In what should come as no surprise, Republicans are warming to the expanded ACA that was designed, implemented, and already extended once by Biden along with the Democratic-controlled Congress. I recently wrote about how our elected officials have lost the ability to exhibit the responsibility and fiscal restraint that existed just a few decades ago, and this is yet another example.
These subsidies shouldn't be expanded for six reasons:
- The ACA was designed to increase subsidies as premiums rose and set definitions of affordability that ensured low-income Americans could afford to purchase insurance no matter the price.
- The ACA focused on people above the poverty line, and paid subsidies to people earning much more than the poverty level, even beyond the median household income.
- There is no reason that the affordability thresholds set by the ACA were too high and need to be reduced.
- Expanded subsidies have not led to uniform gains in coverage at all affected incomes, and the apparent gains are questionable.
- Increased subsidies will generally increase premiums, which will end up hurting taxpayers and people ineligible for subsidies while benefitting insurance companies.
- As always, given debt levels, spending more nonexistent money to make, at best, minor enhancements to a program with many other problems is unjustified.
ACA Already Set Subsidies to Make Health Care Affordable
One of the major features of the Affordable Care Act was the subsidies it paid to people earning too much to qualify for Medicaid, to be used to purchase insurance on the exchanges. The subsidies were designed on a sliding scale, to bridge the gap between what the ACA determined people could afford, and the current cost of insurance. The lower a person's income, the higher the subsidy. The higher their income, up to 4 times the federal poverty level, the lower the subsidy.
According to the original legislation, which Obama signed and every Democrat lauded for a decade, every American, regardless of their income level was expected to pay at least a little bit for their health insurance. For people making less than 133% of the Federal Poverty Level (FPL), Obama and Democrats believed contributing at most 2% of their monthly income was affordable. For a single-person right at the poverty line, that would amount to $20/month. For a family of four, less than $40/month. The government/taxpayers would pay the rest via a subsidy.
What often gets lost in discussions about ACA subsidies is that while these subsidies go to individuals and families who are low-income, they are not going to anyone living in poverty, by the government's definition. "% FPL" is a term used frequently in policy circles, but it's important to remember what it signifies--how much more income a person makes compared to someone living in poverty. The ACA, as originally legislated, focused its subsidies on Americans earning above the poverty level but no more than four times the poverty level.
In 2014, the median household income was $53,657 (2014 $), but subsidies were available to households up to 4 times the federal poverty level, which would amount to $71,040 for a household of 2.5 people (the national average). The diagram below shows how the subsidy availability compares to the income scale. In 2014, 300% FPL was pretty close to the median household income, meaning that subsidies were available well into the middle class of Americans.
One of the smart elements of the ACA was the definition of affordability was in terms of percentage of income. This produced several benefits. For one, it would prevent medical inflation from affecting the subsidy. For instance, if health care costs doubled, and premiums consequently doubled, while incomes remained stagnant, then the subsidy would cover the entirety of the premium inflation.
Defining affordability as the maximum percentage of income people should be expected to pay for health insurance meant that annual updates would be unnecessary and affordability would incorporate both the increase in health care premiums and changes in income. There would be little need to change it going forward. Beyond that, Democrats have been celebrating the slow growth of ACA premiums.
However, in 2021, for no particular reason, Biden and Democrats modified the thresholds so that, at every income level, the expected contribution of people to their health care premiums would fall, for most people by more than 50%, and for a large proportion, so that they were no longer expected to contribute anything. The expanded subsidies were only supposed to last through 2022, presumably covering the pandemic, but in the Inflation Reduction Act, the Democrats extended through 2025.
Affordability Redefined - Changes in Expected Contribution by Income Level
The table above shows the amount that people at various income levels were expected to contribute under the original ACA and under the expanded subsidies. President Obama and the Democrats of 2010 considered $25/month affordable for people just above the poverty threshold, and a gradually increasing amount for people making several multiples of that threshold. President Biden and the Democrats of 2021 substantially redefined affordability. In fact, Biden cut the expected contributions more if you were higher income than if you were lower income. While that may not be clear based on percentages, reducing contributions 4% for a higher income is a greater dollar reduction than for a lower income.
Also, bear in mind that these expected contributions are based on a Silver plan, which has higher premiums and lower out of pocket costs than a Bronze plan. Given Bronze plans are generally cheaper, in most cases, they would already be available for zero premium dollars for people between 100 and 200% of the federal poverty level.1
Like much of the other spending in the ARPA (for instance union bailouts, school slush funds, and an additional stimulus check), the expanded subsidies were not really necessary and were insufficiently debated and discussed, but got smuggled through because on their face, they seemed reasonable given the pandemic.
Subsidies Available to Way More Than Most Needy
Subsidies Raise Prices and are Captured by Corporations not Consumers
History has shown that subsidizing consumers often leads to increases in the list prices of the product. Sometimes, the increase in price completely offsets the subsidy meaning the money intended to help consumers ends up having no effect on their well-being at all, but goes to the company selling the product instead. This relationship has been borne out in education, housing, farm rental, child care, and solar panels.
Generally, this effect is more pronounced when supply of a good is limited, such as with housing or child care. In this case, while insurance products themselves are effectively unlimited, the premiums eventually go to a product that is limited - health care. To the extent that coverage leads to unnecessary utilization, it will lead to price increases for providers and premium increases for everyone.
Gains in Insured Population Are Questionable and Uneven
Since the enhanced subsidies, total ACA enrollment has nearly doubled, but looking more closely, gains have not been uniform across all the income levels. 60% of the growth in enrollment came from the 100-150% FPL and 71% of the growth came from people earning less than 200% of the FPL. On a per-beneficiary basis, these were the smallest changes in subsidy, but for these people their benchmark premium fell to zero. If the goal is to maximize enrollment, then dollars are best spent on the lowest income participants. This has the secondary benefit of being more in line with a system that focuses its social safety net on those most in need.
71% of the growth in enrollment came from the people who received the smallest boost in subsidies.
The Paragon Health Institute conducted its own review of the gains and compared to the number of people who would be eligible for subsidies at these income levels. They found that for many states, there was greater growth in enrollment than there were people in those states. They also found that reported incomes more often than would be expected, exactly matched the income thresholds that would warrant the subsidies. Consequently, they concluded that a 5 million of the newly insured were misstating their income to receive the subsidies. Before extending these subsidies, the government should redouble efforts to make sure only the people who deserve them are receiving them.
Further, there's reason to question the CMS enrollment numbers themselves. According to those numbers, ACA enrollment from people earning between 100 and 199 of the federal poverty level has more than doubled, adding millions of new beneficiaries in this group. The National Health Insurance Survey, though, shows no such growth in private ACA enrollment through 2023, the most recent available.
Insurance Coverage Levels for 0-64 year olds between 100-199% of FPL
Source: Lynn A. Blewett, Julia A. Rivera Drew, Miriam L. King, Kari C.W. Williams, Daniel Backman, Annie Chen, and Stephanie Richards. IPUMS Health Surveys: National Health Interview Survey, Version 7.4 [dataset]. Minneapolis, MN: IPUMS, 2024.
https://doi.org/10.18128/D070.V7.4
The Ever-Present Debt
Lastly, of course, is the same argument against all new spending--there is no money to spend. Deficits are increasing more every year and will continue to for decades. New spending today will mean some combination of reduced services or higher taxes for the next generation. As with all spending, if you're in favor of this, if you think it is important and substantially beneficial, it should be no problem to name something that is less important, that is less beneficial, that is a worse use of money. Unless that can be named, and money shifted, then new spending should not be added.
Put slightly differently, and others don't report it this way, but every deficit dollar we spend today, is actually a commitment to spend more than double that over the next twenty years. It's a commitment to spend 7x that over the next 50 years, because every dollar we spend we have to borrow, and we never pay it back. So year after year, we're paying interest. Imagine you took out a 30k loan for a car that you didn't have to payoff for fifty years, and you never paid back the principle. You'd end up spending $213,000 over the fifty years and still owe more. The CBO predicts a baseline interest rate of 4% going forward, but there are many reasons to believe that that interest rate will increase as our debt increases and the United States falls deeper and deeper into debt.
As worrisome as the graph above looks, the reality will probably be worse because of the likelihood of higher interest rates as the debt mounts but also because CBO forecasts don't account for surges in spending due to recessions or spendthrift leadership.
Don't Extend the ACA Subsidies
There are plenty of reasons to be circumspect about the ACA subsidy expansion. Unfortunately, it's a lot easier to avoid careful review and not worry about the budget, the effectiveness of your spending, or fraud but bask in the adulation you get from blindly spending other people's money on a problem people wish was fixed.
Notes
1On average, Bronze plans' premiums are around $100 lower than Silver plans' premiums, so if your expected contribution is below $100 for the second-lowest cost silver plan, the subsidy you receive will be greater than the cost of the bronze plan.
