EHB categories, such as habilitative services and pediatric dental and vision services, which are services that will be required to be covered in plans sold through the PPACA exchanges. For example, habilitative services were not covered by two of the potential exchange benchmark plans or by three of the HCTC state-qualified plans.

VEBA plans (10 percent of HCTC participants). The potential exchange benchmark plans cover the same EHB categories that the 2012 VEBA plan that we reviewed does. Also, like some of the potential exchange benchmark plans, the VEBA plan does not cover certain services that are a subset of certain EHB categories, such as habilitative services.

Individual market plans (1 percent of HCTC participants). Plans purchased through the PPACA exchanges may provide coverage of EHB categories in which coverage may be more limited in individual market plans. In 2011, HHS reported that coverage of certain EHB categories is limited in individual market plans, specifically for maternity services, substance abuse services, mental health services, and prescription drugs.in individual market plans.

HCTC Plans’ Actuarial Values Are Likely above PPACA’s Minimum Level of Value

The vast majority of HCTC participants in 2012 were likely enrolled in plans with actuarial values that were above the minimum level of 60 percent (bronze) required for plans purchased through the PPACA exchanges, including many who were likely enrolled in plans that had actuarial values of 80 percent (gold) or higher.

COBRA plans (46 percent of HCTC participants). The majority of HCTC participants in COBRA plans are likely to be in plans with actuarial values of 80 percent or higher on the basis of data from two studies. One study estimated that 80 percent of all enrollees in employer-sponsored health plans in 2010 were in plans that met or exceeded 80 percent (gold). The other study estimated that about 65 percent of all employees enrolled in group health plans in 2010 were in plans with actuarial values that met or exceeded 80 percent (gold).

HCTC state-qualified and VEBA plans (47 percent of HCTC participants combined). The actuarial values of the four HCTC state- qualified plans and the one VEBA plan that we reviewed in the selected states vary. However, all of the plans have an actuarial value of at least 60 percent (bronze) and three of the five plans have an actuarial value of 80 percent (gold) or higher. See table 5.

Individual market plans (1 percent of HCTC participants). The small number of HCTC participants that have individual market plans are likely to have a plan with a lower level of actuarial value. A recent study found that about half of the plans (51 percent) in the individual market have an actuarial value of less than 60 percent and another third (33 percent) have an actuarial value at the 60 percent (bronze) level.

Certain PPACA Provisions May Incentivize HCTC Participants to Change Their Level of Coverage in 2014

The varied actuarial values of the HCTC plans suggest that the level of coverage for many HCTC participants may change after the expiration of the HCTC depending on the options available to participants and the choices they make in 2014 under PPACA. Also, the way that the PPACA tax credits will be calculated may incentivize HCTC participants to change their level of coverage. The PPACA premium tax credits will be calculated from a reference plan at the 70 percent (silver) level of coverage, so individuals who choose other plans—with either higher or lower levels of actuarial value—could face higher or lower out-of-pocket costs for premiums. However, plans with higher levels of actuarial value may result in lower out-of-pocket costs for copays and deductibles, and plans with lower levels of actuarial value may result in higher out-of- pocket costs for copays and deductibles. Ultimately, for any HCTC participant, the overall financial effect of a change from an HCTC plan to a PPACA exchange plan will be the net effect of the choice between higher or lower premium costs and higher or lower cost-sharing. Further, out-of-pocket costs for premiums and cost-sharing for HCTC participants will be affected by whether they are eligible for the PPACA premium tax credits and cost-sharing subsidies. Considering these factors, current HCTC participants may choose to change their level of coverage when the HCTC expires. For example:

Some HCTC participants eligible for PPACA premium tax credits could have an incentive to change to a higher level of coverage. For example, if the HCTC participants who have coverage at the 60 percent (bronze) level of coverage are eligible for PPACA premium tax credits, they may choose a PPACA exchange plan that has a higher actuarial value than their current HCTC plan. This is because PPACA premium tax credit amounts will be calculated on the basis of the reference plan premium (the second-lowest-cost 70 percent plan) for their exchange. Given this, it could be possible for these HCTC participants to purchase a 70 percent (silver) plan that would have on average lower out-of-pocket cost-sharing expenses than their current HCTC plan.

Alternatively, some HCTC participants who will be eligible for PPACA premium tax credits could have an incentive to change to a lower level of coverage. For example, if the HCTC participants who have coverage at the 80 percent (gold) or 90 percent (platinum) levels of coverage are eligible for a PPACA premium tax credit and want to purchase a plan through a PPACA exchange with a comparable actuarial value, they will have to pay the difference between the premium for a plan with an actuarial value of 80 percent (gold) or 90 percent (platinum) and their PPACA premium tax credit. Again, this is because the PPACA premium tax credit amount will be based on the reference plan premium (the second-lowest-cost 70 percent plan) for their exchange. For example, if a participant in a family of four with a household income at 300 percent of the FPL purchases a plan in a PPACA exchange with an annual reference (silver) plan premium for a family of four of $10,000, he or she would receive a PPACA premium tax credit of $3,716 and would have to pay $6,284 for the premium if he or she purchased the reference plan. However, if the participant instead decided to purchase a plan with an actuarial value of 80 percent (gold) having an annual premium of $11,000, the PPACA premium tax credit would remain the same ($3,716) but the premium amount the participant would have to pay would increase by $1,000 to $7,284. Because participants would have to pay this difference in premiums, they may opt to purchase a plan with a lower level of actuarial value than their current plan, such as a plan at the 70 percent level of coverage (silver), even though it may have higher out-of-pocket cost-sharing expenses on average than their current plan. In contrast, HCTC participants may also have an incentive to choose a plan below the 70 percent (silver) level if obtaining the lowest possible premium is their main factor in choosing a health plan. In this case, participants could choose a plan at the 60 percent (bronze) level of coverage because the premium cost would likely be lower than choosing a 70 percent (silver) level plan. However, a plan at this level would mean that on average participants could have higher out-of-pocket cost-sharing expenses than they would with a 70 percent (silver) plan.

The health plan coverage options for HCTC participants not eligible for a PPACA premium tax credit will vary depending on their household income level. The HCTC participants’ not eligible for PPACA premium tax credits because their incomes are above 400 percent of the FPL could decide to purchase a health plan at any level of coverage. However, the loss of the HCTC combined with their ineligibility for PPACA premium tax credits because of their higher incomes could affect the level of coverage that they choose or even whether they purchase a health plan through a PPACA exchange or elsewhere. The HCTC participants who have household incomes below 138 percent of the FPL and live in states that expand Medicaid will not be eligible for PPACA premium tax credits; instead they will be eligible for Medicaid. However, in states that do not expand Medicaid, it is uncertain what health plan, if any, that HCTC participants who have household incomes below 100 percent of the FPL may purchase in 2014. These individuals would not be eligible for PPACA premium tax credit in any instance or Medicaid in most instances, and their ability to pay for premiums will be limited. However, because of their low incomes, these HCTC participants will likely be exempt from certain PPACA provisions, such as the tax penalty that individuals will have to pay beginning in 2014 if they do not have a health plan.

Agency Comments

We provided draft copies of this report to HHS and IRS for review, and both provided technical comments, which we incorporated as appropriate.

As arranged with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies to the Secretary of the Treasury and the Commissioner of the IRS, the Secretary of Health and Human Services, appropriate congressional committees, and other interested parties. In addition, the report will be available at no charge on the GAO website at http://www.gao.gov.

If you or your staffs have any questions about this report, please contact me at (202) 512-7114 or dickenj@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs are on the last page of this report. GAO staff who made major contributions to this report are listed in appendix II.

Appendix I: Characteristics of Health Coverage Tax Credit (HCTC) Participants and Nonparticipants in 2010

We identified HCTC participants and nonparticipants by age groups, household income based on a percentage of the federal poverty level (FPL), and HCTC eligibility type using 2010 Internal Revenue Service (IRS) data. We found that most HCTC participants and nonparticipants were ages 55 to 64 (see table 6), over a third of participants and nonparticipants had household income greater than 400 percent of the FPL (see table 7), and more than half were potentially eligible for the HCTC because of participation in the Trade Adjustment Assistance (TAA) or Reemployment Trade Adjustment Assistance (RTAA) programs rather than being eligible by having their pension payments assumed by the Pension Benefit Guaranty Corporation (PBGC) (see table 8).

Appendix II: GAO Contact and Staff Acknowledgments

GAO Contact

Staff Acknowledgments

In addition to the contact named above, Gerardine Brennan, Assistant Director; George Bogart; Andrew Ching; Sandra George; Alison Goetsch; Lisa A. Lusk; John Mingus; and Laurie Pachter made key contributions to this report.

Related GAO Products

Trade Adjustment Assistance: Changes to the Workers Program Benefited Participants, but Little Is Known about Outcomes. GAO-12-953. Washington, D.C.: September 28, 2012.

Medicaid Expansion: States’ Implementation of the Patient Protection and Affordable Care Act. GAO-12-821. Washington, D.C.: August 1, 2012.

Health Coverage Tax Credit: Participation and Administrative Costs. GAO-10-521R. Washington, D.C.: April 30, 2010.

Health Coverage Tax Credit: Simplified and More Timely Enrollment Process Could Increase Participation. GAO-04-1029. Washington, D.C.: September 30, 2004.