Reform Obamacare Instead of Spending More Money on It

The main reason Democrats in Congress are willing to shut down the government is health care. Democrats are insisting the Republicans undo all the cuts in health care spending that were in the “big beautiful bill.”

But what they want most is a continuation of the Covid-era subsidies in Obamacare for people who buy their own insurance. These subsidies are set to expire at the end of this year. The cost of continuing the Covid subsidies is $450 billion over ten years. The cost of all the Democrats’ demands is $1.5 trillion. Republicans are resisting.

With Covid-era subsidies, taxpayers are paying for 90 percent of the premiums charged in the (Obamacare) marketplace exchanges. If the subsidies are allowed to expire, the taxpayer share drops to 80 percent. That means the government is still paying the lion’s share of the costs.

The Congressional Budget Office predicts that 3.6 million people will find the insurance not worth the new price and will drop their coverage. Since these will be mostly healthy people, they will leave behind a sicker insurance pool, and premiums will substantially rise to cover the cost of insuring everyone who remains.

Both parties are missing an opportunity here. Obamacare desperately needs reforming. Smart reforms would make the insurance better for those who have it and save taxpayers money at the same time.

There are seven main problems with Obamacare insurance: (1) it is absurdly expensive; (2) it leaves people vulnerable for huge out-of-pocket costs; (3) it imposes high marginal tax rates on earned income; (4) it often excludes the best doctors and the best hospitals; (5) it gives insurers perverse incentives to avoid unprofitable enrollees; (6) it over-subsidizes the healthy and under-subsidizes the sick; and (7) it invites widespread fraud.

Put differently, in a free market for health insurance, Obamacare plans are plans that very few people would willingly choose to buy with their own money.

Premium costs. According to eHealth, last year the average premium for a family of four in the exchanges was $23,968. Adding the average premium to the average deductible brings the total to $27,025. If the family is not getting a subsidy, that’s the amount they can expect to spend before they get any benefit from the plan!

Out-of-pocket costs. Nor is that the worst that can happen. In addition to deductibles, there can be coinsurance and copayments. These could reach $9,450 for an individual in 2024 or $18,900 for the family.

So, the family could pay as much as $42,868 of their own money, even though they are theoretically insured. If they have family members with chronic conditions, they could pay that much every year.

For the same money, you could buy a moderately priced Tesla every year.

High implicit marginal tax rates. Writing in the Wall Street Journal, Beverly Gossage and I examined the case of a Dallas couple with two children. With an income of $60,000, the adults can qualify for a zero-premium Blue Cross plan, and the children can get all their medical care under the Children’s Health Insurance Program (CHIP) or Medicaid.

But things quickly change if their income rises to $70,000. If two family members have serious medical problems, they would then face $18,200 in potential medical costs for earning $10,000 in additional income. That’s a marginal tax rate of 182%!

No access to medicine at its best. Plans in the Obamacare exchanges typically have narrow networks that exclude the top doctors and the top hospitals. Because they pay such low fees to providers, exchange plans are generally not accepted at the University of Texas Health Science Center in Dallas or the MD Anderson Cancer Center in Houston.

Patients with exchange plans also generally do not have access to the Mayo Clinic, the Cleveland Clinic, Memorial Sloan Kettering Cancer Center in New York City, or the Dana-Farber Cancer Institute in Boston.

Incentives to avoid unprofitable patients. Health plans are required to “community rate,” charging the same premium regardless of health condition. By itself, this requirement makes healthy enrollees attractive to the plans and unhealthy enrollees unattractive.

To offset this perverse incentive, the exchanges have risk-adjustment payments that compensate plans that attract more costly enrollees.

They have also, from time to time, experimented with reinsurance (which can be thought of as an invisible risk pool). These adjustments turn out to be imperfect, however.

Economist Michael Geruso, an advisor to former President Joe Biden, and his colleagues give the example of a drug that treats multiple sclerosis. On average, the drug will cost $61,000. But after premium adjustments, the health plan will only receive $47,000 in net revenue. That is a significant loss.

In this way, the system creates perverse incentives for insurers to make their plans less attractive to the sick through measures such as higher coinsurance and more requirements for prior authorizations.

Over-subsidizing the healthy and under-subsidizing the sick. With Covid era subsidies, roughly 46 percent of people with exchange insurance are eligible for a plan with a premium of zero. If they are healthy, the only care they need is preventive care, and that is also free. So, millions of healthy people are getting all their health needs met at no personal cost.

Yet, as we have seen, people with high health care costs can face out-of-pocket payments of $9,200 for an individual and twice that for a family.

This is not the result of free market competition. It is the result of misguided public policy.

Widespread fraud. The opportunity to insure for a zero premium is an open invitation for fraud. If an insurance agent doesn’t have to get a check from a potential enrollee, he or she can enroll that person without their knowledge. The agent gets a fee, the insurer gets a big government payment, and the “enrollee” may never learn he is enrolled. Also, without the enrollee verifying personal information, it is easy to falsify data in order to fabricate eligibility.

The Paragon Health Institute estimates that through this and other devices, 6.4 million people with exchange insurance are actually not eligible for it. Also, nearly 12 million enrollees had no medical claims during 2024. That is a figure that invites suspicion.

Before spending $450 billion to continue this very flawed health insurance program, Congress should focus on how to reform it.