Oops. People with Subsidies under ObamaCare Will Be Insensitive to Price

…[E]veryoreconciliation-subsidiesne who is subsidized has an infinite subsidy that will make them insensitive to premium levels.

How can that be? Let’s take an example. A family of four at 138 percent of the poverty level ($32,499) has its premium capped at 3.29 percent of income or $1,071. The rest is subsidy. So, if the cost of a silver plan is $10,000, the subsidy for this family is $8,929. A family at 400 percent of the poverty level ($94,200) has to pay up to 9.5 percent of its income for a plan, or $8,949. So the same $10,000 premium carries a subsidy of only $1,051…

But now look at those two families from the insurer’s perspective. A $10,000 plan already costs more than the maximum amount either family would pay. If the insurer raises the premium to $10,001, both families get $1 in additional subsidy. If it raises premiums to $11,000, both families get $1,000 in additional subsidy. In other words, no matter how much an insurer raises rates, a subsidized household pays zero more.

David Goldhill.

Comments (23)

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  1. Andy says:

    From the proponents of ACA, this is a feature not a bug, correct?

  2. Wayne says:

    This makes no sense what-so-ever.

    Why did the the creators of the ACA completely forget about the laws of economics?

    • Perry says:

      Because it’s irrelevant. The ultimate goal is single-payer.

    • Dupree says:

      The subsidy calculation assumes someone enrolls in the second lowest cost silver plan in the region. If someone chooses a more expensive silver plan, they are paying the difference. So the insurance companies should be competing to be at or around the second lowest cost silver plan. And, industries would never collude and price fix to move the whole market upwards. That would be just outrageous….

  3. Marcus says:

    “…the exchanges will fit into a long pattern of U.S. health-care policy: They will serve a constituency (a policy triumph) while driving up the cost of care (which will be blamed on external factors).”

    Not looking forward to this.

  4. Crawford says:

    “…insurers are now required to spend at least 80 percent of revenue from premiums on care.”

    How do you all feel about this?

    • Tommy says:

      It’s much better than 60%.

      • Greg Scandlen says:

        My goodness, why would you think that? What difference does it make what the loss-ratio is if the administrative costs are used to lower your health care bill, such as through fraud prevention? Medicare currently loses some 20% in fraudulent claims. If Medicare raised its administrative costs by 10% to prevent that fraud, the program would still save 10% even though it had higher administrative costs.

    • ColoComment says:

      In addition to Greg’s excellent and accurate comment below re: admin & anti-fraud costs, government has no place dictating to the private sector how much of its revenues must go here or there. It doesn’t matter if it’s health insurance companies, ethanol companies, software companies or the neighborhood children’s lemonade stand. It’s none of the government’s business.

      That law has no legitmate place in a free enterprise system. (‘Course, we all know that’s not what we’ve got here.)

      • Perry says:

        Which begs the question (despite the Supreme Court ruling) how is this constitutional?

        • ColoComment says:

          Perry, I’ve got another ConLaw question: if CJ Roberts has determined that the mandate penalty is a “tax,” then what kind of tax is it? The Constitution (Art. I, Sec. 2) provides only for direct (which MUST be apportioned per Census), excise, duties and imposts, and tariffs. The 16th Amendment had to be passed to get a national income tax, after an earlier income tax law was ruled unconstitutional as not falling under one of the Art. I, Sec. 2 tax categories.

          I know there is at least one lawsuit making its way through the court system that disputes that ACA originated in the House. Recall that ACA includes multiple taxes and was passed in the House under “reconciliation” procedures, which are restricted to revenue/budget bills). Prior to that, the Senate took the shell of a different House revenue bill and inserted its own text, passed it & returned it to the House. The TEXT of the law did not originate in the House. Superficial camouflaging of a Senate bill should not pass the Constitutional “sniff” test, IMHO.

          • ColoComment says:

            Dang,I’d really like to edit that comment, but… no edit. All cite errors and any typos are blamed on … my fingers moving faster than my brain cells.

          • Perry says:

            Good question. The whole thing stinks if you ask me.

    • Dupree says:

      Pigeon-hole a companies profits into a set percentage of the overall price. Somehow, that will incentive them to keep their overall price low.

  5. Bob Hertz says:

    David Goldhill as usual offers a throught provoking comment.

    But the future is even more complicated than he suggests.

    The ACA will include people who get subsidies AND people who make too much to qualify for subsidies.

    I do not see how an insurance carrier can tell who is who. If insurers raise rates in year 2, which I expect, those on subsidies will feel no effect but those who are not on subsidies are back to the same old death spiral that many of them have been on for years.

    At the very least, we will see many familiies try to suppress their income in order to qualify for subsidies.

    The IRS will collect less money in order to pay out more subsidies. Not a pretty picture.

  6. James Lansberry says:

    Not to quibble too much here (because the article is true) but consumers don’t have any sensitivity to price in the majority of the current (employer centric) system either, which is the biggest part of the problem with costs in the first place. So I don’t know that this is a change in general price sensitivity for most folks, and may not have very much change in the aggregate on its own.

    Of course the zero copay on preventative care mixed in with this however….

  7. Bob Hertz says:

    James, I will probably by roasted by some of the readers of this blog, but I will say it anyways…..

    Health care consumers in Canada have zero sensitivity to prices. Consumers in Germany and Scandinavia and Japan have very very little exposure to prices.

    But those nations appear to control health costs better than we do. (I know this is a complex measurement but let me go on.)

    These nations enact price controls. If they want something cheaper, they set a low price and that is it. They do not wait for the free market to drive prices down.
    Mainly because that takes too long, and of course because many health care transactions are not very free.

    • jo chiang says:

      China has built huge public transportation systems in major cities (e.g.Shenzhen) in the last 10 years in a light-year speed compare to US cities (e.g. Los Angeles). China can dictates any (low) price it sees fit to relocate all the households that sit on the path of construction. … US health care costs can be controlled by government dictating prices in theory, too. But will it? will it take away the big profits of big insurance companies if it won’t take away big bonuses of big bankers?

  8. Don Levit says:

    What if an insurer finds a way to lower premiums and the corresponding subsidies? Do you think the federal government may provide “subsidies” to the insurer for lessening the burdens of government?
    Don Levit

  9. Rob Hasselman says:

    To quote Margaret Thatcher “The problem with Socialism is eventually you run out of other people’s money.” This is insane! I would love to own a business where I could increase my prices as much as I want and know the government will subsidize my increase. The problem that so many uneducated people don’t seem to get is that the government doesn’t have any money. They are only a middle man. The money comes from taxes (translation working people). Eventually those of us who work will get tired of paying for people who don’t want to. It’s time to impeach these leaders who treat our constitution like it’s only a recommendation and get back to what made America great.

  10. I Stand Alone says:

    The article makes a great point. I appreciate some of the comments regarding the same insensitivity due to employer sponsored health plans as well. Until we institute the ability to allow standalone HRA’s (as is allowed for retiree plans) in the marketplace, the law will never achieve a good balance of government and free enterprise. Allowing businesses to graduate out of the health administration game by utilizing a Defined Contribution Strategy in collaboration with guaranteed subsidies, then you would see all insurance companies in the exchange. This would provide market pressure to control cost and that guaranteed margin would then actually dwindle.