The Debate over Health Care Subsidies

The Basics of Health Insurance

Health insurance costs have two key components: an annual deductible for initial health care expenses (the amount of money a recipient must pay out-of-pocket each year for covered healthcare services before a recipient's insurance starts to pay) and monthly premium payments. The recipient pays monthly premiums and all medical expenses until the deductible is met. Thereafter, the insurance company covers most or all of the recipient’s medical expenses. Healthy people generally pay more in premiums than they receive in medical services, while sick people generally receive more in services than they pay in premiums. Insurance providers set deductibles, copays (a fixed dollar amount paid for a specific service), coinsurance (a percentage of the cost a recipient pays after meeting their deductible), out-of-pocket maximum (the annual cap on what a recipient pays for covered, in-network, services), monthly premiums, and what specific benefits are included in each plan.  

Some people prefer to pay higher monthly premiums with lower deductibles and other out-of-pocket expenses, while others, particularly healthy and young people, prefer so-called ‘catastrophic coverage’ with higher deductibles and related out-of-pocket expenses, but with lower monthly premiums. In essence, a catastrophic coverage plan is expensive if a medical need arises because the policyholder must pay the full cost of coverage (i.e.: deductible) and absorb most if not all medical non-catastrophic expenses. However, such plans can be fairly inexpensive if little to any medical needs arise because monthly premiums are low.

Republican and Democratic Health Care Proposals

Under legislation enacted during the COVID Pandemic, ACA health insurance policies are subsidized by the federal government to keep monthly premiums down. These subsidies expired on December 31, 2025, significantly increasing premiums for about 22 million ACA recipients.

Democrats propose extending the subsidies for several years (different groups have proposed one, two, or three-year extensions). Keeping the subsidies in place is costly ($1.1 trillion over 10 years). Also, subsidies reduce the incentive for many recipients to comparison-shop for the most effective, cheapest plan, and insurers have less incentive to compete by offering lower prices.

Republicans in the House and Senate argue that ACA subsidies are inefficient, particularly for people seeking catastrophic coverage. They propose reallocating the funds used to provide subsidies, dividing it among recipients, and funding healthcare savings accounts (HSAs) for these individuals, who could then use the funds to pay for the coverage they wanted. Republicans argue that the HSAs would offset premium increases resulting from the loss of subsidies and that their plan would give consumers more choice in selecting a plan.

Analysis of the Republican plan predicts that some healthy, young ACA recipients would likely shift from their current plans to low-cost catastrophic coverage. Compared to the current system, they could potentially save money because they would not have to pay the higher premiums needed to fund lower deductibles and more generous medical benefits. In fact, if they required expensive care, they could switch to a lower-deductible plan during the next enrollment period. However, the group that remained on conventional low-deductible ACA plans would be disproportionately older and sicker. Insurance companies might then raise premiums to cover the higher average cost of care for these individuals.

Thus, if the government adopted an HSA subsidy plan, ACA recipients would have more options than they do today. However, depending on insurers' actions, some recipients (particularly older, sicker recipients) may find that the government’s HSA contributions do not fully cover their higher premiums.

The Politics of ACA Subsidies

Most Republican members of Congress favor some version of the HSA subsidy plan, and most Democrats support the extension of the subsidies. A Democratic-sponsored House discharge petition (see brief here) for a 3-year extension received a majority of member signatures (mostly Democrats but some Republicans), meaning the extension will come to a vote in January 2026. However, this proposal is unlikely to pass the Senate, where Republicans hold 53 seats (out of 100), and 60 votes are needed to end debate and bring a proposal to a vote.

The Takeaway

Health insurance costs are rising and will continue to do so, whether or not ACA subsidies are expanded. However, most evidence indicates that costs for ACA recipients will spike significantly in January 2026 without an expansion of ACA subsidies.

The two options for addressing the expiration of ACA subsidies highlight a fundamental constraint facing policymakers: it is often impossible to make some people better off without making others worse off.

The outcome of the ACA subsidy debate will depend on negotiations between Democrats and Republicans and between House members and Senators.