How much subsidy should each person get for health insurance?

For all the bubble and boil the past 4.5 years on health reform, there are basic questions that have not been asked clearly, much less answered. An important one is how much subsidy should people get from government for their health insurance?

The table below is a quick estimate of the per capita subsidy that different groups now receive, or will receive in health exchanges under the ACA. The magnitudes range from a maximum of $10,720 per capita for Medicare, to none for the uninsured or persons purchasing health insurance in the individual market currently, or in exchanges in the future if they make above 400% of poverty. Most people get some government subsidy for their health insurance.

ScreenHunter_02 Nov. 16 11.16

Link to table, including sources: insurancesubsidy.11.16.13

A few points:

  • Medicare. You might object to the word subsidy in the case of Medicare. People did pay taxes in the past, but they were of course paying for old people’s health care then. This is the magnitude of actual government flows required to fund the program today (and does not include out of pocket costs). If you want to call it something other than subsidy, fine.
  • Employer Provided (ESI). Underneath per capita figures there are big variations. For example, I receive about double the average subsidy shown for ESI. My federal tax bill is around $3,000 less than it would be if ESI did not receive tax preferences because: (1) the amount Duke pays for my insurance is not subjected to taxation (and thus tax free compensation); (2) My premium share is pre-tax, and thus reduces my income that is subjected to taxation. Further, there are 5 people who receive coverage via my employment at Duke and this subsidy (me, wife, 3 kids). This subsidy, combined with the pooling power of (especially) large employers mean that there are a very large number of people who have it quite good under the current system. So, the size of the per capita subsidy understates the political power for the status quo that exists in employer sponsored coverage. Paul Starr calls this plus the Medicare subsidy above the policy trap.
  • Individual purchase v uninsured. Speaking of political power, the force behind the “President lied” meme leading to the administrative “fix” is a subset of those currently in individual coverage plans who make over 400% of poverty and were therefore going to be forced to buy employer-sponsored levels of benefits without the benefit of an employer paying 75-80% of the premium cost with tax preferenced spending (a true disadvantage for the self employed). A better fix would have been to add some tax preference short term while not messing with the risk pooling aspects of the law, and answering the question posed in this post longer term. Note the crushing political silence on behalf of the uninsured, and especially on behalf of those purposefully left out by their state’s decision to not expand Medicaid, while their income falls below 100% of poverty so they don’t qualify for exchange subsidies.
  • Speaking of Medicaid, the per capita expenditure of $7,000 shown above does not characterize any group of Medicaid beneficiaries well. Children and adults are numerous and relatively inexpensive; there are fewer disabled and elderly, but they have high per capita costs. The most important thing to understand about Medicaid reform is who is covered by the program. In a state like North Carolina that has not expanded Medicaid for 2014 (seven part series of NC Medicaid reform), most of the expansion effect would be in groups with relatively low per capita costs, and who would therefore likely improve the state’s Medicaid risk pool (in North Carolina, childless adults can never be eligible for Medicaid, and working parents only up to 49% of poverty; non-working to 39%).
  • Exchange subsidies. There is a sliding scale from 100-400% of poverty ($11,500-$46,000 for singles, $23,500-$94,000 for family of 4) that determines how much subsidy is provided to purchase private health insurance in the exchanges. The $5,510 shown in the table is an average, with the amount of subsidy falling with income. Note that the tax benefits of employer sponsored insurance are the opposite, and rise with income. The different slopes of these curves summarize how politically hard it would be to modify/end the tax preference for ESI that now exists, to be replaced by a fixed amount of money to purchase private insurance.

What is the correct amount of subsidy? Above is what we have now and coming in the near future. I am not telling you what to think, but your thinking needs to account for all these groups.

update: revised ESI section for clarity.

About Don Taylor
Professor of Public Policy (with appointments in Business, Nursing, Community and Family Medicine, and the Duke Clinical Research Institute), and Chair of the Academic Council at Duke University . I am one of the founding faculty of the Margolis Center for Health Policy. My research focuses on improving care for persons who are dying, and I am co-PI of a CMMI award in Community Based Palliative Care. I teach both undergrads and grad students at Duke. On twitter @donaldhtaylorjr

10 Responses to How much subsidy should each person get for health insurance?

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  5. Workers Unite says:

    What is the correct amount of subsidy? Zero, but not for the reason you might think. Allow me to explain.

    It never ceases to amaze me how a nation of 312 million people with the largest economy in the world lets a handful of insurance companies hold the entire economy and most of the population hostage. Here’s the problem with subsidizing insurance for low income people: it is addressing the wrong end of the problem. Sure, some people say “But as poor workers’ wages rise they can eventually afford insurance and they’re weaned off the subsidies.” This ignores the reality of what’s been happening for the last few decades with stagnant wages but ever-increasing costs of living. One of those costs of living is steadily rising health insurance premiums. If nothing is done on the insurance company end of the problem and the government contents itself with throwing money at the problem by subsidizing poor people’s insurance coverage it won’t take long before the situation is unsustainable. Think about it: if health insurance premiums rise 7% this year, 7% next year and 7% the year after then if today’s premium cost is X then in only three years it will be 21% higher. In six years it will be 42% higher than today’s cost. That low income worker’s wages aren’t going to rise 42% in six years (at the rate things are going his wage won’t rise 42% in SIXTY years!) but will remain relatively flat. So the idea of him ever being able to make enough money that he won’t need subsidies for his exorbitantly expensive insurance is nothing more than a comforting fantasy.

    No, the solution is to approach this problem from the opposite angle. This is where the coercive power of the government needs to be used but not to lean on the little guy who can’t afford insurance to MAKE him buy what he can’t afford as per Obamacare. No, this is where the government needs to do the right thing and work FOR the little guy and lean on the insurance companies. Tell them “Listen, you’ve had things your way for far too long. Look at the results, tens of millions of Americans can’t afford what you’re selling yet you’re making so much profit off it that it doesn’t affect your pricing in the least that tens of millions of Americans are priced out of the insurance market. I hope you’ve spent your money wisely because it ends now. Starting today the United States will have 100% non-profit health insurance. Insurance companies will be run as if they were electrical cooperatives providing affordable electricity to rural areas that are unprofitable for the for-profit electrical companies to provide service to. Starting today America will have a health care system that operates based around providing affordable but high quality health care to the most people, NOT as a business concerned with making the most profit. We’re talking about people’s lives and deaths and health and well being. That’s a damn sight more important than profits.”

    That’s why the answer to “how much should a poor person’s health insurance be subsidized” is zero. Subsidies won’t be necessary when their health insurance is not a for-profit business first and a public service a distant second. Subsidies won’t be necessary because insurance will no longer be cost prohibitive. Subsidies are the backwards way to go about this because subsidies tell the insurance companies “Go ahead, keep jacking up your premiums, no problem, we the government will continue to try to keep up with you by steadily increasing our subsidies until 95% of the U.S. government’s revenue is spent enabling poor people to be able to pay the wildly outrageous costs of your for-profit insurance by which time this country will have no more usable roads because we can’t afford to repair them, no navigable waterways because they’ve all become silted up and no more schools because we can’t afford to keep them open and pay the teachers as all our revenue is going to pay for poor people’s health insurance because that’s preferable to ripping off the band-aid and mandating that health insurance become a non-profit enterprise.”

    • Don Taylor says:

      Your position and proposal are understandable and defensible. However, in the way I construed subsidy in the post, the subsidy under your proposal will simply be the per capita tax financed health care amount, similar to what I showed for Medicare.

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