The health insurance subsidies behind the government shutdown

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.  

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: Can you explain what these subsidies are and who they’re for?

The issue of subsidies can be confusing because America’s health insurance system is so complex and fragmented. There are so many different programs and sources of health coverage that it’s easy to get lost about where these subsidies fit in. The subsidies we’re talking about are for coverage in private health insurance marketplaces, sometimes called “exchanges,” that were created by the Affordable Care Act (ACA) in 2014.

These ACA markets were intended to fill in what I call the “missing middle” of the American health insurance system. The U.S. doesn’t have a single health insurance system, but a patchwork of different types of coverage. People with jobs that offer benefits—typically larger companies and better-paid positions—usually get private insurance from their employer. That’s about 160 million people, which accounts for about half of Americans. Then there are two large government programs: Medicare for seniors and people with disabilities, and Medicaid for the very poor (with many children covered in the related CHIP program). Those programs cover another 120 million people or so.

But then there’s a big group—about 40-50 million people—who fall in the “missing middle”: they earn too much to qualify for Medicaid and they’re too young for Medicare, but they don’t have a job that offers health insurance. These are differentially lower- and middle-income people and people who are self-employed or are in smaller businesses that don’t offer insurance.

That’s where the ACA markets come in. They’re a way for this middle group to obtain health insurance from private insurers that compete in state-level markets. These aren’t purely free markets; they’re regulated to ensure the coverage is decent quality and doesn’t do things like excluding pre-existing conditions or charge higher premiums to the sick. Those were major reforms instituted by the ACA back in 2014.

But here’s the challenge: health care in America is extremely expensive. That means that health insurance—which pays for the cost of health care—is also very expensive. For a benchmark ACA Silver plan, the total premium for a 40-year-old individual is about $500 per month in 2025, or $6,000 for the whole year. The high cost is not unique to ACA coverage—the average employer-sponsored insurance plan was actually even more expensive at almost $9,000 per year in 2024. But it’s still a lot of money and out of reach even for many middle-income families. The median personal income for American adults is roughly $45,000, and this is before subtracting taxes and the cost of other necessities.

That’s where the ACA subsidies come in. They’re designed to make sure the marketplace coverage is “affordable” based on a person’s income. They do so by covering the difference between the full premium (set by insurers) and a target “affordable” amount based on income. As of this year, about 24 million people are enrolled in these ACA markets, and 22 million of these people get federal support to make coverage more affordable.

It’s also important to note that not everyone who could get insurance is enrolled. There are still about 26 million people who are uninsured. Even with the ACA, uninsurance has been stuck at around this level since 2016.

Q: What changed with the “enhanced” subsidies passed in 2021?

Subsidies are intended to make coverage affordable, but that raises the question of what “affordable” means. Affordability is a term used a lot in public discourse, but economists don’t have a clear technical definition. It’s more of a judgment call.

When the ACA was first written, the idea was that it was affordable to ask people to pay premiums between 2% to 10% of income for a standard plan. Poorer people—those just above the poverty line—paid closer to 2% of income, while middle-income people paid closer to 10%.

Now, 2-10% of income may have seemed affordable to the ACA’s designers, but in retrospect it proved more than many Americans were willing or able to pay. A study I co-authored found that for each $40 increase in monthly premiums that you asked low-income people to pay, about one-fourth of them dropped out of the markets entirely. When asked why people don’t sign up for insurance, cost is the main reason cited.

Democrats and Republicans interpreted these facts differently. Republicans said it showed the failure of Obamacare. They advocated for repealing it and starting over, but in practice they couldn’t agree on an alternative, and ACA “repeal and replace” failed in 2017.

Democrats remained in favor of the ACA but argued that the subsidies weren’t large enough. In 2021 under President Biden, they passed “enhanced” subsidies that lowered the affordability thresholds. Instead of 2-10% of income, affordable was now redefined as 0% to 8.5% of income.

That may not seem like a big change, but in practice it made a big difference. The biggest change was for the lowest-income people (those below 150% of poverty) for whom coverage is now free. It turns out that free provides an added benefit: it’s much easier to get and keep people enrolled when you don’t need to collect a monthly insurance bill, which keeps more people insured. That is especially true in the 10 states that still haven’t expanded Medicaid under the ACA—states like Florida and Texas—where there aren’t good coverage alternatives for the poor. But this is also a place where Republicans have raised concerns about improper enrollment: if so many people are signed up for free coverage, how do we know they are eligible and really need it?

Since enhanced subsidies began in 2021, the market enrollment has grown tremendously, rising from 11 million people in 2020 to 25 million today. Again, Democrats and Republicans interpret this growth in opposite ways. Democrats see it as a sign of success, whereas Republicans are concerned about waste and over-use.

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.

Q: Republicans argue these subsidies are costly and prone to abuse. How do you think about those concerns?

It’s fair to worry about cost. The enhanced subsidies add tens of billions of dollars a year to the federal budget, and deficits are already large. The real question is what kind of tradeoffs we’re willing to make.

There are two basic ways to save money. One is to make health care cheaper overall—by cutting payments, shrinking benefits, or increasing deductibles—but those changes come with real downsides for patients and providers. The other is to shift more of the cost to households, which is what happens when subsidies fall. The trouble is that when you ask people to pay more in voluntary markets, many (and especially younger and healthier folks) simply opt out, which drives premiums up for everyone else.

Other countries with private insurance systems, like Switzerland or the Netherlands, solve this by enforcing a mandate that everyone has coverage and collecting premiums through taxes or payroll. The U.S. tried a mild version of that under the ACA, but it was repealed by Congress in 2017.

So Congress is left with a choice: keep subsidies generous to maintain broad coverage or scale them back and accept higher uninsurance. There’s no easy way around that.

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Photography by AP Photo/J. Scott Applewhite.