Today we look into a different subsidy under Obamacare: cost-sharing subsidy. It doesn’t lower your premium but it gives you a better plan.
A better plan means a lower deductible, lower co-pays, and a lower out-of-pocket maximum. It’s only available to people at the lower end of the income spectrum. There are three tiers. The lower your income, the better plan you get.
A Silver plan pays on average 70% actuarial value, i.e. the costs the policy-holders as a whole incur. If your income is low enough, you get better Silver plans.
| Silver Plan Actuarial Value | |
| > 250% FPL | 70% |
| 250% FPL or below | 73% |
| 200% FPL or below | 87% |
| 150% FPL or below | 94% |
Here are what the plans offer in my area:
Regular Silver plan: $2,000 deductible per person, $6,350 annual out-of-pocket maximum per person, $45 co-pay for primary care visits, $19 co-pay for generic drug prescription, 20% co-insurance for hospital stays.
Silver 73: $1,500 deductible per person, $5,200 annual out-of-pocket maximum per person, $40 co-pay for primary care visits, $19 co-pay for generic drug prescription, 20% co-insurance for hospital stays.
Silver 87: $500 deductible per person, $2,250 annual out-of-pocket maximum per person, $15 co-pay for primary care visits, $5 co-pay for generic drug prescription, 15% co-insurance for hospital stays.
Silver 94: $0 deductible per person, $2,250 annual out-of-pocket maximum per person, $3 co-pay for primary care visits, $3 co-pay for generic drug prescription, 10% co-insurance for hospital stays.
As you see, the Silver 73 plan is only slightly better than the regular Silver plan. The Silver 87 and Silver 94 plans offer much better value.
Bronze or Fortified Silver?
If you are healthy and you don’t use up the deductible anyway, a $2,000 deductible or a $5,000 deductible makes no difference to you. A $15 co-pay for office visits versus a $45 co-pay saves you very little money if you only go to a doctor twice a year. In that case you may be better off getting the less expensive Bronze plan, which is often free at 250% FPL or below.
If you have health issues and you use $6,000 worth of health care every year, a Silver 87 plan with $500 deductible saves you thousands of dollars versus a regular Silver plan with $2,000 deductible. In that case you will want to qualify for the cost-sharing subsidy at a lower income level.
When I retire I would save the low income years until I’m less healthy. If I run into a major health issue, I would then switch to withdrawing from Roth.
Related
Please read these related articles in the series about the Affordable Care Act:
- Stay Off the Obamacare ACA Premium Subsidy Cliff
- Marriage Penalty Under Obamacare ACA Premium Subsidy
- Income Bunching Under Obamacare ACA Premium Subsidy
- Converting to Roth and Harvesting Capital Gains Under Obamacare ACA Premium Subsidy
- Effective Tax Rates Under Obamacare ACA Premium Subsidy
- IRS Guidance On Circular Reference in Obamacare ACA Premium Subsidy and Deduction
[Photo credit: Flickr user davidciani]
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KD says
I believe the subsidy is based on the cost of second lowest cost of a Silver plan. I would like to understand the variation in the cost of silver plans and the effect it would have on a Silver 94 plan. kff.org says “You are guaranteed access to a Silver plan with an actuarial value of 87%” etc based on your income. So does the cost variation among Silver plans not matter if the income level guarantees the actuarial value of a Silver plan?
Harry says
As I understand if a company offers a Silver plan, it has to offer all four variations (70, 73, 87, 94), which are otherwise identical except cost sharing. The cost difference among plans still matters. A more expensive plan, say with a better provider network, is still more expensive whether you are buying the 70% or 87% variation.
Pam says
I didn’t fully understand what you meant by
>>
When I retire I would save the low income years until I’m less healthy. If I run into a major health issue, I would then switch to withdrawing from Roth.
>>
Can you please clarify? “Save the low income years” meaning you will use a high deductible bronze plan? And if you fall sick you would use ROTH to pay for the increased expenses incurred in the form of deductible?
Thanks.
Harry says
I will buy a bronze plan when I’m healthy. I will also convert some money from traditional IRA to Roth (but still stay off the subsidy cliff). The beefed up Roth account serves as a reserve. When I’m chronically ill, I will withdraw more from the Roth account, which doesn’t count in MAGI. That’ll put my MAGI under 200% FPL and qualify me for the better Silver 87 plan.
Jere says
I worked through the numbers and found taking a BCBS Bronze plan (HSA qualified high deductible) and making a $4,300 HSA contribution would be beneficial since the HSA contribution is above the MAGI line for a subsidy. Keeping annual MAGI income below $32k qualified for a subsidy while allowing zero taxable Social Security benefits. To keep MAGI that low requires using savings and Roth/HSA accounts for living expenses. Estimated savings will be over $10k in 2014.
Thank you for your article on optimizing the new Healthcare subsidies … jump-started my thinking process.
Tom says
What about the cliff for cost sharing reduction? Be sure to estimate your income so you get the best plan possible if you are near that cliff. They will reconcile premium subsidies at the end of the year but not cost sharing.
If your income is unpredictable, what would happen if you estimated on the low end (145% FPL) and got the best cost sharing but end up making income (lets say 350% FPL) which would have given you the lowest cost sharing plan? You would have to reconcile the premium subsidies but you could save thousands in deductibles, etc. That cliff is bad. A $24,980 salary vs a 25k one alters your deductible and out of pocket costs by thousands. So, suddenly if you make $10 more in a year, you are rich?
Harry Sit says
As part of the application process, you agree to give timely update of your estimated annual income to the exchange. Your income usually doesn’t jump from 145% FPL to 350% FPL over night. As soon as you know it’s going to be meaningfully higher than your original estimate, you are supposed to notify the exchange. They may then switch you to a plan with less or no cost sharing subsidy for the coming months and reduce your Advance Premium Tax Credit. If it’s $20 difference near a cliff, you may be forgiven for not being able to tell with that level of accuracy. It’s unreasonable to not know a big jump from 145% FPL to 350% FPL.