How the ObamaCare Subsidies Work
A number of commentators have incorrectly concluded that the ObamaCare subsidies insulate buyers from higher premium and premium increases, because the subsidies cap out-of-pocket spending as a percent of income. (See Jonathan Cohn, for example.) To explain why this view is wrong, I posted this comment at Marginal Revolution:
1. The premium the individual pays is not fixed as a percent of income. The subsidy is fixed, based on the second lowest silver plan premium and that amount is based on income. But the consumer is free to buy any plan. Remember, the second lowest priced silver plan may be a really lousy plan. It might have a very narrow network, for example. So, all the plans are competing against each other, with one fixed subsidy and an array of premiums. The premium an insurer charges will matter very much.
2. After 2018, the out-of-pocket premium for the second lowest priced silver plan will no longer be fixed as a percent of income. Premium subsidies as a whole will grow no faster than GDP + 0.5%, the same rate of growth that is in the Obama budget for Medicare.
Tyler Cowen reposted it and the comments that follow are very interesting, including an explanation of a Vickery auction (which is how the pricing works in the exchange). Bill Vickery BTW was my teacher at Columbia.
Nothing will insulate the buyers. It’s only a matter of time before everyone ends up broke.
You can only take from one hand and give it to another for so long…
I definitely recommend reading the comments on the original post, it gets quite good further along.
“ObamaCare subsidies insulate buyers”
Never going to happen.
I think we can start kissing the Middle Class goodbye.
It’s a sad but honest reality.
“So, all the plans are competing against each other,”
The creators of this formed competition between the wrong factors.
At the end of the day, insurers will have to charge a small premium to attract customers. Yet, this will come at the expense of customer service and other “costly” expenses that any company experiences.
Actually, there is no reason a health insurer should provide good customer service. The reason for this is fairly logical.
The only reason someone cares about customer service of a health insurer is likely someone who is a high cost patient.
Those who don’t care about customer service are those who are low cost.
This means better customer service is actually bad for business.. (In terms of the health insurance industry)
Maybe that’s the approach that healthcare.gov is taking.
It sure has started out that way. Then again, has the gov’t ever cared about customer service?
Yes, I agree that the comments below Dr. Goodman’s comment at Marginal Revolution are very illuminating.
I paid special attention to the projection that there will not just be adverse selection getting into an exchange or not, but that there will be adverse selection within an exchange, between the differently colored metal plans.
This is not easy to think through. Nevertheless, I am pretty sure that the subset of young and healthy who opt in will go for bronze, which many will get for “free”. The sicker will go for other metals.
Therefore, a gap will widen between premiums for bronze and other plans. By 2018, the subsidies for silver, gold, and platinum plans could be quite inadequate compared with what people have expected.
It seems to me in the interests of all parties that as many silver plans are priced at the benchmark.
That way, subsidieds are maximized and premiums are minimized to the policyhilders. Assuming a family cannot afford more than the percentage of premium left unpaid, the other higher tiers will be left untapped.
Is there any way the government may be interested in providing subsidies to policyholders if, over time, silver benchmark plans are provided at substantially lower premiums, with commensurate lower subsidies?
Don Levit
I suspect John Graham is correct; young, healthy people will congregate in cheaper plans while older, less healthy people will congregate in more comprehensive plans. This is not what the proponents of the PPACA had in mind but it’s the scenario that they should have anticipated.
However, I’m not convinced that is necessarily worse than attempts to force young people to cross subsidize people with higher expected costs. Risk pools are inherently unstable when people are charged more than their expected costs — because they tend to leave when treated unfairly. This way, maybe the risk pool will be segmented into similar risks, with plans competing to efficiently manage the risks. There’s nothing wrong with that.
In other words, the subsidy — to coin a phrase — is a voucher
I’m still not sure that many young healthy people will show up at all. It certainly does not look good. If Obamacare persists through 2017, then there won’t be any risk corridors or reinsurance payouts anymore, just the risk adjustment.
I have not studied the risk adjustment mechanism very closely. (Perhaps it would be a waste of time, because even if Obamacare survives through 2017, I expect it will look quite different than it does today.) However, if the risk adjustment looks like the mechanism used in Medicare Advantage, it may work okay.
But even in Medicare Advantage there are signs that insurers select for healthy risks (through, e.g. free health-club memberships).
So, until individuals can buy our own health insurance and health-status insurance (against being re-underwritten), segmenting the risk pools will still have some issues for the sick.