The ACA Subsidy Debate Misses the Real Cost Drivers
Why Extending Premium Tax Credits Won’t Fix High Premiums—and What Structural Reforms Would Fix
Key Points
The subsidy fight is a distraction. Whether enhanced ACA subsidies expire or continue, the core problem remains: the ACA’s design drives high premiums and unstable coverage.
Low-income adults and children are placed in the wrong programs. Routing poor adults into private exchange plans instead of Medicaid—and children into family plans instead of CHIP—raises premiums, increases federal spending, and worsens protection.
ACA subsidies impose hidden taxes on work. Income-linked premium subsidies phase out as earnings rise, creating implicit marginal tax rates that can exceed 50 percent when combined with income taxes and student loan repayment rules.
Premium subsidies treat symptoms, not causes. High insurance costs are driven by catastrophic medical claims concentrated among a small share of patients, not by insufficient household subsidies.
Public reinsurance would lower premiums at the source. Shifting public spending toward reinsurance would reduce insurer risk, lower premiums for everyone, and weaken incentives for restrictive networks and bureaucratic rationing.
Employment-based insurance remains a structural flaw. Tying coverage to jobs causes coverage loss during job transitions and recessions; portable credits or exchange-based employer subsidies would improve stability.
Congress faces a structural choice. It can repeatedly extend temporary subsidies—or reform health insurance markets so premiums fall on their own.
Washington is again arguing about the Affordable Care Act from the wrong starting point. The looming expiration of the enhanced premium tax credits has triggered the familiar warnings: Democrats say families will lose coverage if subsidies lapse, while Republicans warn that continuing them is too costly for taxpayers. Both views may be true in the short run, but the debate ignores the real reason coverage is expensive. The ACA’s core design, not the size of the subsidy, is what drives high premiums and unstable coverage.
If Congress wants health insurance to become affordable, it must reform the structure of the system, not simply extend temporary support. Three changes would do more to lower premiums, strengthen protection, and reduce long-run federal spending than any debate over subsidy generosity.
First, the ACA misroutes many low-income adults into costlier private exchange plans instead of Medicaid. States that expanded Medicaid have shown consistently that Medicaid delivers lower costs and better protection for the poorest households than private exchange coverage. Yet political resistance to expanding public insurance has forced many of these adults into higher-priced private plans. As a result, federal spending rises while beneficiaries face higher out-of-pocket exposure.
A similar problem affects children. A typical family may obtain coverage for adults through the exchanges while their children would qualify for CHIP, which offers more stable and less expensive coverage. Placing children into private family plans rather than CHIP increases premiums and federal subsidy costs. Moving the poorest adults into Medicaid and children into CHIP are rare reforms which both saves money and improves protection.
Second, the ACA quietly imposes steep implicit taxes on work. Premium subsidies are tied to Adjusted Gross Income, so as a household earns more, its subsidy declines. This works like a hidden tax. When combined with statutory federal and state marginal income tax rates—and with higher payments under income-driven student loan repayment plans—many middle-income households face effective marginal tax rates exceeding 50 percent. The system penalizes workers for earning more, and it does so in ways that are invisible in the tax code.
This problem has been recognized before. More than a decade ago, Senator John McCain proposed replacing the employer tax exclusion with a universal tax credit. That reform would have reduced implicit tax rates, simplified the system, and made coverage portable across jobs.
Third, the ACA subsidizes premiums rather than addressing the real driver of high costs: catastrophic medical risk. A small share of patients account for a disproportionate share of total medical spending. Insurers that must absorb this volatility respond rationally by restricting networks, pushing prior authorization, and managing care through denials and delays. These practices are often criticized as moral failures, but they are better understood as financial ones.
A more rational system would target subsidies at the highest-cost claims. Public reinsurance, in which government absorbs part of the cost of extraordinarily expensive care, would lower premiums by removing the most volatile risks from insurers’ balance sheets. It would also weaken the incentive to avoid sick patients or ration care through bureaucracy. Instead of writing ever-larger checks to households through subsidies, Washington could reduce prices at the source.
Shifting toward reinsurance would also reduce dependence on income-linked subsidies. When public money flows through reinsurance rather than premium tax credits, insurance becomes cheaper for everyone, not only for those who qualify based on income. The system would rely less on redistribution and more on structural cost control.
There is a broader problem that most politicians avoid: tying health insurance to employment is a design error. Job loss routinely triggers coverage loss, and recessions produce spikes in Medicaid enrollment not because eligibility changes, but because employer-based insurance collapses. Here again, Senator McCain’s overlooked proposal pointed in a better direction. A universal tax credit, available regardless of employer, would have weakened the link between employment and insurance and made coverage portable—exactly the kind of reform the ACA debate continues to avoid. Alternatively, allowing employers to subsidize state exchange health insurance instead of employer-based insurance would reduce insurance loss during job transitions.
Congress faces a choice. It can extend the credits and revisit this fight a few years from now. Or it can reform the structure of health insurance markets so that premiums fall on their own. One path preserves temporary affordability. The other might actually make insurance affordable.
Mr. Bernstein is a retired economist in Denver.
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