Sorry, Subsidies Aren’t Going to Save People from Obamacare Premium Hikes

When the Obama administration admitted last week that premiums under the Affordable Care Act are rising significantly — 25 percent across states that use the federal exchange; more than 100 percent in Arizona — liberals were there to save the day.

Remember that the law includes generous subsidies, they said. That will cover the premium hikes and keep the law on track.

So, no problem, right?

Wrong. Here’s why:

1. Someone has to pay for those subsidies

This is pretty straightforward: If huge increases in millions of people’s premiums are being covered by the federal government, that’s coming from taxpayers.

Now, as liberals love to point out, Obamacare has so far ended up costing less than projected, because health care inflation has been unexpectedly low and fewer subsidized enrollees are signing up than expected.

But subsidy spending on a per capita basis is actually much higher than expected — that is, we are spending much more in subsidies for every person covered on the exchanges than the Obama administration promised. Even before the full size of the premium hikes were known, taxpayers were projected to shell out $56 billion to subsidize 12 million Obamacare enrollees next year, or about as much as we’ll spend on the entire federal highway system.

2. Only about half of people on Obamacare plans get subsidies

You may have heard liberals point out that about 85 percent of enrollees in the Obamacare exchanges receive subsidies, meaning about 1.5 million people on the exchanges will see the full impact of the premium hikes.

But this hugely understates the number of people who pay for pricey Obamacare coverage without subsidies: 7 or 8 million more Americans buy Obamacare plans without going through an exchange and therefore get no subsidies.

That is, about half of the entire individual health insurance market doesn’t get subsidies, and will see the full brunt of the premium hikes. Meanwhile, millions of other Americans bear the cost of Obamacare by going uninsured because premiums were already too high.

Generally, most of these people make more than 400 percent of the federal poverty line, so maybe they’re not in dire need. But they’re not rich, either: For a two-person household, 400 percent of the poverty line is about $63,000 a year, not a princely sum.

President Obama certainly thinks they need help. He’s proposed expanding subsidies to more of the middle class and to young people (many of whose premiums are high for what they’re getting but not high enough to receive subsidies).

3. If you don’t change your plan, the subsidies may not cover the premium hike

You may have heard Obamacare defenders note that you won’t see premium hikes if you “shop around.” Shopping around is a key part of having a competitive insurance system, but it doesn’t come without costs.

Exchange subsidies are pegged to help people afford the second-cheapest “silver” plan in their insurance market. If your current plan went from being, say, the cheapest silver plan in your market to one of the most expensive, subsidies won’t cover your premium hike.

Switching health insurance plans isn’t a cinch, especially as insurers have used limited doctor networks and narrow drug coverage to help keep premiums down.

In other words: If you like your subsidy, you might not get to keep your doctor.

4. Eventually, the subsidies stop growing

For those who receive them, subsidies have generally covered the premium hikes this year, because they’re calculated based on people not having to pay more than a certain share of their income for health insurance. (Originally, 2 percent for those making 100 percent of the federal poverty line, up to 9.5 percent for those making 300 to 400 percent of the poverty line.)

But that won’t always be the case — indeed, the law is explicitly designed for subsidies to stop covering premium increases at a certain point. For the next few years, the percentage of income expected to be spent on insurance rises slightly if premium hikes exceed income growth (as they certainly will this year).

Source: Investor’s Business Daily

Then, starting with plans bought for 2019, subsidies will only increase at the rate of inflation — much less than the typical premium increase — if the total amount spent on subsidies exceeds 0.504 percent of the entire economy.

We’re not currently on track to do that in 2019, because overall health spending has not been rising terribly fast and there haven’t been as many enrollees as expected. But if subsidies are needed to cover rapidly rising premiums for a couple more years, it’s quite possible that threshold will be reached. (Of course, that’s sort of the point: The architects of the law know that ever-increasing subsidies could encourage premium growth. It’s too bad the rest of the law made out-of-control premium growth nearly unavoidable.)

5. Liberals know subsidies aren’t the answer

Premiums are rising because insurance companies are spending more money covering their Obamacare customers than they’re currently charging in premiums.

The optimistic explanation for this is that they set premiums too low in the beginning, and this is a correction to a more realistic level.

But this year’s premium hikes could well make the pool of people they’re covering even more expensive, by causing some healthy people to drop out. (Remember, half of the people in the Obamacare market will see these premium hikes — not just the small sliver you’ve heard about.)

That makes it hard for this to be a one-time correction. Premium hikes could push so many healthy enrollees out of the market that at the new, higher prices, insurers are still losing money. Then, you need even more premium hikes, and even more healthy people leave the market, and you’re in a death spiral — which widely respected Princeton health economist Uwe Reinhardt thinks is already happening.

This is all a long way of explaining why you’ve seen many Obamacare defenders not claim that subsidies will solve things, but admit that another solution will be needed: a tougher individual mandate. The most direct way to solve the problem, they realize, is just to force more people into the pool.

So that’s where the current premium hikes leave us, at best: To save Obamacare, its defenders want us to beef up its least-popular, most coercive, and solidly unconstitutional provision.

Sounds like a great system.

Patrick Brennan is a contributor for Opportunity Lives. You can follow him on Twitter @ptbrennan11.