More than a decade after the Affordable Care Act (ACA) reshaped the individual health insurance market, the debate in Washington is once again focused on reform efforts. One key question is whether to extend the “enhanced” premium subsidies introduced during the pandemic. But the question of whether to extend the subsidies continues to obscure a more fundamental issue: the ACA’s subsidy system creates a set of incentives for households, insurers and federal spending that deserve closer scrutiny.
To understand today’s debate, it is helpful to revisit how the ACA subsidy structure was originally designed — and how it changed during the pandemic, and what can be done to stabilize it for the future.
How the Original ACA Subsidies Worked
The ACA’s premium tax credits were built around an income-based formula. Households purchasing a benchmark silver plan were expected to contribute a fixed percentage of their income, with federal subsidies covering the difference. This design targeted assistance toward lower- and middle-income households and restricted eligibility to those below 400 percent of the federal poverty level.
In practice, this approach had several implications.
First, because families paid a fixed share of income rather than a share of the actual premium, subsidies adjusted automatically when insurers raised premiums. As a result, higher premiums did not translate into proportionally higher out-of-pocket costs for most subsidized enrollees. This shielded households from price increases but also meant that insurers had limited competitive pressure to restrain premiums, because the federal government would absorb most of the increase.
Second, the system made it difficult for consumers to see or understand the value of the subsidy. The financial support went directly to insurers, and choosing a lower-cost plan did not generate any financial benefit for the enrollee. Whether someone selected an inexpensive plan or a relatively costly one, the household contribution — almost by definition — remained the same share of income.
Third, unsubsidized enrollees and households just above the original income threshold were exposed to the full price of insurance, making coverage comparatively expensive for a subset of consumers.
How Pandemic-Era Changes Altered the System
Congress changed this structure dramatically during the pandemic. The income cap was removed entirely, making subsidies available to higher-income enrollees. Required household contributions were reduced across nearly all income levels. In many states, the combination of these changes pushed the enrollee’s share of premiums to zero for large segments of the market.
Enrollment rose to record levels, surpassing 24 million in 2025. At the same time, federal spending rose sharply because the subsidy mechanism effectively requires the government to shoulder most premium growth. Households were insulated from rising premiums, but the overall fiscal exposure increased significantly. Indeed, federal spending increased from $53 billion in 2020 to $138 billion in 2025. Moreover, misunderstanding about pandemic-era subsidy expiration has led to confused reporting about how premiums will “double” if enhanced subsidies are allowed to expire. Of course, these reports reflect the enrollees’ share of the premium, not the total premium.
A secondary effect was the rapid growth of zero-premium plans. In 2020, 16% of enrollees paid zero premium after the subsidy; this fraction grew to 40% in 2024 and 2025. While such plans reduce financial barriers for many, they have also been associated with problems such as unauthorized enrollments and aggressive steering by third-party brokers — behaviors that exploit the structure of the subsidies rather than reflect consumer preferences.
These changes were enacted under emergency conditions, which are now over. As policymakers now debate whether to extend them, the underlying structure of the subsidy design deserves renewed attention.
Why the Structure Matters More Than the Size
The ACA’s subsidy system mixes two goals: affordability protection for households and broad participation in the individual market. But because the subsidies absorb most marginal premium increases, insurers face weaker incentives to compete aggressively on price. Consumers, meanwhile, have little incentive to choose lower-cost plans because the savings do not accrue to them.
This creates a financing environment where total spending can grow faster than the underlying medical risk would suggest. The question for policymakers is not simply whether subsidies should be generous or limited, but whether the design channels incentives in a way that makes long-term affordability more or less likely.
A More Predictable and Market-Aligned Approach
One way to improve the structure is through a “defined contribution” model. In such a system, federal subsidies would be tied to a basic benchmark plan, with the subsidy amount growing each year at a predictable rate, such as the medical CPI, rather than automatically increasing when insurers raise premiums. There is economic research suggesting that benchmarking subsidy levels to premiums results in weaker competition and higher premiums.
Consumers would continue to receive income-based protections, but insurers would face stronger incentives to manage premiums relative to the benchmark because enrollees would pay the incremental cost of the plan above the defined contribution amount. Additionally, federal spending would be more predictable. And the program would be less vulnerable to price distortions driven by regulatory or actuarial assumptions.
This kind of approach aligns with how several other insurance markets operate, including Medicare Part D and the Federal Employees Health Benefits Program, both of which rely on structured competition around a clearly defined subsidy contribution.
Allowing Households to Benefit from Cost-Conscious Choices
A second improvement involves aligning consumer incentives with program financing. Under the current ACA system, households see no benefit from choosing a lower-cost plan. If a consumer selects a cheaper option, the subsidy shrinks and the household’s contribution remains unchanged. The federal government — not the enrollee — captures the savings.
A more consumer-oriented alternative would allow part of the savings to be deposited into a simple, portable account. These accounts could be used for premiums, prescriptions, routine medical care, or unexpected expenses. Unlike traditional Health Savings Accounts, they would not require enrollment in a high-deductible plan and would be accessible to lower-income households.
The goal is not to assume that enrollees can be transformed into price shoppers overnight but to give them a clearer stake in the financial consequences of their choices and to make the subsidy more tangible. This combined with the continuing price transparency initiative can also generate incentives for an ecosystem of consumer-oriented healthcare “shopping tools” to blossom.
Addressing the “Silver Loading” Distortion
A final structural issue involves the pricing phenomenon known as “silver loading.” When federal payments for cost-sharing reductions were discontinued in 2017, insurers increased premiums for silver plans — the ones used to calculate subsidies — to compensate. This raised benchmark premiums, pushing up federal subsidy spending and increasing costs for households that do not receive subsidies.
Restoring CSR payments (by paying them directly to the enrollees’ accounts) would unwind this pricing distortion, normalize premiums across metal tiers and reduce federal spending without reducing benefits.
Where This Leaves Policymakers
The ACA has expanded coverage, but the way its subsidies are structured creates a set of incentives that may not support long-term affordability or fiscal sustainability. The pandemic-era enhancements intensified these trends. As policymakers consider whether to continue temporary generosity, a broader question emerges: how should the subsidy system be designed to balance affordability, transparency, competition and fiscal discipline?
A predictable defined contribution, paired with consumer-directed accounts that allow households to retain part of the savings from choosing lower-cost plans, would realign incentives in a more sustainable direction. Correcting technical pricing distortions would further stabilize the market.
The central challenge is not the size of the subsidies, but the way they work. Improving the underlying structure offers a path to a more durable and affordable ACA, which ultimately makes sense for households, insurers and taxpayers alike.
