Subsidy Calculations Not As Simple As They Seem

If you’re confused about the subsidies for health insurance starting in the exchanges in 2014, you’re probably not alone.  Although the basic math is quite simple in terms of the maximum amount a family or individual will have to pay based on their income if they earn less than 400% of federal poverty level, it’s still tough to pin down specifics in terms of who will end up getting subsidies, especially for people who are right on the border of the income cut-off.

There have been subsidy calculators online for quite some time.  The first one we found was from the Kaiser Family Foundation, but numerous others have appeared recently.  Connect for Health Colorado, the Colorado exchange, has a calculator on its website, but their calculations aren’t calculatin subsidies for health insurance exchangebased on Colorado data yet.  On the contrary, the calculator includes language explaining that “The premiums in this calculator reflect national estimates from the Congressional Budget Office for silver plans, adjusted for premium inflation and age rating.”  So for the time being anyway, you can’t use the Connect for Health Colorado calculator to generate Colorado-specific subsidy numbers.

That might change after the Division of Insurance releases official rates at the end of July.  Part of the confusion around rates and subsidies stems from the fact that rates are not yet finalized.  There’s still a lot of number-crunching (and maybe some “do-overs” from carriers) going on, and July 31 has been set as the date for final numbers to be released in Colorado.

For now, it appears that most subsidy calculators are using generalized national average data, estimated by the CBO.  But the numbers turn out differently depending on what calculator you use.  Let’s consider a family of four, with an income right around the cut-off for subsidy qualification.  We’ll do a calculation based on an income of $94,000 and another using $94,500 (which puts them just above the subsidy qualification limit of 400% of FPL).  For two parents (age 37 and 35) and two young children with an annual household income of $94,000, the Kaiser Family Foundation calculator estimates a total subsidy of $2327/year, which amounts to roughly $194 per month.  For that same family, the Connect for Health Colorado calculator projects an estimated subsidy of $330/month, which adds up to a significantly higher annual total of $3960.  Both calculators accurately predict zero subsidy if that same family’s income is five hundred dollars higher.

There is similarly conflicting results when you input data for a single individual:  The KFF calculator predicts an estimated annual premium of $3736 for a 37 year-old applicant.  So there are no projected subsidies for that person if his or her annual income is $40,000, since 9.5% of $40,000 would be $3800 and the KFF estimated premium is below that amount (9.5% of income is the max amount that a person earning between 300% and 400% of FPL will have to pay for the benchmark silver plan in the state.  So if the premium for that plan is less than 9.5% of the person or household’s income, there is no subsidy).  If the individual’s income were $39,000, the projected subsidy would be $31 annually.  The Connect for Health Colorado calculator shows very different results though:  They estimate that same individual would qualify for subsidies of $48 per month with an income of $39,000 (obviously they are projecting higher premiums than the KFF calculator, making the premiums more than 9.5% of the person’s income without a subsidy).  That works out to $576 annually.  In their estimation, our hypothetical 37 year-old would have to earn $45,000 per year in order to not qualify for subsidies.

It’s important to note that subsidies will be tied to the price for the second least-expensive silver plan in each state’s exchange (that’s a particularly informative article – definitely a good read if you’re curious about how the subsidies will work), so the calculations will vary from one state to another.  But even before that data is finalized and most calculators are presumably using averages instead of specific data, it’s tough to get consistent numbers.  In Colorado, CCHI has put together a helpful chart with premiums submitted by carriers in Colorado for silver plans for a family of four with two 40 year-old adults and two young children.  So you can see the general range of where the second-least-expensive silver plan would be, and presumably the final numbers won’t be drastically different from these – but we’ll have to wait and see.

It’s also important to understand that even though the subsidy amounts will be calculated based on a silver plan, people who qualify for a subsidy will be able to apply their subsidy to a more expensive (gold or platinum) or less expensive (bronze) plan if they choose to do so.  To use very simple math, if you qualify for a $3000 annual subsidy and are comparing a bronze plan with a $5000 annual premium and a gold plan with a $10000 annual premium, you would be able to use your subsidy to get the bronze policy for $2000 or the gold plan for $7000.  If you select the bronze plan, however, you have to be aware of the higher out-of-pocket requirements if you need to use the coverage.  Although the premiums are likely to be most attractive at the bronze level, the coverage will get better with each “metal” level that you go up.

For people who are right on the brink of qualifying for a subsidy based on income, it might be worth crunching the numbers and possibly discussing your situation with a qualified financial adviser or tax planner.  For the family described above, it’s obvious that an income of $94,000 is preferable to an income of $94,500 if they’re interested in purchasing health insurance through the exchange and receiving a subsidy.  For subsidy purposes, income is defined by MAGI, or modified adjusted gross income.  So take a look at the first page of your 1040 and see if there’s anything in the adjusted gross income category where you could be taking advantage of a way to lower your MAGI: contributing the maximum allowable amount to your retirement accounts and making HSA contributions if you qualify are a good idea if you’re not already doing so.  If you think that you might be close to the cut-off, it’s definitely worth spending a little time to make sure that you’re not missing out on some deductions that could help you qualify for subsidies.

But for the time being, it’s tough to hammer out the specific details.  Stay tuned.  There’s likely to be more specific information coming later this summer in Colorado, once the DOI releases finalized rates for health insurance plans.

About Louise Norris

Louise Norris has been writing about health insurance and healthcare reform since 2006. In addition to the Colorado Health Insurance Insider, she also writes for,, Verywell, Spark by ADP, and Boost by ADP, and Gusto. Follow on twitter and facebook.

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