California’s health care exchange released its 2014 premiums last week, and this week’s big debate is over what we should think about them.
Are they a huge increase over premiums in the individual market today?
Or are they a great value because the plans in the exchange are comprehensive and cover people of all health statuses?
But what’s happening in California is exactly what was supposed to happen: If you’re young, healthy, and affluent, your insurance is getting more expensive. If you’re old, sick, and poor, it’s getting cheaper. That’s because Obamacare is designed to be a fiscal transfer from the young to the old, the healthy to the sick, and the rich to the poor.
It’s not just Obamacare: any system that shifts health expenditure from the private sector to the public sector causes transfers like this. If we had no government financing of health care at all, healthy people with high incomes would spend a very small percentage of their income on health care, and the sick poor would spend a large percentage. If we had a fully socialized system where the government paid for everything, rich people would bear most of the cost of providing health care to everyone. And systems that involve a split of public and private expenditure — including Obamacare — have distributional effects somewhere in between.
What makes Obamacare’s redistribution look odd, even “shocking”, is that the law was structured to move much of the redistribution off the government’s books. To reduce the need for direct, tax-financed subsidies, the law regulates the insurance market to ensure that it will have cross-subsidy: premiums for people who are older and sicker are held artificially low, while premiums for the young and healthy are inflated. Then other rules (including employer and individual mandates) aim to ensure that young, healthy people buy insurance despite the inflated the price.
So, instead of hiding the transfer from the young and healthy as part of a tax bill that finances the whole government, Obamacare causes it to show up in the form of a higher insurance “premium.” That tax increase will make some young and healthy people worse off. But they would also be worse off if the government provided direct health care subsidies to the old and the sick and used a broad based tax like a payroll tax to finance those subsidies. In fact, that’s how we finance Medicare, which is a huge fiscal transfer from the young to the old.
So instead of being shocked that insurance prices will go up for the young and healthy, we should ask ourselves three questions about the transfers inherent in Obamacare.
- Are the transfers in Obamacare directionally desirable — do we want to move money from the young to the old, the healthy to the sick, and the rich to the poor? The more arguments for the latter two are strong. The first is more dubious, but it’s worth noting that every advanced country has a health care system with subsidies flowing from the young to the old. Switzerland, the country whose health care system most closely resembles the Obamacare exchanges, has no age-based rating at all, meaning young people there are dealing with much more rate shock than in California.
- Are the transfers in Obamacare efficiently designed — are they the right way to subsidise health care for the groups with the biggest needs? The answer to this, I think, is unclear. In some cases, Obamacare’s system of indirect subsidies looks inefficient compared to direct tax financing. The employer mandate is likely to discourage job creation and cause employers to choose part-time employees over full-time ones. But a system of cross-subsided premiums plus an individual mandate may actually be an unusually economically efficient way of financing a universal health care benefit. Larry Summers wrote about this more than two decades ago — mandates look like lump-sum taxes that are very economically efficient but would be politically untenable if applied as explicit taxes.
- Are health care-related subsidies themselves efficient, or should we instead be giving poor people more cash? This question is harder than most conservatives take it to be. One reason to subsidise health care is that health care markets are inefficient, and giving people cash instead of health insurance may leave them unable to access care that they need. Another is that the likely political alternative to a universal health care benefit is not more generous cash transfers to the poor, but fewer total transfers to the poor.
A lot of the claims about rate shock are overstated. Avik Roy says premiums under Obamacare are inflated by requirements to buy “a costlier plan with add-ons you neither need nor want.” Well, that depends. If you’re a woman who wants maternity coverage, the add-on may well be something you want, and the mandate for it to appear in everybody’s plan will save you money.
That is, among other things, Obamacare acts like a fiscal transfer to pregnant women from everybody else. And that’s fine. But the transfers within Obamacare aren’t set in stone and we’ll be tweaking the rules that govern them for decades to come, so it’s worth thinking about which transfers are warranted and which aren’t.
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