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Federal and state healthcare programs often base income eligibility for subsidies for health insurance coverage on how an individual's or family's income compares to the federal poverty level (FPL). Rather than a set income limit, this measure provides annual updates for cost of living and is adjusted for family size. However, a new paper from the Kaiser Family Foundation illustrates how linking income-related eligibility requirements for subsidized health coverage this way may not provide a consistent level of financial protection over time because health insurance costs are increasing more rapidly than poverty levels.

In general, the federal poverty level (in 2007, $17,170 for a family of three) serves as the benchmark for determining when low- income people can obtain many government-subsidized health benefits. For example, children in families with incomes less than twice FPL are eligible for subsidized coverage through Medicaid or the State Children's Health Insurance Program in most states. Also, under the new Massachusetts law that requires residents to purchase health insurance, free coverage is available to people in families with incomes under FPL; people in families with incomes up to three times FPL can receive assistance covering a portion of premiums (a declining share as income rises); and those with incomes above three times FPL are expected to pay the full cost of health insurance.

However, in recent years, the cost of health insurance has risen much faster than the federal poverty level on which eligibility is based. Between 1996 and 2004, premiums for family health insurance more than doubled and premiums for individual coverage rose 86 percent, while the FPL increased only about 20 percent. For a family whose income was just over an eligibility threshold based on FPL at the beginning of this period, the share of family income required to purchase health insurance would rise over the period by about 55% for single coverage and by about 68% for family coverage.

This dynamic has important implications for policymakers. As long as health insurance premiums continue to rise more quickly than the costs of other goods and services, eligibility thresholds tied to FPL (or a multiple of FPL) will not maintain a consistent level of financial protection against rising health insurance costs. Protecting low and moderate income families from spending too high a percentage of their income on health insurance would require subsidy structures that reach an expanding income range over time. Options might include increasing income thresholds for subsidies at the same rate as the cost of health insurance or making periodic adjustments in thresholds to account for the rapid growth in health insurance premiums relative to incomes and other costs.

The paper, "Effect of Tying Eligibility for Health Insurance Subsidies to the Federal Poverty Level," is the latest in the Foundation's online Snapshots: Health Care Costs series. Each of the Snapshots are written by Kaiser Family Foundation staff and uses charts, data and analysis to provide insight into key issues affecting the cost of health care in the United States. The Snapshots are intended to help increase understanding of how rising health costs can be addressed, and encourage a well- informed and fact-based discussion as policymakers in Washington and across the country weigh strategies for curbing the rising costs of health care for people, businesses and governments alike.