Topic: Health Care & Welfare

The Obamacare Giveaway – It’s Better to Be 64 than 30 (sometimes)

Take a typical 30-year-old and 64-year-old, earning identical amounts of money, living in the same place, and choosing the same health plan. Who will pay more for that health care plan under Obamacare?

No one would dispute that 30-year-olds have much lower health care costs than 64-year-olds, on average. A compelling illustration comes from a highly cited article using the National Medical Expenditure Survey; the authors show that health care costs for 64-year-old women and men are approximately 2 to 4 times that their 30-year-old counterparts (Cutler and Gruber, 1996, p. 429). A natural implication is that groups with higher expected medical costs (such as older individuals), will tend to face higher health care premiums than those with lower expected medical costs (such as younger individuals).

A quick quiz:

  • First, take a 30-year-old and 64-year-old living in Florence, Wisconsin, each of whom is purchasing health insurance on the federal exchange. If they have the same income of $41,000, are non-smokers, and choose the exact same plan, which one faces higher premiums ignoring subsidies?
  • Second, who pays more out of their own pocket, once Obamacare subsidies are included?

The answer to the first question is easy. The 64-year-old faces higher premiums. For example, if the 64-year-old purchased the Molina Marketplace Bronze Plan, he or she would face nearly $7,400 in premiums without subsidies. A 30-year-old would pay around $2,800 for the same plan.

The second question’s answer may surprise you. Obamacare gives large subsidies for people with incomes between 100% and 400% of the federal poverty line. The more you make, the more you pay for a given plan. But Obamacare gives subsidies that are pegged to a generous benchmark plan (the second lowest cost silver plan). Costs, premiums and subsidies will all be higher for the generous benchmark plan for an older individual than a younger one. However, the subsidy amount can be applied to less generous plans, and this can lead to the surprising result that an older person actually pays less out of their own pocket.

The Obamacare Giveaway, Wisconsin Edition: Earn $62k and Get Free Insurance

The King v. Burwell decision last month highlighted the role of the premium tax credit (i.e. “subsidies”) in Obamacare. I have examined the structure of the subsidies quite carefully, and was shocked by their size. I’ll try to educate you about this, state-by-state. Today, I’m starting with Wisconsin, which has some of the largest giveaways on the federal exchange.

Among all individuals aged 55 to 64 in Wisconsin, approximately 70% – or 522,000 people – rely on employer coverage, where the odds are high that they’re paying something out of their own pocket for monthly premiums.

Consider either a single person earning $41,000, or a married couple earning $62,500. Each is 64-years-old, a non-smoker, and lives in Florence, Wisconsin (ZIP code 54121).  The structure of Obamacare subsidies means that many individuals who are not poor can find health plans with such large subsidies that they pay absolutely nothing for premiums out of their own pocket. In this case, the married couple or single person would qualify for the Molina Marketplace Bronze Plan with zero monthly premium.

See the graphic below for a married couple:

Married Couple, Earn $62,500, Florence, WI
Pay $0 per year for premiums

Although plenty of other plans exist – with higher premiums but less cost sharing– this plan is essentially a giveaway for those who didn’t want to purchase coverage, but were mandated to do so by the government. And if a near-elderly person (in the age range of 55 to 64) happens to get sick, they could always move into a plan with generous cost sharing provisions in future years, a problem that economist Martin Feldstein calls Obamacare’s fatal flaw.

King v. Burwell: Six Humpty Dumptys Playing Calvinball

My King v. Burwell recap is up at SCOTUSblog. Excerpt:

In King v. Burwell, all nine Supreme Court Justices agreed on one thing. The King challengers claimed the Patient Protection and Affordable Care Act (ACA) authorizes the Internal Revenue Service to issue tax credits and impose the related penalties only “through an Exchange established by the State,” and not through exchanges established by the federal government. “Petitioners’ arguments about the plain meaning of Section 36B are strong,” Chief Justice John Roberts wrote, and their interpretation is “the most natural reading of the pertinent statutory phrase.” Justice Antonin Scalia agreed, finding the meaning of that phrase “so obvious there would hardly be a need for the Supreme Court to hear a case about it.”

There was no dissent about the plain meaning of the phrase “through an Exchange established by the State.” All seven of the other Justices joined one of those two opinions. Nor was there dissent about the fact that that phrase, used repeatedly in the statute, is the only provision of the Act that speaks directly to the question presented. Not a single Justice lent credence to the government’s assertions that this was a meritless case, or one that the Court should never have accepted. Nor was there dissent about the consequences of that provision’s plain meaning in the face of broad state resistance to the ACA. All agreed that withholding tax credits in the thirty-four states with federal exchanges could lead to adverse selection in those states, with premiums climbing higher and higher in a “death spiral.”

Where disagreement emerged was over the question of whether the former should alter the latter – whether the potential for adverse consequences “compels” the Court to disregard the universally acknowledged meaning of the operative text. The Court split six to three in favor of rewriting plain text, and rendering the requirement “established by the State” a nullity…

Roberts managed to conclude that “by the State” could be read to mean “by the federal government,” even though he acknowledged Congress explicitly defined “State” in a way “that does not include the Federal Government.” So perhaps spending more time with the statute would not have helped.

The King ruling is actually much, much worse than this excerpt suggests. Read the whole thing. For a reference guide to King, click here.

One Consequence of King v. Burwell

Some say that today’s decision maintains business as usual for Obamacare, taxpayers and consumers. The Supreme Court upheld the subsidies (also known as the Premium Tax Credit) to consumers in the 34 states that rely on the federal exchange. Proponents of these subsidies argue they help keep health insurance affordable.

The subsidies lower the out-of-pocket cost to consumers who get them, but at what cost? Consider a 64-year-old consumer in Hialeah, Florida (one of the largest areas impacted by King v. Burwell) who is receiving the maximum subsidy of $7,488 per year. Of the 87 plans offered in the marketplace, 16 entail zero cost to the consumer. Premiums for these “free” plans range from $6,300 to $7,200. There is no incentive for the consumer to shop prudently from these 16 plans. The consumer does not get to keep any unused subsidy, creating incentives to choose health plans with additional features of only marginal value. The taxpayer – not the consumer – picks up the cost of the imprudent choices.

In addition to discouraging shopping based on plan value, the premium tax credit offers a set of perverse incentives, especially on the decision to earn more than 400% of the poverty line and on reporting your income for the upcoming year.

Today’s decision may very well mean business as usual, but there are serious economic issues with how the subsidy is set up.

John Roberts Rewrites Obamacare Yet Again

“If we give the phrase ‘the State that established the Exchange’ its most natural meaning, there would be no ‘qualified individuals’ on Federal Exchanges.” You’d think that I pulled that phrase from Justice Scalia’s dissenting opinion in today’s big Obamacare ruling—it makes clear that Congress said what it meant in the ACA, giving states the incentive to create exchanges by making their citizens eligible for tax credits if they do—but you’d be wrong.

It comes from the pen of Chief Justice Roberts, who admits, as he did three years ago in the individual-mandate case, that those challenging the administration are correct on the law. Nevertheless, again as he did before, Roberts contorts himself to eviscerate that “natural meaning” and rewrite Congress’s inartfully concocted scheme, this time such that “exchange established by the state” means “any old exchange.” Scalia rightly calls this novel interpretation “absurd.”

Of course, Roberts explains his transmogrification by finding it “implausible that Congress meant the Act to operate in this manner,” to deny subsidies to millions of people as part of legislation intended to expanded coverage. But it’s hardly implausible to think that legislation that still says that states “shall” set up exchanges—the drafters forgot to fix this bit after lawyers pointed out that Congress can’t command states to do anything—would effectively give states an offer nobody thought they’d refuse. It was supposed to be a win-win: states rather than the federal government would run health care exchanges (yay federalism!) and all those who need subsidies to afford Obamacare policies would get them (yay universal healthcare!).

The Court Today: At Once Deferential and Activist

A few additional broader thoughts on the Court’s King v. Burwell ruling today. First, technically, this is not an administrative law ruling. That is, the Court did not apply so-called Chevron deference and thereby uphold the IRS’s reading of the relevant Affordable Care Act’s provision. But practically, it comes to the same thing. In both cases, a provision that makes tax credits available to eligible individuals who buy insurance on exchanges “established by the State” is read to mean that those credits are also available to individuals who buy on exchanges established by the federal government.

Rather, this is a statutory ruling—as if the IRS had never interpreted that provision and the Court were doing so as a matter of first impression. And the tangled web the Court weaves in reading “established by the State” as meaning “established by the State or by the federal government” is reduced to shreds by Justice Scalia’s devastating dissent. It is a tour de force that must be read.

Toward the end of his dissent, however, Scalia waxes more broadly, on the proper roles of Congress and the Court. “Our task,” he writes, “is to apply the text, not to improve upon it.” “Rather than rewriting the law under the pretense of interpreting it, the Court should have left it to Congress to decide what to do about the Act’s limitation of tax credits to state Exchanges.” “The Court’s insistence on making a choice that should be made by Congress both aggrandizes judicial power and encourages congressional lassitude.” And he concludes this important section of his dissent with Hamilton in Federalist No. 78: “What a parody today’s decision makes of Hamilton’s assurances [that the Court has] ‘neither FORCE nor WILL but merely judgment.’”

With Chief Justice Roberts’s opinion for the Court, therefore, we have a perverse blend of the opposing positions of the judicial restraint and activist schools that reigned a few decades ago. To a fault, the Court today is deferential to the political branches, much as conservatives in the mold of Alexander Bickel and Robert Bork urged, against the activism of the Warren and Burger Courts. But its deference manifests itself in the liberal activism of a Justice Brennan, rewriting the law to save Congress from itself. As Scalia writes, “the Court forgets that ours is a government of laws and not of men.”

Supreme Court Validates Obama’s Power Grab

Today the Supreme Court allowed itself to be intimidated. Afraid that ObamaCare as written would throw the sickest patients out of their health plans a second time, the Court rewrote ObamaCare to save it—again. In doing so, the Court has sent a dangerous message to future administrations: If you are going to violate the law, make sure you go big.

The Court today validated President Obama’s massive power grab, allowing him to tax, borrow, and spend $700 billion that no Congress ever authorized. This establishes a precedent that could let any president modify, amend, or suspend any enacted law at his or her whim.

ObamaCare will continue to disrupt coverage for sick Americans until Congress repeals it and replaces it with reforms that make health care better, more affordable, and more secure. Despite today’s ruling, ObamaCare remains unpopular with the American public and the battle to set in place a health care system that works for all Americans is far from over.

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