Fourteen Reasons to Let The Expanded Obamacare Subsidies Expire
In early 2021, President Biden signed into law the American Rescue Plan (ARP) Act—a massive fiscal package that has wasted enormous amounts of taxpayer dollars and caused inflation to soar to the highest levels in the past 40 years. One problematic provision was an expansion of Obamacare subsidies. The original subsidies were ill-designed, and the expansion made the original problems worse. According to a May 25, 2022 report from the Congressional Budget Office (CBO), the expanded subsidies will cost a whopping $30 billion in 2022, an amount 50% above the amount CBO projected one year earlier. Obamacare’s total subsidy cost will be about $90 billion in 2022—$60 billion for the original and $30 billion for the expanded component. Congress should let the expanded Obamacare subsidies expire for at least fourteen reasons.
1) The expanded subsidies were intended to be temporary COVID relief, not a permanent expansion of government.
ARP contained a host of temporary provisions—including enhanced child tax credits, large payments to states, and expanded Obamacare subsidies—which created excess demand and fueled the inflationary pain permeating the American economy. Although excessive and misguided, the new spending programs were intended to be temporary to help Americans best weather the pandemic. Allowing the expanded Obamacare subsidies to expire at the end of the year would simply revert them to the levels they were from 2014 to 2020.
2) Extending the expanded subsidies would crowd out private financing and be inflationary.
The fiscal cost of the expanded Obamacare subsidies was about $30 billion in 2022, according to new CBO estimates. This $30 billion was entirely new deficit spending. CBO originally estimated that nearly 75% of the spending for the expanded subsidies was on behalf of individuals who already had health insurance. Most of the new government spending simply replaced household spending, permitting these households to spend more money in other ways (contributing to inflation by increasing aggregate demand without an increase in aggregate supply). Last year, CBO estimated that the annual cost of a permanent expansion of Obamacare subsidies would average about $25 billion per year over the next decade. Based on CBO’s updated estimates from May 25, 2022, the updated average cost would probably be much higher—likely around $35 billion per year. Congress should be looking for ways to reduce inflation rather than pouring fuel on the fire.
3) Extending the expanded subsidies would lead to higher health care prices and higher premiums.
Obamacare’s original subsidies were only available to people below the age of 65 who were not enrolled in Medicaid and had income between the poverty line and four times the poverty line. The subsidies are structured to limit the amount that households pay for a benchmark exchange plan premium to a percentage of their income. In other words, the household pays the same amount for the benchmark premium regardless of its actual price tag. The rest is paid by the government, or more precisely by future taxpayers since the new spending is entirely deficit-financed. This subsidy design gives insurers pricing power since most of the cost of premium increases is absorbed by the government; insurers lack incentives to lower premiums. Thus, the subsidy design produces higher premiums and consequently higher health care prices. The ARP’s expanded subsidies worsened the original problem by making the subsidies even more expensive and bringing more households into the perverse structure by lifting the cap at 400% of the poverty line. According to CBO’s May 25, 2022, report, premiums for exchange plans are rising faster than they anticipated, so the subsidies are also larger than anticipated.
4) Extending the expanded subsidies would lead to large loss of employer coverage.
Obamacare subsidies are not available to households with an offer of affordable employer coverage. As the size of the subsidies increase, so does the incentive for employers and employees to arrange compensation that takes advantage of the subsidies. Employers can pay employees higher wages instead of offering health benefits, with employees using a subsidy to purchase an exchange plan. Small employers—those with fewer than 50 full-time employees—will be particularly incentivized to do this since they do not face tax penalties for failing to offer coverage. If the Internal Revenue Service finalizes its “family glitch” fixand the expanded Obamacare subsidies are extended, all employers will have even more incentive to stop offering contributions to family coverage because their employees’ dependents will be able to access subsidies to purchase exchange plans.
5) The budgetary cost will grow as employers drop coverage.
According to CBO, the average budgetary cost of the tax exclusion for an individual with employer provided coverage is $2,000. The average amount of the exchange subsidy is much higher. Here are examples for workers at 200% of the federal poverty level (FPL), or about $26,000 for a single person:
· A 60-year-old worker receives a subsidy of nearly $11,000.
· A 45-year-old worker receives a subsidy of nearly $6,000.
· A 30-year-old worker receives a subsidy of more than $4,000.
As more people replace private employer coverage with heavily subsidized exchange plans, the budgetary cost will grow.
6) Extending the expanded subsidies would be a very inefficient way to spend taxpayer dollars.
Despite the large amount of ARP’s new subsidy spending, CBO originally projected that the number of new insured individuals would increase by only 800,000 in 2021 and 1.3 million in 2022. Therefore, on an annualized basis, CBO projected that the ARP increased federal spending on subsidies by about $17,000 for every person newly insured. The reason: nearly 75% of the new spending is for people who already have coverage and largely replaces private spending with government spending. Of note, these estimates are likely too low given the new CBO report that the expanded subsidies cost 50% more in 2022 than CBO originally projected.
7) Government health care commitments are already unsustainable, and extending the expanded subsidies just worsens the already grim U.S. fiscal picture.
When trying to get out of a hole, it makes sense to first stop digging. The U.S. fiscal path is calamitous, with large budget deficits expected to grow exponentially. The May 25, 2022, CBO report projects average federal deficits of $1.6 trillion over the next decade. Current and future deficits are driven in large part by federal health care spending, and this problem is set to increase from Medicare, Medicaid, and Obamacare cost growth. According to another recent CBO report, the failure to reduce cost pressures in these programs will lead to lower capital stock, labor supply, GDP, and wages. And the current unsustainable path includes the expiration of the expanded subsidies. Adding new spending, such as the extension of Obamacare subsidies, means that future cuts to health programs will need to be more severe to avoid such ruinous outcomes and a lower standard of living for Americans.
8) Extending the expanded subsidies provides unfair benefit for wealthy households.
As the figure below shows, the largest financial benefit of the expanded Obamacare subsidies accrues to households with income above 400% of the FPL. The benefit is also larger for older households and households in higher premium areas since the subsidy structure limits premiums to a certain amount based on household income, regardless of the age of the household members or the actual premium.
For example, a family of four headed by a 60-year-old qualifies for a $21,327 subsidy if they earn 401% of the FPL. If that household earned eight times the FPL—or $212,000—the subsidy would exceed $12,000. In some parts of the country, households with incomes of more than $500,000 qualified for subsidies in 2021 and 2022. For example, in 2021, a 64-year-old couple with no dependents in Kay County, Oklahoma and an income of $500,000 per year, who faced a benchmark premium of $49,897, qualified for a subsidy of $7,397.
9) Only about 1,000 West Virginians with income above 400% of the poverty line are enrolled in the exchanges.
Several media outlets have promoted a recent Families USA study to ratchet up the pressure on West Virginia Senator Joe Manchin due to his opposition to the Build Back Better Act, which would have extended Obamacare’s expanded subsidies through 2025. As stated above, the largest subsidy loss is for people with income above 400% of the FPL. But not that many exchange enrollees in West Virginia have income above 400% of the FPL. Estimates provided by University of Minnesota economist Steve Parente suggest that fewer than 1,200 West Virginians with income above 400% of the FPL are currently enrolled in the exchanges.
10) The loss of the expanded subsidies is much more limited than the media projects.
Most people generally have individual market coverage for less than a year, as people move to employment that offers health coverage and others qualify for Medicare or Medicaid. Only 47% of individual market enrollees have continuous coverage for more than one year, and only 30% have continuous coverage for more than two years. Thus, the loss of the expanded subsidy will be less impactful for people who currently receive them than is currently being portrayed. And those who already qualify for them received a huge windfall from the expanded subsidies in 2021 and 2022 when they were enrolled in coverage.
11) The expanded subsidies mostly benefit insurers, while consumers place a low value on the coverage.
Obamacare subsidies are sent directly from the U.S. Treasury to health insurance companies. People only receive these subsidies if they purchase federally-approved products on an insurance exchange. A recent economics study found consumers value the subsidies at less than half of their cost. This study found that the big winners from the flawed design of Obamacare subsidies are health insurers, confirming earlier studies that show that health insurer profits soared after Obamacare took effect.
12) Extending the expanded subsidies would reduce work and economic output.
The rate of return to work is diminished both by explicit taxes, such as income and payroll taxes, and implicit taxes—that is, the loss of a government benefit as income increases. Because the Obamacare subsidies are conditioned on having a job without affordable employer coverage, they incentivize workers to have no full-time job or to choose jobs where they are not offered coverage. In 2015, CBO projected that the original Obamacare subsidies would reduce work by about 2 million full-time workers and reduce GDP by about 0.7%. Since the expanded subsidies are particularly large for older workers, they incentivize workers close to retirement age to transition from full-time to part-time work. Furthermore, these subsidies must be financed with taxes, and higher taxes result in even less economic activity as people take action to reduce their tax exposure.
13) Extending the expanded subsidies discriminates against women.
The expanded subsidies benefit men more than women because the U.S. median income was about $10,000 higher for men than for women ($56,264 versus $46,332) in 2020. Since men tend to make more than women do and the expanded subsidies provide greater benefit as incomes increase, they almost certainly benefit men more than women overall. Some might consider this particularly unfair for older women because they have suffered the highest premium and cost-sharing increases of any group because of the ACA.
14) Extending the expanded subsidies papers over Obamacare’s problems and reduces Congress’s appetite for actual reform.
Prior to the expanded subsidies, exchange enrollment was roughly 60% below expectations. Even with the expanded subsidies, enrollment remains well below expectations. Obamacare caused individual market premiums to double in just the first four years for coverage with high deductibles that was accepted by relatively few doctors and hospitals. The law spawned adverse selection by allowing people to wait until they needed medical care to purchase coverage, an incentive that has been strengthened by the Biden administration’s actions to make it easier for people to enroll in coverage at any time during the year.
Premiums are so high that subsidies must also be very high to enable people to afford the premiums. These subsidies are ill-targeted, especially given that enrollees value them at well less than the taxpayers’ cost to provide them.
Congress needs to reform the underlying Obamacare regulatory structure that has limited insurance options for Americans and reduced the quality of health insurance. Congress needs to also reform the inherently flawed subsidy structure that wastes so much taxpayer money. These reforms could build on Trump administration actions that expanded options and better targeted taxpayer dollars to those who most needed them. Papering over Obamacare’s problems with additional taxpayer dollars is exactly the wrong approach and reduces Congress’s appetite for actual reforms.