Enhanced Affordable Care Act (ACA) tax credits introduced during the pandemic are nearing their expiration date. An upcoming Senate vote will determine whether these subsidies continue, and understanding the risk and underwriting environment for healthcare providers already under pressure is critical.
What lawmakers are considering
The ACA, passed in 2010, established a health insurance marketplace through which Americans could obtain coverage. Subject to certain limitations, the ACA makes Americans with incomes up to 400% of the federal poverty line eligible for tax credits to help make the coverage more affordable.
Two bills passed during the pandemic — the American Rescue Plan Act of 2021 and the Inflation Reduction Act of 2022 — increased the amount of the original tax credits in the ACA and eliminated the income threshold. These enhanced credits are set to expire at the end of 2025.
Though the smaller and more restrictive tax credits in the original ACA will remain, the premium spikes for insurance through the marketplace are significant. The Congressional Budget Office (CBO) estimates the expiration of the enhanced premium tax credits will result in 3.6 million fewer insured Americans (opens a new window).
The future of the enhanced premium tax credits has been a point of contention between Republican and Democratic lawmakers, as illustrated during the record-long government shutdown that ended on Nov. 12. As part of the agreement to end the shutdown, Republicans agreed to a Senate vote — the timing of which is still to be determined — on a bill of Democrats’ choosing to extend the enhanced tax credits.
Although some lawmakers advocate for extending the enhanced tax credits without any changes, several alternative structures are being considered. These include capping enhanced tax credits at 700% of the federal poverty line or — rather than sending the tax credits directly to insurers, as is currently done — putting funds into health savings accounts for individuals who choose lower-tier plans. The latter approach would not reduce health insurance premiums, but would, in theory, help lower-income individuals manage some escalating healthcare costs.
Financial and operational pressures on providers
The vote on the enhanced ACA tax credits comes at a time when healthcare providers already face significant cost pressures and uncertainty about the future. An analysis by the CBO found that the One Big Beautiful Bill Act, signed into law in July, will lead to more than $1 trillion in cuts to Medicaid and the health insurance marketplace (opens a new window).
Traditional financial supports for healthcare organizations, including federal reimbursement, are weakening. Many hospitals and health systems operate on razor-thin margins; while 200 to 300 days’ worth of cash on hand is ideal, an increasing number of providers operate with just a fraction of this.
Allowing the enhanced tax credits to expire is expected to lead to even more financial strain for the industry. Lower overall patient volume — coupled with fewer people being enrolled through the health insurance marketplace — leaves healthcare organizations more responsible for uncompensated care. This could threaten cash flow and trigger bond covenant risks, especially for rural health providers and federally qualified health clinics.
These financial pressures could exacerbate already persistent staffing shortages, notably for registered nurses. The Health Resources & Services Administration projects a 10% shortage of RNs for 2027 (opens a new window), which is anticipated to shrink only slightly, to 6%, by 2037. In addition to struggling to replace experienced nurses as they retire, healthcare organizations are also finding it difficult to retain early-career nurses. In 2024, more than 22% of newly hired RNs left their jobs within a year (opens a new window), according to a report from NSI Nursing Solutions, accounting for nearly one-third of all RN separations.
As providers come under greater pressure to ensure billing accuracy, they could also see greater regulatory and compliance risks. Meanwhile, a wave of consolidation could reshape the industry as larger health systems look to acquire smaller, struggling entities, including rural hospitals and federally qualified health centers that could be especially vulnerable if the tax credits lapse.
Managing greater enterprise risk and questions from D&O insurers
All of these potential factors are contributing to enterprise risks for healthcare organizations, including a more challenging environment for directors and officers liability (D&O) insurance. D&O underwriters are concerned about bankruptcy and solvency risk, especially for organizations with limited cash reserves. In addition to facing potentially higher pricing at renewal, hospitals and other providers may find favorable policy language difficult to obtain. Insurers may impose higher retentions, restrict policy wording — including limiting regulatory and antitrust coverage (opens a new window) — or add burdensome provisions, such as coinsurance.
D&O underwriters are likely to apply greater scrutiny on healthcare organizations’ financials, with a focus on profitability and a targeted focus on days cash on hand. Prospective insurance buyers may be required to provide interim financials and 30-day updates, a significant change from the annual audits that were previously standard.
Organizations with their own captive insurers could consider requesting premium holidays to boost cash flow. However, they should be mindful not to leave captives underfunded, which could raise red flags with auditors and underwriters and draw scrutiny from captive regulators.
In this new environment, planning for upcoming D&O insurance renewals is crucial. Healthcare providers, in partnership with their insurance brokers, should:
Prepare for detailed questions. Organizations must be ready to address questions regarding their dependence on ACA subsidies, HSAs, and flexible spending accounts, along with joint venture concerns. Organizations that have explanations ready and can highlight proactive mitigation strategies for any weak financial indicators will see the best outcomes at renewal.
Start planning for renewals early. Submitting renewal information as early as possible will allow time for underwriters’ additional questions and for organizations to craft strong narratives, especially if financials are under pressure. Healthcare organization CFOs should consider attending prerenewal and underwriting meetings if they are not already involved.
Strengthen submission quality. Organizations should ensure their initial submissions tell the best possible story about their financial health and risk management. Include interim financials and updates, as underwriters are increasingly requesting more data. If margins are thin or cash reserves are low, provide context and details about any plans to improve stability.
Build strong underwriter relationships. Seek to develop and maintain direct, personal relationships with underwriters. If possible, arrange in-person meetings to foster trust and transparency.
Conduct financial stress testing. This process can allow organizations to identify vulnerabilities — including cash flow pressures, troubled assets, and litigation funding gaps — before underwriters do.
As lawmakers weigh the future of the enhanced ACA tax credits, healthcare organizations face critical choices. A strategic approach to D&O insurance renewals can help organizations mitigate risks and ensure long-term stability.
For more information, contact (opens a new window) a member of Lockton’s Healthcare Practice.
