Conservative Research Claims ACA Subsidies Create Financial Penalties For Workers

A conservative health policy organization has released a detailed analysis arguing that the Affordable Care Act’s subsidy structure creates significant financial penalties for Americans with employer-sponsored insurance. The Paragon Health Institute paper quantifies what it describes as discrimination against workers and claims the subsidies discourage workforce participation while encouraging employers to drop coverage.

Understanding The Tax Benefit Structure

ACA subsidies are paid for by federal taxpayers and vary in size based on enrollees’ incomes. Employer health benefits are not taxed as income, meaning employees save on taxes they would have paid if the value of their health benefit were included in wages. Both ACA enrollees and people with employer insurance receive a tax benefit.

Paragon’s analysis argues that ACA enrollees receive a much larger tax benefit than those with employer insurance. Most Americans who are not enrolled in Medicare or Medicaid receive health insurance through their employers or those of their spouses or parents. These workers pay for that coverage. Although commonly called the employer’s share of the premium, that amount simply represents wages the employee forgoes.

The pandemic-era subsidy expansion lifted the cap that had originally limited ACA subsidies to households earning less than four times the federal poverty level. In 2024, federal taxpayers covered 83 percent of the revenue insurers collected for exchange plans and 87 percent in states using the federal exchange. Roughly half of all enrollees were in fully subsidized plans that did not require enrollees to pay any premiums.

Measuring Financial Disparities Between Coverage Types

The paper presents several scenarios showing financial differences. A worker earning $46,950 represents 300 percent of the federal poverty level. With exchange coverage, this worker would receive a $5,797 premium tax credit under current law or $7,656 with the pandemic credits. If a worker with the same job and salary has employer-based coverage, the tax benefit from the premium exclusion is $2,760. The difference is $3,037 underthe  current law and $4,896 with the pandemic credits.

For a young family with 35-year-old parents and two children ages 7 and 10, the differences grow larger. If the family’s income is $64,300, they would receive a premium tax credit of $19,059 under the original ACA subsidies. The tax break for an employer-based family health plan would be only $5,904. The difference is $13,155. With the pandemic credits, the family’s credit would be $22,017, and the difference would increase to $16,113.

For healthcare organizations tracking how patients access coverage, these arguments signal potential policy directions that may affect payer mix and patient volumes. Our healthcare advisory team can help organizations model different scenarios through our Healthcare Services.

Early Retirement And High-Income Enrollees

The paper discusses a case cited by U.S. Senator Amy Klobuchar involving a couple in their 50s recently retired from public employment, earning nearly $140,000 per year in combined pension income. Under the pandemic credits, they received a $15,000 premium subsidy in 2025, even though they are in the top income decile. Before 2021, this couple would have received no premium tax credit.

Paragon argues the expanded subsidies transformed the ACA into a program that subsidizes not only low-income workers but also wealthy early retirees who can now leave the labor force years before becoming eligible for Medicare. In 2023, only about 6.7 percent of enrollees with employer coverage were ages 60 to 64 compared to about 13.0 percent of enrollees in the exchanges of that age.

The analysis suggests that two workers creating equal value for an employer receive dramatically different after-tax compensation depending on whether their employer offers coverage. If a worker receives employer coverage and earns a low or middle income, part of his compensation must be allocated to that coverage. If he does not receive employer coverage, he generally qualifies for large premium subsidies and may be much better off economically.

Small Business Coverage Trends

In 2010, 76 percent of firms with 10 to 24 employees and 92 percent of firms with 25 to 49 employees offered health insurance. By 2020, those numbers had dropped to 59 percent and 70 percent. By 2025, those numbers had fallen further to 51 percent and 64 percent, respectively. There was also attrition in offerings at firms with three to nine employees, from 59 percent to 48 percent from 2010 to 2020

Small businesses are exempt from the ACA’s employer mandate, which only applies to firms with 50 or more workers. Some dropped coverage after the ACA passed. Administrative costs per employee for managing health benefits are higher at small firms than at large ones.

Workforce Participation Arguments

The ACA subsidies create a disincentive to work and income growth, as each additional dollar of income modestly reduces the subsidy amount, according to the paper. On average, the subsidy phaseout creates an implicit marginal tax rate of about 15 percent. For every $100 in extra earnings, an enrollee loses roughly $15 in premium tax credits.

The Congressional Budget Office projected in 2015 that the ACA’s subsidy phase-downs would reduce the full-time workforce by roughly 2 million workers by 2025. By tying the government benefit to the absence of an employer-based health insurance plan, Paragon claims the government discourages people from working for employers who offer health coverage.

Unlike employer-based benefits, which employers use to attract workers and have greater tax benefits when income increases, the ACA tax credits punish enrollees who increase their income because earning a higher income cuts their subsidies. There is no disincentive to a worker with employer coverage who seeks to increase his pay by becoming more productive or working more. Because premiums are excluded from taxable income, the value of employer-provided health benefits rises as workers move into higher tax brackets.

Public Sector Retiree Coverage Shifts

The ACA and its subsidies led many cities, such as Chicago and Detroit, to move public-sector retirees into the ACA exchanges, thereby removing unfunded retiree health care liabilities. The pandemic credits make it more likely that public sector retirees’ health care obligations will be transferred into the exchanges, as few governments have set aside funds to pay for their retirees’ future health care costs.

The paper argues that pandemic credits would make wealthy early retirees eligible for large taxpayer-financed health care subsidies, thereby increasing the incentive for state and local governments to move those retirees into the exchanges. This could make the ACA risk pool older and sicker, pushing up premiums.

Network And Quality Concerns

A 2023 survey found 20 percent of ACA enrollees reported a doctor or hospital they needed was not covered by their plan, whereas only 13 percent of enrollees in employer-based health plans faced this problem. This rose to 34 percent of ACA enrollees in only fair or poor health versus only 16 percent of enrollees in work-based plans. Twice as many ACA enrollees skip or delay care because they cannot find a doctor who accepts their plan as those with employer-based benefits do.

The paper notes that there is strong evidence that ACA coverage is of lower quality than employer-based insurance. These disparities translate into thousands of dollars in after-tax compensation differences for two workers doing the same job.

Congressional Budget Office Projections

The Congressional Budget Office estimates that extending the pandemic credits would reduce employer-based coverage by roughly 4 million people. The paper argues that this crowd-out of employer plans, combined with rising taxpayer costs, creates fiscal concerns. The same subsidy design that discourages work also pressures small employers to drop coverage.

When far larger government benefits are available for exchange plans than the tax exclusion for employer-based insurance, the financial calculus for firms, especially those with lower-wage employees, tilts toward not offering company health plans. Firms can increase worker well-being by raising wages and having workers qualify for premium subsidies on the exchanges. As more workers shift from employer coverage to subsidized exchanges, taxpayer costs rise sharply.

Looking Ahead At Policy Debates

Paragon concludes that allowing the temporary pandemic credits to expire is a critical step toward restoring fairness, strengthening work incentives and improving fiscal discipline. The paper argues that the underlying ACA subsidies, compounded by the pandemic credits, penalize employment, reward early retirement and leave taxpayers footing a rapidly growing bill.

Healthcare CFOs should prepare for multiple scenarios as Congress debates subsidy extensions. Each outcome carries different implications for patient access, payer mix and financial performance. Organizations may need to adjust financial reserves and collection policies based on how Congress resolves the subsidy debate.

Prepare Your Organization For Policy Changes

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