Reforming ACA Premium Subsidies to Enhance Market Stability and Affordability

The Affordable Care Act (ACA) individual health insurance market has undergone significant changes, particularly with the enhanced premium subsidies introduced during the COVID-19 pandemic. These subsidies have extended eligibility beyond the original 400% federal poverty level cap and significantly reduced out-of-pocket premium contributions for many enrollees, contributing to record enrollment exceeding 24 million in 2025. However, the ACA's subsidy system, structured on an income-based formula where enrollees pay a fixed percentage of income toward premiums and subsidies cover the rest, generates certain market distortions. It inadvertently cushions consumers from premium increases, reducing insurers' price competition incentives and increasing federal fiscal exposure. While this system shields most subsidized enrollees from premium hikes, it leaves unsubsidized or near-threshold consumers bearing full premium costs, creating affordability challenges for them. The growth of zero-premium plans due to enhanced subsidies has also been linked to issues such as unauthorized enrollments and broker-driven plan steering, raising regulatory and compliance concerns. The current subsidy design intertwines affordability for consumers with broad market participation but may undermine long-term cost control and market stability. One proposed reform is implementing a defined contribution model where subsidies are tied to benchmark plan costs, escalating predictably with medical inflation rather than insurer premium hikes. This would incentivize insurers to compete more rigorously on price and provide more predictable federal spending patterns. Another suggestion involves introducing consumer-directed accounts that share savings from opting for lower-cost plans with enrollees, fostering clearer financial incentives and promoting smarter healthcare purchasing behavior without requiring high-deductible health plans. Additionally, addressing the 'silver loading' phenomenon—premium increases on silver plans after cessation of federal cost-sharing reduction payments—by restoring direct CSR payments to enrollees could correct price distortions, reduce federal expenditure, and normalize premiums across plan tiers. The article emphasizes that the focus of reform should be on realigning subsidy incentives to improve affordability, transparency, insurer competition, and fiscal responsibility rather than solely adjusting subsidy generosity. Such structural improvements could lead to a more sustainable ACA market benefiting consumers, insurers, and taxpayers by balancing financial protection with market discipline.