The problem with the Obamacare exchanges is adverse selection, not cost-reduction subsidies

By ROGER STARK  | 
POLICY NOTES
|
Dec 7, 2017

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Key Findings

  1. The Obama Administration did an end-run around Congress and directed money from the Treasury to provide tax credits to the Obamacare exchanges.
     
  2. The funds for these cost-reduction subsidies were never appropriated by Congress.  The Trump Administration stopped these unauthorized payments.
     
  3. The fundamental problem in the exchanges, however, is not the withholding of the cost-reduction subsidies. The Obamacare exchanges suffer from adverse selection. 
     
  4. Adverse selection has happened since the exchanges began in 2014, long before the issue making unauthorized cost-reduction subsidy payments out of the Treasury arose.
     
  5. The debate over Obamacare will continue, but cost-reduction subsidies are not the core problem, they are simply prolonging the inevitable collapse of the Obamacare exchanges. 


Introduction

The Obamacare law provides tax credits for people earning up to 400 percent of the poverty level to help them purchase health insurance in the exchanges. The law also gives lower-income people additional money, so called cost-reduction subsidies, to purchase health insurance within the exchanges.

The funds the U.S. Treasury is paying out for these cost-reduction subsidies were never appropriated by Congress. The Obama Administration, however, did an end-run around Congress and withdrew the money from the Treasury unilaterally. The Republican House of Representatives sued the Obama Administration and won. The objection of leaders of the House of Representatives was less about health care policy and mostly about preserving the people’s powers of elected representation under the Constitution.

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