The ongoing US government shutdown, now in its third week, has seen funding bills fail to secure the necessary votes from both Republicans and Democrats. At the heart of the disagreement are the enhanced health insurance subsidies enacted by Congress in 2021. The role of these subsidies and their potential expiration has sparked heated debates as the shutdown continues.
We spoke to Mark Shepard, an Associate Professor of Public Policy at Harvard Kennedy School and Faculty Affiliate at the Taubman Center for State and Local Government, to gain insight into these subsidies, their origins, and the potential consequences for Americans if they are allowed to expire.
Q: The current debate around the government shutdown seems to centre on something fairly technical—health insurance subsidies. How did we arrive at this point?
It’s true that the shutdown has focused on a seemingly technical issue: whether to extend the “enhanced” health insurance subsidies that have been in place since 2021. If Congress fails to act, these subsidies will expire at the end of this year, and millions of Americans could face significant increases in their out-of-pocket insurance premiums come January 2026.
This issue was anticipated, and Congress had the opportunity to address it over the past year. However, they did not. Now, Democrats are insisting that these insurance subsidies be extended as a condition for funding the government. As a result, we’ve reached an impasse.
There has been a great deal of rhetoric from both sides on this issue, but I think it’s important to cut through that and focus on the actual policy behind it.
Q: Can you explain what these subsidies are and who benefits from them?
The concept of subsidies can be confusing, especially given the complexity of America’s health insurance system. There are various programs and sources of coverage, and it can be hard to pinpoint where these subsidies fit in. The subsidies we’re discussing are for private health insurance plans offered through the marketplaces, or “exchanges,” established by the Affordable Care Act (ACA) in 2014.
These ACA markets were designed to fill what I call the “missing middle” in the US health insurance system. The US doesn’t have a universal health insurance system; instead, it has a patchwork of coverage types. About 160 million Americans, typically employed by larger companies, receive insurance through their employer. Then there are two major government programs: Medicare for seniors and people with disabilities, and Medicaid for the very poor (including the Children’s Health Insurance Program, CHIP). Together, these programmes cover around 120 million people.
But there’s a large group—approximately 40-50 million people—who fall into the “missing middle.” These individuals earn too much to qualify for Medicaid but are too young for Medicare, and they don’t have employer-sponsored insurance. This group primarily consists of lower- and middle-income individuals, as well as the self-employed or those working for small businesses that don’t offer health coverage.
This is where the ACA marketplaces come in. They allow people in the “missing middle” to obtain private insurance from companies competing in state-based markets. These plans are regulated to ensure they meet certain standards, such as covering pre-existing conditions and not charging higher premiums for those with health issues—reforms introduced by the ACA.
However, the challenge is that healthcare in America is incredibly expensive, which means health insurance premiums are also costly. For example, the average monthly premium for a benchmark ACA Silver plan in 2025 will be about $500 for a 40-year-old individual—totaling $6,000 annually. The cost of employer-sponsored insurance is even higher, averaging nearly $9,000 per year in 2024. For many middle-income families, this is simply unaffordable, especially when the median personal income for American adults is around $45,000, before taxes and other living expenses.
This is where the ACA subsidies come into play. They are designed to make marketplace coverage more affordable, based on a person’s income. The government pays the difference between the full premium, set by insurers, and an “affordable” amount based on income. As of 2025, around 24 million people are enrolled in these ACA marketplaces, and 22 million of them receive federal subsidies to reduce the cost of coverage.
It’s important to note, however, that not everyone eligible for insurance under the ACA is enrolled—around 26 million people are still uninsured. Since the ACA’s introduction, the rate of uninsurance has remained stubbornly high.
Q: What happened with the “enhanced” subsidies introduced in 2021?
Subsidies are designed to make coverage affordable, but the term “affordable” is subjective. When the ACA was first passed, the goal was to make premiums affordable for people by capping their share of the cost at between 2% and 10% of their income. Low-income individuals paid closer to 2%, while middle-income individuals were expected to pay nearer to 10%.
However, as time went on, it became clear that for many Americans, even 2-10% of their income was too much. A study I co-authored found that for every $40 increase in monthly premiums, about a quarter of low-income people would drop out of the insurance markets entirely. When asked why they didn’t sign up for insurance, cost was the main reason given.
Republicans viewed this as a failure of the ACA, calling for its repeal. However, they could not agree on a viable alternative, and efforts to “repeal and replace” the ACA failed in 2017.
Democrats, on the other hand, argued that the subsidies weren’t generous enough. In 2021, under President Biden, they passed enhanced subsidies that made coverage even more affordable. Instead of the original 2-10% of income, premiums were now capped at 0% to 8.5% of income.
For lower-income individuals—those earning less than 150% of the poverty line—coverage became free. This has proven to be highly effective in keeping people enrolled, particularly in states like Florida and Texas, where Medicaid expansion under the ACA has not been implemented. However, this has raised concerns among Republicans about improper enrolment—how can we be sure that those receiving free coverage truly qualify?
Since the enhanced subsidies were introduced in 2021, the number of people enrolled in the ACA marketplaces has skyrocketed, from 11 million in 2020 to 25 million today. While Democrats see this as a success, Republicans have raised concerns about waste and inefficiency.
Q: What will happen if the enhanced subsidies expire in January?
We have a fairly good idea of the consequences, based on past experience and the basic economics of the insurance market. The outcome can be summarised in three steps:
- Coverage will become less affordable. When the government pays less, households will have to pick up the slack. Premiums will rise for many people. The Kaiser Family Foundation estimates that the average subsidised household’s annual premium will more than double, from $888 in 2025 to $1,904 in 2026.
- People will drop out of coverage. The Congressional Budget Office (CBO) estimates that 3.8 million fewer people will have insurance due to the change. Some will not be able to afford the higher premiums, while others will not re-enrol once coverage is no longer free. Even minor obstacles, such as the need to make premium payments, can cause large numbers of people to drop out, especially younger and healthier individuals.
- The risk pool will deteriorate. As healthier people drop out, insurers will face higher risk, leading them to raise premiums further. We could also see some insurers exiting the marketplace altogether, reducing competition. The combined effect of fewer enrollees, higher premiums, and less competition is something we saw during the failed repeal efforts of 2017-18.
The federal government would save about $30 billion annually if the subsidies were scaled back, according to the CBO. But this comes with the tradeoff of having fewer people insured.
Q: How would these changes affect state and local governments?
When people lose health insurance, they don’t stop getting sick. The uninsured often end up seeking care in emergency rooms, which results in uncompensated care that hospitals must cover. State and local governments often bear much of this burden through public hospitals and Medicaid funding. So, when insurance coverage drops, it directly impacts local governments and healthcare providers.
Q: Republicans argue these subsidies are expensive and prone to abuse. How do you respond to these concerns?
It’s reasonable to worry about the cost of these subsidies. The enhanced subsidies add tens of billions of dollars to the federal budget, and with growing deficits, that’s a significant concern. However, the real question is what tradeoffs we’re willing to accept.
There are two main ways to save money. One option is to reduce overall healthcare costs—by cutting payments to providers, shrinking benefits, or raising deductibles—but that has its own negative consequences for patients and healthcare providers. The other option is to shift more of the cost to households, which is what happens when subsidies are reduced. However, when people are asked to pay more, many, particularly younger and healthier individuals, will opt out, which drives premiums up for everyone else.
Countries with private insurance systems, like Switzerland and the Netherlands, solve this problem by enforcing a mandate that everyone must have insurance, with premiums collected through taxes or payroll. The US tried a version of this with the ACA’s individual mandate, but it was repealed by Congress in 2017.
So, Congress faces a difficult decision: continue generous subsidies to maintain broad coverage, or scale them back and accept higher levels of uninsurance. There is no easy solution.