Obamacare Is In Serious Trouble, And Obama’s Subsidies Are Worth Refusing

President Obama and his signature legislative accomplishment — Obamacare — are in deep trouble.

The health insurance exchanges established by the law aren’t working properly; it now appears that the federally operated HealthCare.gov will not be fixed by November 30, as the president promised. Millions of Americans are irate that their existing policies will be cancelled — and that they may have to purchase more expensive coverage.

President Obama is hoping that an early Christmas for millions of Americans may blunt the outrage. Some 17 million people are set to receive lavish federal subsidies if they purchase coverage through the new exchanges.

But the president’s generosity with other people’s money will yield some unintended negative consequences not just for taxpayers — but for those folks the subsidies are supposed to help.

Obamacare requires all Americans to obtain health insurance. To ease the financial burden of that individual mandate — now delayed until March 31 — the law offers federal tax credits through its new insurance exchanges.

Those who earn between 100 percent and 400 percent of the poverty level qualify for these subsidies, provided they don’t have access to health insurance by other means, like through a job or Medicaid. For a married couple with no children, that’s an annual income range of $15,510 to $62,040. For a family of four, the corresponding range is $23,550 all the way up to $94,200.

The subsidies are on a sliding scale, so that those with lower incomes receive more than those with higher incomes. Those at the bottom will pay no more than 2 percent of their income toward health insurance; at the top, the contribution of an individual or family toward premiums will be capped at 9.5 percent of income.

This may sound like an elegant way to make health insurance more affordable. But Obamacare’s system of subsidies suffers from several design flaws.

First, it encourages people to work less. Since the plan only offers tax credits below a certain income level, Americans will face a strong disincentive to stop working once they reach the income level where their subsidies are cut off.

As CNBC has noted, a family of three in New York earning $78,120 will pay $7,421 in premiums for a mid-level “silver” health plan, after taking their subsidy into account. But if they make just one extra dollar, they’ll have to fork out $12,784 for insurance — an increase of $5,363.

In fact, benefits experts are already advising their self-employed clients to work fewer hours in order to take advantage of the law’s subsidies. That’s especially true in high wage areas, since Obamacare’s subsidies are not adjusted for differences in the cost of living among states.

In effect, Obamacare levies a massive increase in marginal tax rates on middle- and upper-income workers. That tax hike will act as a drag on the economy.

The subsidy system also invites fraud. Obamacare permits people to apply for tax credits with little or no verification of their eligibility. Income verification for receiving a subsidy is part of the law but has been delayed until 2015.

If the government somehow finds that an applicant has a higher income than he or she reported — and is thus ineligible for subsidies — the IRS can only re-claim the difference from his or her tax refund. Liens and wage garnishments are not allowed.

Third, the system penalizes married people. A single person with an income of $45,960 could qualify for insurance subsidies, but a couple earning $91,920 — twice that sum — can’t.

If they live in New York, such a pair will save at least $3,964 if they split up. That’s a powerful financial lure for people to avoid marriage. Indeed, The Atlantic has already found one New York couple planning to divorce because of Obamacare’s subsidy system.

And then there’s the uncertainty about how much the subsidies will end up costing taxpayers. In May, the Congressional Budget Office put the tab at nearly $950 billion over the exchanges’ first ten years.

But those projections were based on a significant number of young, healthy people signing up for coverage in the exchanges. Their premiums would help subsidize the policies of older, sicker enrollees, thereby holding overall premiums down — and decreasing the amount the federal government would have to kick in for subsidies.

Young people aren’t playing ball. According to the Associated Press, just one in four enrollees in Kentucky is under the age of 35. The same is true in Washington. And in California, officials report that most applicants are older.

The technical dysfunction of HealthCare.gov and other exchange websites deserves part of the blame. But many young people may have decided that it’s more economical to forego coverage in 2014 — and pay the fine of $95 or 1 percent of income — than to purchase a policy that could run them several thousand dollars a year.

Regardless, the reluctance of young people to sign up means that the insured pool will be disproportionately comprised of older, sick, costlier individuals. Insurers will be forced to raise premiums to cover these increased costs. And higher premiums require greater federal subsidies.

Even Democrats recognize that the system of subsidies could spell trouble for taxpayers. Former Vermont Governor and Democratic National Committee Chair Howard Dean has called the tax credits “the next crisis . . . [which] is going to make the federal budget more expensive.”

Finally, in the states where the federal government is running exchanges, the subsidies may not even be legal.

The law states that insurance subsidies may be distributed “through an Exchange established by the State.” Thirty-six states declined to establish exchanges and left the task to the federal government. The Obama Administration would love to hand out subsidies through the exchanges it operates. But because of Obamacare’s text, the judiciary may not let them.

Obamacare’s intricate system of subsidies was supposed to help make insurance more affordable for Americans. But the system’s poor design may foster the collapse of the president’s entire health reform effort.

Nothing contained in this blog is to be construed as necessarily reflecting the views of the Pacific Research Institute or as an attempt to thwart or aid the passage of any legislation.

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