What to Cut? Start with the Subsidies to Health-Insurance Companies

The news is full of stories about the “tough” choices that congressional Democrats must make to trim their massive $3.5 trillion reconciliation package. Here’s an easy one — eliminate the $600 billion in subsidies to health-insurance companies that are currently included in the legislation. This $600 billion does not represent health-care reform and does nothing to expand choices, lower costs, or make programs work better for patients. Rather, it throws more money at wasteful, micromanaged, government-run programs.

Senator Bernie Sanders, the chairman of the Senate Budget Committee, a socialist who caucuses with the Democrats, has bemoaned the massive profits of the health-care industry. Unlike the rhetoric, the reality is that the reconciliation bill would significantly boost those massive profits. The proposed windfalls for health insurers build on key provisions of the Affordable Care Act (ACA) that delivered hundreds of billions of taxpayer dollars directly to health-insurance companies. In 2020, federal taxpayers covered 74 percent of the total premium for people enrolled in the ACA exchanges. As a result of the ACA, insurance-company profits and stock prices skyrocketed, more than doubling the growth of the S&P 500 from 2014 through 2018. And the profit margins that insurers make on the heavily subsidized ACA plans are nearly double the margins earned on group plans.

The $600 billion is the estimated ten-year spending from the following three parts of the reconciliation package:

• premium subsidies sent directly to health-insurance companies for people who enroll in ACA exchange plans;
• a new federal Medicaid program that would funnel more money to health insurers through contracts negotiated by the secretary of Health and Human Services (HHS); and
• a massive reinsurance program sending direct payments to health insurers to cover a large share of the cost for their enrollees who have the most expensive claims.

Premium Subsidies
For the vast majority of people who purchase coverage in the ACA exchanges, the U.S. Treasury pays most of their premiums via direct payments to health insurers. For 2021 and 2022, the American Rescue Plan Act (ARPA) increased the amount of those subsidies and lifted the cap on subsidy eligibility (which was at 400 percent of the federal poverty line), sending federal subsidies to people in the top two income quintiles. The reconciliation bill proposes to permanently adopt these subsidy expansions.

The accompanying figure shows the amount of the expanded subsidies — dubbed “premium tax credits” (PTCs) — for six different households based on income, using the national average for the benchmark premium. (In areas of the country where premiums are above the average, the subsidies are higher. In areas of the country where premiums are below the average, the subsidies are lower.) These increased subsidies — direct government payments to health insurers — are projected to total $250 billion to $300 billion over the next decade.

The figure shows how the subsidy expansion provides much greater support for upper-income households than for lower-income households. The subsidy expansion’s disproportionate benefits to health-insurance companies and upper-income households are not the only problems. The following are a few more:

• Nearly three-quarters of the spending merely replaces private spending that would have occurred with government subsidies.
• The expanded premium subsidies will result in many people’s losing their employer coverage, since the subsidies present firms with significant incentives to drop coverage. This is particularly true for smaller firms not subject to employer-mandate penalties.
• The expanded premium subsidies are inflationary and will lead to higher health-care prices, health-insurance premiums, and health-care spending.
• The expanded premium subsidies, available only if people do not receive an offer of coverage at work, will discourage work and economic productivity.

New Federal Medicaid Program
The reconciliation bill would require the secretary of HHS to create a federal Medicaid program to cover the states that have decided against adopting the ACA’s Medicaid expansion. HHS would solicit bids from health insurers to operate the new Medicaid program, and the government would send the winning insurers a monthly payment for every new Medicaid enrollee. In the Wall Street Journal, I recently discussed the numerous problems with this proposed program. One additional problem that was not discussed in that article is that the new federal Medicaid program would likely not be subject to the Hyde amendment, meaning that it could fund elective abortions. Prior to implementation of the new Medicaid program in 2025, the reconciliation bill authorizes subsidies that will cover the full cost of an ACA plan for people who earn below the federal poverty line in non-expansion states. The total cost of the new federal Medicaid program plus these new subsidies through 2024 will likely be between $200 billion and $250 billion over the next decade.

Reinsurance programThe ACA contained a transitional reinsurance program from 2014 to 2016 with the intended purpose of lowering ACA premiums to ease the transition to the law’s new insurance rules. The reinsurance program resulted in the federal government’s compensating insurers for a large share of the medical bills of their most expensive enrollees. The reconciliation bill proposes to restart this program and spend $100 billion over the next decade on what is essentially corporate welfare via direct transfers from the U.S. Treasury to health-insurance companies.

The reinsurance program is particularly problematic since the federal government covered 74 percent of the premium in 2020 before the expanded subsidies from the ARPA. After ARPA, the federal share of the premium likely climbed to 85 percent. So, the reinsurance program would be on top of the federal government’s covering 85 percent of the premium. Thus, in addition to all the up-front subsidies to insurers, insurers would send the federal government a bill to cover their most expensive enrollees. It is worth noting that the reinsurance money will lead to somewhat lower premiums and premium subsidies as the cost of larger medical bills is shifted from taxpayers to insurers. It’s generally assumed that $100 of reinsurance would have a net cost of $40, since it would result in $60 of lower premium subsidies.

Cut the $600 Billion of Subsidies to Health Insurers
While trying to sell the ACA to the American public more than a decade ago, its proponents decried insurance-company practices and cast insurers as the villains. In stark contrast to the rhetoric, insurers have flourished under the ACA from massive new federal subsidies — both for the exchanges and through Medicaid expansion — and increased regulations allowing them to collect more premiums. The health-care components in the reconciliation bill represent the sequel and, if enacted, will be another gift from congressional Democrats to health-insurance companies. In this legislation that is full of bad programs and policies, the $600 billion of increased subsidies to health insurers are among the worst and should be among the first to go when choosing what to cut.