Folly

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  • A new report from the Congressional Budget Office (CBO) shows that expanding Affordable Care Act (ACA) subsidies is poor public policy. CBO projects that expanding ACA spending, which includes increased premium subsidies for exchange plans as well as a new federal Medicaid program, would cost $553.2 billion over the next decade. The main economic effect is crowd out: Most of this new government spending would replace private spending that would otherwise have occurred to purchase health insurance.

    CBO projects that the entire net coverage gains would occur through Medicaid as private coverage would slightly decline over the next decade. CBO projects that 4.0 million people would gain Medicaid, 3.6 million people would gain subsidized individual market coverage, 1.0 million people would lose unsubsidized individual market coverage, and 2.8 million people would lose employer coverage.

    Only 4.1 million people would newly gain health coverage by 2031. CBO expects the government cost would be $77.364 billion that year, an amount equal to $18,869 in new spending per newly insured.

    This analysis will focus on the problems with the proposed permanent expansion of ACA exchange premium subsidies. In a previous Wall Street Journal article, I discussed the numerous problems with the proposed new federal Medicaid program that would empower the Secretary of Health and Human Services to contract with insurers to administer Medicaid expansion in the states that opted against the ACA’s Medicaid expansion.

    In March 2021, Congress substantially expanded subsidies for most people who purchase coverage in the ACA exchanges in 2021 and 2022. These subsidies are paid directly from the U.S. Treasury to the health insurance company offering the plan. The expansion also increased the amount of the subsidies for everyone currently receiving them and lifted the cap on eligibility so that wealthy households now can qualify. Congressional Democrats now are proposing to make these expanded subsidies permanent.

    The proposed permanent expansion of these subsidies is problematic for at least seven reasons:

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    1)     Most of the benefit would go to people who already have coverage.

    2)     Wealthier households would benefit much more than poorer ones.

    3)     Men would receive unfair benefit relative to women.

    4)     The subsidies would go directly to health insurance companies.

    5)     Poor subsidy design would lead to increased premiums, prices, and wasteful spending

    6)     Employers, particularly small employers, would drop coverage.

    7)     The budgetary cost would be substantial.

    Most of the benefit would go to people who already have coverage

    Nearly 75% of the new spending would simply substitute government spending for private spending. Such spending is inefficient for several reasons, including that government spending must be financed with taxes, and the imposition of taxes has economic costs that far exceed the amount of actual spending. Moreover, people have less incentive to obtain value from their purchasing decisions when the government is footing the bill, or a large part of it.

    Since most of the proposed spending would be directed at people who already have coverage, this proposal would not significantly increase the number of people with insurance. CBO projects that the expanded subsidies would lead to about 2.8 million more people being enrolled in the individual market, with 3.4 million more exchange enrollees and a decline in unsubsidized individual market enrollment of 0.6 million.

    Of the 3.4 million enrollees that CBO projects would be added to the individual market, 2.0 million already had coverage.

    CBO projects that the budgetary cost of making the subsidies permanent would total $210 billion over a decade. Since the number of uninsured would only decline by about 1.4 million people, this equates to a staggering $150,000 to cover one person with health insurance over a decade. This calculation isolates the affect of the premium subsidies, unlike the calculation above which includes Medicaid.

    Wealthier households would benefit much more than poorer households

    According to CBO, 65% of the new exchange enrollees would have income above 400% of the federal poverty line ($51,520 for a single person and $106,000 for a family-of-four) – placing them in the top two income quintiles. Of the new exchange enrollees in that income category, 35% have income between 400% and 600% of the FPL ($77,820 for a single person and $159,000 for a family-of-four), 20% have income between 600% and 700% of the FPL ($90,160 for a single person and $185,500 for a family-of-four), and 10% have income above 700% of the FPL.

    Figure 1 demonstrates the inequity of the subsidy expansion by showing the amount of the expanded subsidy—also called the premium tax credit (PTC)—for six different households based on income and using the average benchmark premium in 2021. (The benchmark plan is the second lowest-cost silver plan in an area).

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    Increase in PTC Amount for Households at Various Income Levels

    Galen Institute paper

    Households above 400% of the FPL receive much greater benefit from the expanded subsidies than poorer households. Older households, which tend to be wealthier, receive much greater benefit than younger households. For example, a family-of-four headed by a 45-year-old couple making $159,000 (six times the federal poverty line) receives a subsidy of $5,589 versus a $2,396 subsidy increase for that family-of-four if they earned $53,000 (two times the federal poverty line). If those households were headed by a 60-year-old couple, the wealthier one would receive a subsidy increase of $16,845 versus that same $2,396 increase for the poorer family.

    Since the subsidies are structured to limit the amount of income that households must pay for a benchmark plan, the subsidies are higher in areas where the benchmark premium is higher. In fact, one of the reasons that the ACA needs fundamental reform, and not simply greater subsidization, is the absurdly high benchmark premiums in many parts of the country.

    For example, the benchmark premium for a family of five headed by a 60-year-old in Prescott, Arizona, is $51,059. The benchmark plan is only supposed to cover 70% of the household’s average health expenditures. Since the premium is ridiculously high, so are the subsidies. If the household makes $150,000, they qualify for a $38,309 subsidy. At household incomes of $350,000 and $500,000, the subsidies are $21,309 and $8,559, respectively. In fact, this household’s subsidy does not fully phase out until their income exceeds $600,000. (To verify, this information, see the Kaiser Family Foundation subsidy calculator, enter a zip code of 86301 for two 60-year-old adults with children ages 20, 18, and 16.) Since subsidies rise dollar for dollar with premiums, subsidy amounts will likely increase throughout the ten-year window, meaning even larger subsidies paid on behalf of people with very high incomes.

    Men would receive unfair benefit relative to women

    The proposed subsidy expansion would benefit men more than women. U.S. median income was about $10,000 higher for men than for women ($56,264 versus $46,332) in 2020. Since this subsidy proposal provides greater benefits as incomes increase, it would therefore benefit men more than women overall. This is particularly unfair for older women since they have experienced the highest premium and cost-sharing increases of any group because of the ACA.

    Subsidies would go directly to health insurance companies

    As a result of the ACA, insurance companies’ decisions are increasingly geared toward maximizing revenue from the federal government. In 2020, federal taxpayers covered 74% of the total premium for people enrolled in the ACA exchanges. That percentage has likely risen to about 85% because of the expanded premium subsidies in 2021 and 2022.

    As a result of the ACA, insurance-company profits and stock prices have skyrocketed, more than doubling the growth of the S&P 500 from 2014 through 2018. And the profit margins that insurers make on the heavily subsidized ACA plans are nearly double the margins earned on group plans. The proposed expanded subsidies would pour hundreds of billions of additional federal dollars into insurers’ coffers, further enriching the companies while undermining private financing of health coverage and strengthening the codependence between big government and big health insurance.

    Poor subsidy design would lead to increased premiums, prices, and wasteful spending

    Since the subsidies limit the amount of income that households must pay for a benchmark plan, individuals will not be sensitive to premium increases. This structure provides insurers with pricing power, which is particularly acute in many areas of the country with little competition among insurers. The proposed subsidy expansion makes this worse by significantly increasing the taxpayer burden of financing premiums for exchange plans as well as by bringing people with income above 400% of the FPL into this perverse subsidy structure. Since insurers know they can increase premiums on taxpayers’ dime, they will have less incentive to negotiate lower prices and reduce wasteful spending.  The expanded subsidies will therefore exacerbate inflation in the health sector.

    Employers, particularly small employers, would drop coverage

    According to the CBO, an estimated 1.6 million people would lose their existing employer coverage due to these expanded subsidies. In fact, the deterioration in employer coverage could be even much greater than the CBO’s estimate. 

    Companies with fewer than 50 full-time employees are not subject to employer mandate tax penalties for not offering employer-based health insurance. Since the proposed expanded subsidies are so large, particularly for lower-income workers, it would make little economic sense for these smaller firms to offer coverage, particularly if their employees earn below median wages. The federal government is simply providing too much money in premium subsidies.

    The budgetary cost would be substantial

    According to CBO’s cost estimates, the extra premium subsidies themselves will cost about $260 billion, partially offset by $50 billion in budgetary savings. These savings largely result because the government would be collecting higher federal tax revenue due to people losing their employer coverage. Employer contributions to health insurance are nontaxable compensation. CBO assumes that employers who drop coverage due to these subsidies will increase employees’ wages, which are taxable – resulting in an increase in federal revenues. 

    The budgetary cost of the tax exclusion for employer provided coverage averages $2,000 per worker. This means that the federal government loses about $2,000 per worker from this untaxed form of worker compensation. If the enhanced ACA subsidies are made permanent, the average budgetary cost will exceed $2,000 for most workers. As a result, the cost to the federal government would grow significantly as enrollment in employer coverage declines. If far more employers stop offering coverage than CBO expects, the budgetary cost to the government would be much higher than projected.

    Better Alternatives Exist

    The ACA subsidy structure is poorly designed and leads to rampant inefficiencies and waste. Congress should not throw good money after bad by permanently enlarging the pipeline that goes directly from the Treasury to insurance companies that sell through the exchanges. Instead, Congress should pursue more fruitful paths, such as empowering consumers and families to have greater control over their own health spending to demand more choices of more affordable coverage and care.

    To move in this direction, Congress can build on a rule promulgated by the Trump administration, which permits employers to offer coverage through individual coverage health reimbursement arrangements. Congress should also enact reforms that would improve choice and competition and thereby lower average individual market premiums by eliminating the ACA’s age-rating band and minimum loss ratio and loosening benefit mandates.

    Source : https://www.forbes.com/sites/theapothecary/2021/10/19/congressional-budget-office-confirms-the-folly-and-waste-of-expanded-obamacare-subsidies/

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    Congressional Budget Office Confirms The Folly And Waste Of Expanded Obamacare Subsidies

    Source:Forbes

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