Republicans say giving health care subsidies as cash to consumers would give Americans more control over their coverage. Critics say it could severely undermine the ACA marketplaces.
Republicans are putting their own spin on subsidizing Americans’ health care: Route money away from insurers and put cash directly in consumers’ hands to give them more choice over their coverage.
Economists and policy experts suspect President Donald Trump and GOP lawmakers are presenting this alternative to extending the enhanced Affordable Care Act subsidies because they want to undermine or even replace Obamacare — something the party has repeatedly failed to do in the past.
With direct cash payments from the federal government into special accounts, “healthy people could get much cheaper insurance that has medical underwriting and doesn’t cover preexisting conditions, but that would leave much sicker people in the ACA pool, and likely send it into a death spiral,” said Larry Levitt, executive vice president for health policy at KFF, a nonpartisan research organization.
If younger, healthier consumers choose such so-called junk health plans — with lower costs and less robust coverage — or don’t use the money for health insurance, it could throw off the balance of risk and prompt insurers to exit the market entirely, Levitt and others said.
Republican proposals for the direct payments still lack key details. They include creating health savings accounts or flexible spending accounts for millions of Americans and depositing cash into them instead of providing the enhanced premium subsidy that goes directly to health insurers.
Such accounts have been loved by Republicans for years but are gaining steam as the GOP searches for alternatives to extending the enhanced Obamacare subsidies — a key demand from Democrats in the government shutdown fight.
Trump appeared to endorse the concept over the weekend when he said in a Truth Social post that “the Hundreds of Billions of Dollars currently being sent to money sucking Insurance Companies … [should] be sent to the people.”
Sen. Bill Cassidy (R-La.) has proposed redirecting the enhanced subsidy funding into pre-tax flexible spending accounts — which, unlike HSAs, must be exhausted within a fixed period — for Americans to use for health care expenses like deductibles or co-pays. He said talks are nascent, but he hopes Democrats listen in good faith.
“This is the sort of American patient-consumer-looking piece of policy that we should be able to agree to on a bipartisan basis,” he told reporters Monday.
Democrats appear unlikely to buy in.
“We are not going to come up with that deal during open enrollment,” said Sen. Chris Murphy (D-Conn.). “Right now, the only option is to extend the subsidies for a year.”
As part of the bipartisan deal to reopen the government, Republicans have promised Democrats a Senate floor vote in December on legislation to extend the expiring tax credits, which have helped drive record Obamacare enrollment since Democrats created the subsidies in 2021. The enhanced tax credits, which help low- and middle-income Americans pay for their Obamacare premiums, were extended in the Inflation Reduction Act, which then-President Joe Biden signed into law in 2022.
Tax credits created under the ACA in 2010 will remain even if the enhanced version expires.
The ‘death spiral’
Economists said the GOP proposals would not likely significantly drive up inflation, because cash in HSAs and FSAs generally must be spent only on health care services. Handing out cash payments directly to Americans to spend on anything could create a surge in consumer demand without a corresponding increase in supply — a key factor driving inflation.
Providing health insurance subsidies, like the enhanced Obamacare tax credits, meanwhile, can have an upward impact on health care price inflation, because people are more likely to seek out medical care if they’re insured, they said.
But the Republican plans, depending on how they’re designed, could prompt fewer people to enroll in ACA marketplace coverage.
“People are not going to buy as much insurance as before, and these markets do seem to struggle to sustain participation and competition from insurers, and so if there were this type of large wholesale shift from subsidies to cash payments, I would expect enrollment to drop significantly, and I would expect insurers to pull out of the markets,” said Tim Layton, an associate professor of public policy and economics at the University of Virginia.
Americans, especially if they are young and healthy, might also opt for cheaper health plans that do not have to comply with the ACA, including short-term health plans, which aren’t required to cover essential services like preventive screenings or maternity care, experts said.
“You’re going to leave a bunch of people who have an unfortunate health event just in a catastrophic situation,” said Vivian Ho, chair of health economics at Rice University.
But former Trump adviser Brian Blase, now president of the influential right-leaning think tank Paragon Health Institute, argues that some plans to divert funds from insurers and into Americans’ pocketbooks would have little to no impact on Obamacare enrollment.
Paragon wants Republicans to let the enhanced ACA subsidies expire and has been promoting a new health care plan that would allow some lower-income Obamacare enrollees to take a portion of the government cost-sharing subsidies that go to health insurers and instead use them as health savings account deposits.
HSAs, which require enrollment in a high-deductible health plan, offer greater flexibility than FSAs over long-term health benefits, as the funds roll over from year to year and can be used over a person’s lifetime. FSA funds must be spent by the end of the plan year, otherwise, they will be forfeited. Funds in an HSA can also be used to pay for a broader range of health care services than those of FSAs.
Any changes to the Obamacare risk pool under Paragon’s plan would be minimal, because people would have to be enrolled in an ACA plan to access the benefit, Blase said.
It’s unclear whether Republicans are considering Paragon’s specific proposal, but Blase is encouraged by Trump’s Truth Social post over the weekend.
“He basically gave the policy direction, which I think is correct, that we have to stop the status quo,” he said. “Just sending more taxpayer dollars to health insurance companies is not making anything more affordable, it’s just increasing their profits and making health care less affordable.”
But giving cash directly to Americans to purchase health care as opposed to health insurers is also unlikely to largely “bend the cost curve” because consumers typically aren’t armed with price data to shop and compare the most cost-effective plans, said Robert Kaestner, a research professor at the University of Chicago’s Harris School of Public Policy.
That means the major cost drivers in health care — the prices and networks that providers and insurers negotiate — would likely continue to keep costs high for consumers, he said.
“The idea that consumers will be more cost-sensitive and make good choices is really overblown,” said Kaestner. “They still have to rely on insurance companies putting together networks, getting the price discounts that they get now.”
Truncated timetable
It’s unclear whether there is enough time to put together such a policy for 2026.
Open enrollment for most states started Nov. 1 for 2026 ACA coverage. It could take some states several weeks to update even a clean subsidy extension, and any major change could take longer.
Some Republicans conceded it might be too late this year to make a major change.
“I’ve talked to my colleagues, and I think they realize we can’t get everything done,” said Sen. Mike Rounds (R-S.C.), who praised the idea of savings accounts. “But let’s put together a good approach.”
Cassidy believes there is enough time.
He has his own FSA through the Obamacare small business exchange and argues it wouldn’t take much to expand it to the individual markets, used by people who aren’t covered by their employers. The individual market, which does not allow FSAs, makes up the majority of ACA enrollments.
He added that his proposal is more “practical” than a subsidy extension because insurance exchanges can keep the rates they have already approved and instead “issue FSA eligibility and it plugs right in.”
Next steps
There have been largely informal talks among senators on a subsidy extension, but they are expected to ramp up now that a deal to reopen the federal government has been reached.
Senate Majority Leader John Thune promised Democrats a vote on subsidies by the second week of December. It is unclear whether that would mean votes on competing proposals from Democrats and Republicans or a bipartisan approach.
Republicans themselves have to coalesce around a proposal.
Sen. Rick Scott (R-Fla.) is working on a bill for his version of a health savings account, which is different from Cassidy’s pitch. The legislation will go to the Senate Finance Committee for consideration.
The top Democrat on that panel — Oregon Sen. Ron Wyden — said he could see the savings accounts as an option for people, but not the only one.
“If you’re saying you would like to have it as a choice with other kinds of policies, I am open to that which is largely what we have today,” he said.
But Wyden was more skeptical of the proposal if a health savings account is the only option instead of an enhanced subsidy.
“We’re going to have to have choices for people,” he added.
Other Democrats called the accounts a tactic to undermine Obamacare.
“I think that is just a ploy to delay and derail the extension of the ACA tax credits,” said Sen. Chris Van Hollen (D-Md.).