Health insurance subsidies, especially as provided by Medicaid, are under scrutiny as Republicans scout for savings to make way for their tax agenda. However, instead of selective cuts, Congress should simplify the enrollment rules, treat individuals with similar incomes more equally regardless of where they get their coverage, and implement reforms which will lower costs across the board. Any savings should be applied to deficit reduction.

Medicaid has multiple missions. Most of the program’s beneficiaries are below the age of 65 and not disabled. For them, Medicaid provides access to routine and acute care services much like employer plans do for workers. As shown in Figure 1, these younger and healthier Medicaid enrollees, many of whom are children, far outnumber the disabled and elderly but also cost much less on a per-person basis.

Figure 1. Medicaid Enrollment and Spending Shares, 2022

Medicaid is only one part of a complex three-part insurance subsidization system. The Affordable Care Act (ACA) created a new premium credit program for individuals who are ineligible for affordable employer plans and have incomes too high to qualify for Medicaid. Most working-age Americans and their families get their coverage through their places of work and receive indirect subsidies through federal tax law. Employer-paid premiums are excluded from the taxable compensations of eligible workers.

Congress should examine all of these subsidy streams to ensure they are well coordinated and support population-wide enrollment with a minimum of waste and duplication.

As shown in the example outlined in Figure 2, what is driving federal and state spending is the high cost of insurance. The average 2024 premium for an employer-sponsored plan for a four-person family was $25,600.

Figure 2. Public Subsidization by Annual Household Income: An Example

Even with the tax subsidy, the overall cost burden of employer-sponsored insurance (ESI) is too high for workers at low wage levels. For instance, for a family with an annual income equal to 200 percent of the federal poverty line (FPL), or $64,300, the implicit annual cost of ESI exceeds $20,000. Many workers believe the employers’ shares come out of profits, but these expenses mostly displace cash wages paid to the employees.

At higher income levels, the ESI tax subsidy rises because the households face higher marginal rates. A two-earner couple with a combined income of about $250,000 annually pays about $18,000 annually for ESI, with the federal tax subsidy covering the other $7,600.

There is high demand for both Medicaid and the ACA’s premium credit program because ESI is too expensive at lower income levels. At $5,000 per person, the implicit premium for Medicaid is about $20,000, and the beneficiaries are fully exempt from any cost. Medicaid’s provider payment restrictions hold total costs below the average ESI plan.

The ACA premium credits are also generous at lower wages but phase out as incomes rise. Under the revised schedule of support approved by Congress in 2021, at 200 percent of the FPL, a family gets $18,800, which is $2,900 more than the pre-2021 rules would provide. For this family, the amount of federal support is nearly $14,000 above the implied federal tax subsidy for ESI. The more generous ACA subsidies are scheduled to expire at the end of 2025.

Some Republicans in Congress want to tighten the enrollment processes for Medicaid and the ACA premium credits. While there is room for some savings, the larger problem is an overly complex and burdensome process, with frequent changes in wages or household compositions potentially affecting eligibility.

Moreover, many millions of low-wage workers get less support with their ESI plans than they would get if they were eligible for the ACA’s premium credits. If the support differences were small, it would not matter, but in many cases the gap can exceed $10,000 annually.

Congress should consider a more consistent, coordinated, and equitable subsidy system aimed at stable and secure coverage for the entire population with the least amount of duplication, hassle, and federal expense.

Three steps would help.

First, instead of basing eligibility on fluctuating current incomes, Medicaid and the ACA premium credits should look to actual data from the final months of the prior calendar year and then allow the beneficiaries to remain eligible for a full calendar year.

Second, for low-income individuals who fail to select a plan, automatic enrollment should place them in default coverage for which they are eligible.

Third, tax subsidies for higher-income households should be redirected toward low-wage workers enrolled in ESI.

The highest payoff reform would lower prices for high-volume medical services through a structured market and incentives for patients to migrate toward the most efficient providers. This reform would lower premiums in all insurance settings and thereby relieve pressure on the federal budget.