Reduce Medicare Subsidies to Reduce Reconciliation Bill Costs

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Advice to Congressional Democrats looking to cut the $ 3.5 trillion reconciliation package: Cut the $ 600 billion in subsidies to health insurance companies.

The the news is full of stories on the “tough” choices Congress Democrats must make to reduce their massive $ 3.5 trillion reconciliation package. Here’s a simple one: Eliminate the $ 600 billion in subsidies to health insurance companies that are currently included in the law. This $ 600 billion does not represent health care reform and does nothing to expand choices, reduce costs or improve programs for patients. On the contrary, it is spending more money on unnecessary, micromanaged and government-run programs.

Senator Bernie Sanders, chairman of the Senate Budget Committee, a Socialist who caucuses with Democrats, has lamented the huge profits of the health care industry. Contrary to rhetoric, the reality is that the reconciliation bill would dramatically increase these massive profits. The windfall benefits proposed for health insurers build on key provisions of the Affordable Care Act (ACA) which provided 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 ACA exchanges. Due to the ACA, insurance company profits and stock prices skyrockets, more than doubling the growth of the S&P 500 from 2014 to 2018. And the profit margins of insurers on heavily subsidized ACA plans are almost double the margins earned on group plans.

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

  • premium grants sent directly to health insurance companies for people who sign up for 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 much of the costs of their members who have the most expensive claims.

Premiums Subsidies
For the vast majority of people who purchase coverage from ACA scholarships, the US Treasury pays most of their premiums through direct payments to health insurers. For 2021 and 2022, the American Rescue Plan Act (ARPA) increase the amount of those grants and lifted the grant eligibility cap (which was 400% of the federal poverty line), sending federal grants to people in the top two income quintiles. The reconciliation bill proposes to definitively adopt these subsidy extensions.

The attached figure shows the amount of the extended subsidies – called “premium tax credits” (CTP) – for six different households by income, using the national average for the benchmark premium. (In areas of the country where premiums are above average, subsidies are higher. In areas of the country where premiums are below average, subsidies are lower.) These increased subsidies – direct payments from the government health insurers – are expected to total between $ 250 billion and $ 300 billion over the next decade.

The figure shows how the expansion of subsidies provides much more support to high-income households than to low-income households. The disproportionate benefits of expanding subsidies for health insurance companies and high-income households are not the only problems. Here are a few more:

  • Almost three-quarters of spending simply replaces private spending that would have been made with government grants.
  • The increase in premium subsidies will cause many people to lose their employer’s coverage, as the subsidies present significant incentives for companies to abandon their coverage. This is especially true for small businesses that are not subject to employer-imposed penalties.
  • Expanded premium subsidies are inflationary and will lead to higher prices for health care, health insurance premiums and health spending.
  • Expanded premium subsidies, available only if people do not receive an offer of cover at work, to discourage labor and economic productivity.

New Federal Medicaid Program
The reconciliation bill would require the secretary of the HHS to create a federal Medicaid program to cover states that have decided not to adopt the ACA’s Medicaid extension. HHS would solicit bids from health insurers to operate the new Medicaid program, and the government would send winning insurers a monthly payment for each new Medicaid member. In the the Wall Street newspaper, I recently discussed the many problems with this proposed program. An additional issue that was not addressed in this article is that the new federal Medicaid program would likely not be subject to the Hyde Amendment, meaning it could fund elective abortions. Prior to the implementation of the new Medicaid program in 2025, the reconciliation bill authorizes grants that will cover the full cost of an ACA plan for people earning below the federal poverty line in states without expansion. The total cost of the new federal Medicaid program plus these new grants through 2024 is likely to 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 aim of reducing ACA premiums to facilitate the transition to the new insurance rules of the law. The reinsurance program has caused federal government insurers to compensate a large portion of the medical bills of their dearest members. The reconciliation bill proposes to restart this program and spend $ 100 billion over the next decade on what is essentially the welfare of businesses through direct transfers from the US Treasury to health insurance companies.

The reinsurance program is particularly problematic since the federal government covered 74% of the premium in 2020 before the expanded subsidies from ARPA. After ARPA, the federal share of the premium probably climbed to 85%. Thus, the reinsurance program would be in addition to that of the federal government covering 85% of the premium. So, in addition to all the initial subsidies to insurers, insurers would send the federal government a bill to cover their most expensive members. It should be noted that reinsurance money will lead to lower premiums and premium subsidies as the cost of larger medical bills is shifted from taxpayers to insurers. It is generally assumed that $ 100 of reinsurance would have a net cost of $ 40, since this would result in $ 60 in lower premium subsidies.

Cut $ 600 billion in subsidies to health insurers
As they tried to sell the ACA to the American public over a decade ago, its supporters decried the practices of insurance companies and called insurers bad guys. Contrary to rhetoric, insurers have flourishes under the ACA through massive new federal grants – both for trade and through the expansion of Medicaid – and increased regulation allowing them to collect more premiums. The health care elements of the reconciliation bill represent the sequel and, if enacted, will be another giveaway from Congressional Democrats to health insurance companies. In this legislation teeming with bad programs and policies, the $ 600 billion in additional subsidies to health insurers are among the worst and should be among the first to disappear when it comes to choosing what to cut.

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Brian Blase is the founder and president of the Paragon Health Institute. From 2017 to 2019, he served as the President’s Special Assistant for Economic Policy at the White House National Economic Council.


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