Understanding ACA Subsidies Beyond the Shutdown

The pending expiration of enhanced Affordable Care Act (ACA) premium tax credits at the end of 2025 has become a central policy issue not only in the current government shutdown but more broadly for the health care sector and the nation’s fiscal outlook. Whether lawmakers choose to extend or allow them to lapse will have direct implications for household costs, Federal spending, and the insurance market.

• Provisions that expanded income eligibility and reduced required household contributions for ACA insurance plans expire on January 1, 2026. Whether to extend these provisions became an issue between the parties leading up to the current government shutdown.
• Estimates suggest that allowing the subsidies to expire would lead to higher premium costs for enrollees. Meanwhile, a permanent extension would increase coverage and add to the Federal deficit over the next ten years.
• The ACA Open Enrollment period begins November 1, adding to the issue’s urgency now. Proposals to address the issue range from permanent extension to temporary renewal conditioned on reforms.
• Businesses, insurers, and providers face uncertainty, as subsidy decisions will affect premiums, enrollment levels, and broader health care cost pressures.

Health Insurance Premium Tax Credits

The premium tax credit (PTC), established under the Patient Protection and Affordable Care Act (P.L. 111-148), is a Federally funded subsidy that lowers monthly premium costs for individuals and families enrolling in qualified health plans through the exchanges set up under the ACA. The credit is determined by a statutory formula that ties the premium cost to household income and family size, with higher-income households expected to pay a larger share of premiums. Under this framework, the credit is available to households with incomes between 100 and 400 percent of the federal poverty level (FPL), subject to limited exceptions. Congress specified the required household contribution (the “applicable percentage”) in the statute, and the IRS adjusts it annually.

The statute governing the PTC has been amended to include temporary provisions that expanded eligibility and increased subsidy amounts for plan years 2021-2025. Congress revised these parameters in the American Rescue Plan Act of 2021 (ARPA; P.L. 117-2) as part of pandemic relief. For plan years 2021 and 2022, ARPA eliminated the upper income threshold of 400% of FPL, maintaining only the 100% minimum, and reduced applicable percentages while suspending annual indexing. In effect, ARPA expanded eligibility to include enrollees with income above 400% of the FPL and reduced the maximum household contribution, thereby increasing subsidy amounts. Congress extended these temporary changes through plan year 2025 in the Inflation Reduction Act of 2022 (IRA; P.L. 117-169). Since 2020, ACA marketplace enrollment has grown by 88% (from 11.4 million to 21.4 million), with subsidies cutting average annual premiums by about 44% (to $705).

Subsidy Expiration and Impact

The PTC remains on a permanent basis, with no sunset clause. However, the temporary enhancements—expanded income eligibility and increased subsidy amounts—enacted under the ARPA and extended by the IRA are scheduled to expire at the end of 2025, reverting to pre-pandemic levels on January 1, 2026. Without an extension, the maximum income limit of 400 percent of the FPL would apply, and the applicable percentage formula will revert to higher pre-ARPA levels. As a result, households above 400 percent FPL would lose access to subsidies entirely and experience higher premium costs, while lower- and middle-income Marketplace enrollees would see reduced subsidy amounts and higher out-of-pocket premium costs relative to the enhanced levels in effect since 2021.

The uncertainty around the enhanced subsidies is already impacting health care markets for next year. An analysis by the Peterson Institute and KFF found that ACA marketplace insurers are projecting a median 18% increase in gross premiums, the total amount insurers charge enrollees, in 2026, 11 percentage points higher than the previous year’s increase. States are already calculating different rate scenarios on their exchanges in response to the looming expiration. While health care costs are continuing to increase generally, this study concluded that most insurers are assuming the PTC’s expiration and adjusting costs.

ACA marketplace tax subsidies cost nearly $14 billion in FY 2024. The Congressional Budget Office (CBO) released an analysis estimating the effects of extending the expanded premium tax credits on the federal deficit and health insurance coverage. CBO projects that a permanent extension of the enhanced PTC increase the Federal deficit by $349.8 billion from 2026-2035 and increase the number of insured by 3.8 million in 2035. The higher cost estimate reflects not only premium growth over time but also higher average subsidies and increased enrollment among households newly or more fully eligible under the enhanced rules.

Proposals for Extension and Reform

Congressional leadership has been discussing this matter as part of negotiations over the FY 2026 budget (see CED Policy Backgrounder on shutdown). Lawmakers’ decisions on whether to extend or end the ACA’s enhanced premium tax credits have become a central policy issue affecting the health care sector and the fiscal outlook. Open enrollment begins on November 1, with insurers expected to send notices of 2026 premium increases in the coming weeks.

As households and insurers prepare for potential cost shifts, this may put increased pressure on Congress to act. Congressional Democrats are pressing for a permanent extension, citing projections of significant premium increases next year if insurers anticipate that subsidies will lapse. Some Congressional Republicans believe that the enhanced subsidies should end as other pandemic-era supports have ended, but the politics of the enhanced subsidies (as opposed to the shutdown itself) issue do not divide neatly along party lines. The White House argues that the matter should be considered separate from government funding, but have been negotiating on the future of the enhanced subsidies with Congressional Republicans looking for a deal. Centrists in both parties are reportedly exploring a compromise, including a proposed income cap for receiving the subsidy at $200,000 or requiring enrollees to pay a minimum premium. Bipartisan back-channeling between members interested in maintaining the enhanced subsidies continues. Earlier in the shutdown, House Minority Leader Hakeem Jeffries dismissed the idea of a one-year extension of the subsidies, an idea supported by some Republicans. As state and local officials begin to prepare for expiration of the enhanced subsidies, other ideas range from closing access to new beneficiaries to ending the program outright.

Employers, insurers, and providers should prepare for possible volatility in coverage levels and premium costs. A lapse in subsidies would raise premiums and could reduce enrollment, shifting costs onto providers and state systems. A longer or even permanent extension would stabilize coverage but increase long-term Federal spending, with potential implications for future fiscal and health policy debates.