ISSN 2330-717X

Fixed-Dollar Tax Credits Would Reduce Individual Health Insurance Premiums – OpEd


Sonia Jaffe and Mark Shepard of the National Bureau of Economic Research (NBER) have written a new paper, which compares the effects of fixed-dollar subsidies for health insurance to subsidies that are linked to premiums. She concludes that fixed-dollar subsidies reduce taxpayers’ costs and improve access. Unfortunately, the structure of subsidies in U.S. health insurance has moved in the other direction.

Tax credits that subsidize health insurance offered in Obamacare’s exchanges are based on the second-lower cost Silver-level plan in a region. Intuitively, this implies insurers will not compete too much because that would drive down subsidies. As long as subsidies chase insurance premiums, premiums will be higher than otherwise.

Jaffe looks at evidence from Massachusetts’ health reform (“Romneycare”), which dates to 2006. Its costs are still spiraling, and Jaffe estimates one factor is its design of subsidies, which is similar to Obamacare’s:

Across several simulation years and assumptions, we find a non-trivial upward distortion in the price of the cheapest plan (to which Massachusetts’ subsidies are linked) of $4-26 per month, or 1-6% of baseline prices. Although modest, these effects imply meaningful increases in government costs. For instance, the $24/month subsidy distortion (in our simulations for 2011) would translate into $46 million in annual subsidy costs for Massachusetts, and over $3 billion if extrapolated nationally to the ACA. We show that absent uncertainty, shifting to fixed subsidies could let the government achieve the same coverage at 6.1% lower taxpayer cost, or 1.3% greater coverage at the same cost.

(Sonja Jaffe, Price-Linked Subsidies and Health Insurance Markups, Cambridge, MA: National Bureau of Economic Research, Working Paper 23104, January 2017)

The paper is a heavy read, full of PhD-level economic theory and modelling. Nevertheless, it demonstrates that replacing Obamacare’s tax credits with a fixed-dollar tax credit to subsidize health coverage is as close to a free lunch as is possible in health reform.

This article was published at The Beacon

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John R. Graham

John R. Graham is Senior Fellow at the Independent Institute and a Senior Fellow at the National Center for Policy Analysis. Formerly Vice President at the Advanced Medical Technology Association (AdvaMed), he previously directed health-policy research at the Pacific Research Institute and the Fraser Institute. In prior positions he served as Assistant Vice President at Kidder, Peabody Securities Company; Associate at Goldman Sachs and Company; Political and Military Analyst for the United Nations Operation in Somalia; Development Consultant for Covenant House Vancouver; and Captain in the Canadian Army. He received his Bachelor of Arts (Honors) in economics and commerce from the Royal Military College of Canada and his M.B.A. from the University of Cologne, Germany. He is also Senior Fellow at the Fraser Institute as well as Adjunct Fellow for the Mackinac Center for Public Policy.

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