By Associate Professor of Public Policy Mark Shepard
The U.S. government shutdown is in its third week as funding bills have failed to garner the necessary votes from both Republicans and Democrats to reopen the government. At the center of this disagreement is the enhanced health insurance subsidies that were enacted by Congress in 2021. The role of these subsidies and their impacts have been hotly debated as the shutdown has continued.
We asked Mark Shepard, Harvard Kennedy School associate professor of public policy and faculty affiliate with the Taubman Center for State and Local Government, to explain what these subsidies are, how they came to be, and how they will impact Americans if they are ended. In this explainer, Shepard dives into the “missing middle” of Americans who are likely to be most affected if these subsidies expire, as well as potential impacts that are getting less attention, like those on state and local government. Read a brief selection of the explainer below and read the full Q+A at the Harvard Kennedy School’s Policy Topics page.
Q: In addition to the current political divide, the government shutdown fight seems to center on something pretty technical—health insurance subsidies. How did we get here?
It’s true that this shutdown fight is about a seemingly technical issue: whether to extend more generous “enhanced” health insurance subsidies that have been in place since 2021. If Congress doesn’t act, those subsidies will expire at the end of this year, and out-of-pocket insurance premiums will rise for about 20 million Americans in January 2026.
This subsidy cliff was well known, and Congress had a chance to address this over the past year, but they did not. Now Democrats are demanding that these insurance subsidies be extended as a condition of funding the government. So, we’ve ended up at an impasse.
There is a lot of heated rhetoric from both sides around this issue. I think it’s important to cut through the rhetoric and understand the real substantive policy issue behind it.
Q: What happens if the enhanced subsidies expire in January?
We have a pretty good sense of what will happen given past experience and the basic economics of the markets. You can summarize it in three steps.
First, coverage will become less affordable for subsidized enrollees. That’s mechanical: when the government pays less, households will have to pay more. And in many cases, the premium shocks will be quite large in percentage terms. The Kaiser Family Foundation estimates that the annual out-of-pocket premium for the average subsidized household will more than double from $888 in 2025 to $1,904 in 2026.
Second, higher premiums mean people will drop out of coverage. The CBO estimates 3.8 million fewer people will have health insurance because of the change. Some won’t be able to afford the higher bill; others simply won’t bother to re-enroll once the coverage isn’t free. Research shows that even small frictions associated with initiating premium payments can lead large shares of enrollees to fall off the rolls, and these tend to be younger and healthier people.
Finally, as healthier people leave, the risk pool worsens. Insurers will respond by raising premiums further to cover this added risk, raising costs even for people without subsidies. We also might expect some insurers to exit the markets, resulting in less competition. That combination—fewer enrollees, higher premiums, less competition—is exactly what we saw during the 2017-18 period when Congress was debating whether to repeal the ACA.
Of course, the federal government would save money—about $30 billion per year according to the CBO. But that’s the tradeoff: lower spending means fewer people insured.
Q: What would these changes mean for state and local government?
When people lose health insurance coverage, they don't stop getting sick. In practice, the uninsured often seek care through emergency rooms, putting strain on hospital budgets who must cover these costs as uncompensated care. State and local governments often end up bearing additional burden through public hospitals and Medicaid funding for uncompensated care. So there's a follow-on effect of loss of insurance that ends up affecting governments and health providers in the local community.
