Evaluating Republican Alternatives to ACA Premium Tax Credits
Why HSA-Based Proposals Increase Household Risk—and Why the Subsidy Debate Still Misses the Bigger Reform Agenda
Key Findings
Republican HSA-based alternatives do not resolve affordability.
Replacing or supplementing premium tax credits with credits for health savings accounts linked to bronze or catastrophic plans creates substantial financial exposure for households and weaken the HSA-HDHP framework originated by Republicans.Low-income households are poorly served by account-based assistance.
Empirical evidence shows that high deductibles discourage timely care, increase medical debt, and delay clinically important treatment among lower-income households. HSAs do not reliably mitigate these effects because participation and balances skew toward higher-income households.Administrative and compliance risks remain.
Although framed as an alternative to refundable tax credits, HSA contributions are refundable in effect and retain similar vulnerability to improper payments driven by income volatility and household complexity or even fraud.Broader structural reform remains necessary.
Durable affordability will require reforms that address plan design, catastrophic risk, and portability—not repeated reshuffling of household subsidies.
Memo: Refundable Credits, HSAs, and the ACA Premium Tax Credit Debate
Issue
Recent Republican proposals responding to the expiration of the ACA’s enhanced premium tax credits would provide federal payments—often structured as contributions to Health Savings Accounts (HSAs)—for individuals purchasing bronze or catastrophic plans on the ACA exchanges. These proposals expose households to substantial out-of-pocket risk, are poorly suited to low-income populations, exacerbate tax and administrative problems, and leave the underlying drivers of high premiums unchanged.
Democratic proposals to extend the existing subsidies avoid immediate disruption but likewise fail to address the structural features of exchange coverage that produce high premiums, rising federal costs, and unstable protection.
Plan Design and Household Financial Exposure
Deductibles and cost-sharing in bronze and catastrophic exchange plans are substantially higher than deductibles and cost sharing for traditional health savings accounts linked to high deductible health plans.
Bronze plans must meet a 60 percent actuarial value, which in practice requires substantial cost-sharing. Catastrophic plans go further by limiting insurer liability until very high spending thresholds are reached.
· In 2025 dollars, typical individual deductibles for bronze plans range from roughly $6,500 to $8,500, while catastrophic plan deductibles are commonly equal to the ACA out-of-pocket maximum (about $9,450).
· In contrast, HSA-qualified HDHPs are subject to statutory limits: a minimum deductible of roughly $1,600 and a maximum out-of-pocket limit of roughly $8,050.
These statutory limits were central to the original Republican case for HSAs. Households would accept higher deductibles in exchange for lower premiums, but only within defined bounds that preserved protection against catastrophic loss.
Employer-sponsored HDHPs also typically include pre-deductible preventive coverage, negotiated networks, and employer HSA contributions that materially reduce effective exposure. The proposed tax credit could serve a function similar to the employer contribution to health savings accounts; however, the relatively modest cash infusion would do little to offset risk stemming from the lack of limits on deductibles and other higher cost sharing obligations.
Allowing HSA-linked assistance to be paired with bronze or catastrophic plans removes these guardrails. A modest HSA contribution offsets only a small share of the deductible in exchange plans, leaving households exposed to several multiples of the account contribution before insurance makes any meaningful payout.
Limits of HSA-Based Approaches for Low-Income and Middle-Income Households
Even when HSAs are paired with plans meeting traditional HDHP standards, account-based assistance remains poorly suited to low-income households. Liquidity is a major concern.
A substantial empirical literature shows that lower-income households enrolled in HDHPs are significantly more likely to delay or forgo care because of cost. For these households, the binding affordability constraint is not whether spending is capped at catastrophic levels, but whether care is affordable before those caps are reached.
Evidence shows that high deductibles can delay clinically important care, including diagnostic testing and treatment for serious conditions, with effects concentrated among lower-income patients.
https://jamanetwork.com/journals/jamainternalmedicine/fullarticle/226261
https://jamanetwork.com/journals/jamanetworkopen/fullarticle/2768344
A policy change pairing a credit for health savings accounts to existing high-deductible health plans with the guardrails of limits on deductibles and out-of-pocket expenditures would be an enhancement that would benefit low and middle income households.
However, the current Republican tax credit proposal removes guardrails which were part of the original policy promoting use of higher deductible health plans and creates an unacceptable level of risk for low-income and middle-income households.
Refundability and Administrative Risk
Republicans often oppose the use of refundable tax credits which can be claimed by households that do not pay any federal income tax. The proposed HSA contributions are refundable in effect: payments would be made regardless of income tax liability.
Oversight literature documents persistent administrative risks associated with refundable, income-tested credits, with improper payments driven primarily by income volatility and household complexity rather than criminal fraud.
https://www.gao.gov/products/gao-16-475
Political debate over the use of refundable tax credits often emphasizes fraud concerns, as reflected in Vice President J.D. Vance’s claim that ACA premium tax credits generate “a lot of waste and fraud.”
Refundable credits for health savings account contributions share some of the same risks associated with credits for the premium tax credit and other refundable credits including the earned income tax credit. By contrast, alternative approaches that subsidize costs at the claim or insurer level—such as public reinsurance for high-cost patients—can reduce premiums broadly while limiting exposure to income misreporting and payment error.
Employer Coverage and Market Boundaries
The effect of HSA-based exchange assistance on employer-sponsored insurance is ambiguous. The credit is only provided to state exchange plans creating a potential incentive for small employers to drop coverage to allow their employees to claim the new credit. However, employer plans are generally more generous than bronze or catastrophic coverage and weaker exchange options may reinforce reliance on employer insurance.
An increased reliance on employer-based insurance should not be considered a success. Preserving employer coverage because state exchange alternatives are materially worse will increase the number of workers who lose their health insurance during job transitions or during economic downturns, increasing the number of uninsured, increasing the demand for Medicaid and increasing out-of-pocket costs from having to satisfy a new deductible.
Proposals that weaken exchange coverage relative to employer plans risk entrenching a system that delivers stability only while employment is continuous.
Conclusion
The continuing debate over ACA subsidies reflects a persistent analytical error. Policymakers remain focused on the delivery mechanism of assistance—premium tax credits versus alternative tax-favored accounts—rather than on how health insurance markets allocate risk and why coverage remains expensive in the first place. Replacing premium tax credits with HSA-linked tax credits tied to bronze or catastrophic plans would not solve these problems. It would substantially worsen household financial risk by shifting more spending to the front end of care, where affordability constraints are most binding for low- and moderate-income households.
As argued in The ACA Subsidy Debate Misses the Real Cost Drivers, durable affordability will not come from repeatedly adjusting subsidy generosity but from correcting structural design flaws that inflate premiums and destabilize coverage.
👉 Full article: https://bernsteinbook1958.substack.com/p/the-aca-subsidy-debate-misses-the
First, low-income adults and children are systematically routed into the wrong programs. Steering poor adults into private exchange plans instead of Medicaid, and children into family plans rather than CHIP, raises premiums, increases federal subsidy costs, and weakens financial protection. Correcting these misallocations would lower costs and improve coverage simultaneously.
Second, the current subsidy structure imposes large implicit taxes on work. Income-linked premium subsidies phase out rapidly as earnings rise, creating marginal tax rates that interact with income taxes and student loan repayment rules to discourage labor supply and income growth. Structural reforms that reduce reliance on income-tested premium subsidies—rather than layering additional tax-preferred accounts on top—would improve both efficiency and transparency.
Third, premium subsidies treat symptoms rather than causes. High premiums are driven primarily by catastrophic medical claims concentrated among a small share of patients. Insurers respond to this volatility by restricting networks and rationing care through administrative barriers. Expanding public reinsurance would address this problem at its source by removing extreme risk from insurers’ balance sheets, lowering premiums for everyone, and reducing incentives for bureaucratic rationing.
Finally, the continued reliance on employment-based insurance remains a fundamental flaw. Job-linked coverage amplifies instability during job transitions and recessions and forces public programs to backfill gaps when employer coverage collapses. More portable forms of support—whether through exchange-based employer contributions or universal credits—would improve continuity and reduce churn.
Until these structural issues are addressed, subsidy fights will continue to recur. Temporary affordability will require ever-larger transfers, while premiums remain high and coverage fragile. Structural reform offers a harder path politically, but it is the only path that can make health insurance meaningfully affordable on a durable basis.
Further Reading
📄 The ACA Subsidy Debate Misses the Real Cost Drivers
👉 https://bernsteinbook1958.substack.com/p/the-aca-subsidy-debate-misses-the
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