The Incidence of the Obamacare Subsidies

The Incidence of the Obamacare Subsidies

Justin Fishel and Mary Bruce covers Trump’s dismantling of Obamacare:

The White House announced Thursday night that the administration will slash Obamacare subsidy payments to insurers. The “cost-sharing reduction payments,” worth an estimated $7 billion this year, are intended to reduce out-of-pocket costs for low-income Americans on Obamacare … House Democratic leader Nancy Pelosi and Senate Democratic leader Chuck Schumer issued a joint calling the action “pointless sabotage.” “Sadly, instead of working to lower health costs for Americans, it seems President Trump will singlehandedly hike Americans’ health premiums,” they said in a joint statement. “It is a spiteful act of vast, pointless sabotage leveled at working families and the middle class in every corner of America.”

Trump’s counter is that the health insurance companies are very profitable because they are reaping the benefits of these subsidies. I would argue that health insurance company profit margins are high in large part because we have not enforced the anti-trust laws and allowed a lot of market power. Brad and Michael Delong made this point last fall:

The United States’ Affordable Care Act (ACA), President Barack Obama’s signature 2010 health-care reform, has significantly increased the need for effective antitrust enforcement in health-insurance markets. Despite recent good news on this front, the odds remain stacked against consumers … It is not surprising, then, that in 2015 some of the largest private American health-insurance companies – Anthem, Cigna, Aetna, and Humana – began exploring the possibility of merging. If they could reduce the number of national insurers from five to three, they could then increase their market power and squeeze more profits from consumers.

Even five health insurance companies are two few. But suppose we did have real competition in the health insurance market – what would be the effect of subsidies. Let’s consider this primer on the incidence of taxes:

The tax incidence depends on the relative price elasticity of supply and demand. When supply is more elastic than demand, buyers bear most of the tax burden. When demand is more elastic than supply, producers bear most of the cost of the tax.

Most economists know this and we know how to translate this into the implications for the incidence of a subsidy. We have to admit, however, that Trump is really awful at economics. But he does have economic advisors. Trump is implicitly assuming a very elastic demand for health care or a very inelastic supply of health care. But where is his evidence for these claims? I guess when Kevin Hassett produces his “analysis, we might see a link from Greg Mankiw.

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