The US federal government shutdown has become a standoff over health care that will likely end with some sort of extension of the temporary health-insurance subsidies adopted during the pandemic. But that would not address the larger problem of America’s high health-care costs – to say nothing of its fiscal imbalance.
WASHINGTON, DC – Democratic Senators have delayed reopening the US federal government in an effort to extend health-care subsidies that are scheduled to expire at the end of 2025. US President Donald Trump and Republican leaders seem open to striking a deal with the Democrats on the subsidies – but only after the government shutdown ends. “I’d like to see a deal done for great health care,” Trump recently said. “I’m a Republican, but I want to see health care, much more so than the Democrats.”
In this case, bipartisan agreement is the enemy of long-term prosperity. The health-care subsidies should be allowed to expire.
The 2010 Affordable Care Act – US President Barack Obama’s landmark health-care law, also known as “Obamacare” – established marketplaces in which eligible households could purchase private health-insurance coverage. The ACA originally provided subsidies to help eligible households with incomes below 400% of the federal poverty line afford insurance. This year, that rule would have limited eligibility for subsidies to families of four earning less than $128,600 per year.
Moreover, Obamacare originally capped health-insurance premiums based on household income. Households below 150% of the poverty line faced a maximum premium of 4.2% of their income, while households at 400% faced a maximum premium of around 10% of their income.
In response to the COVID-19 pandemic, congressional Democrats and US President Joe Biden made the credits more generous on a temporary basis. They removed the eligibility cutoff, so households with incomes above 400% of the poverty line were eligible for subsidies. And the Biden administration changed the caps as well. Households below 150% of the poverty line owed no premiums, and households at and – thanks to the pandemic-era change – above 400% of the poverty line owed at most 8.5% of their incomes.
These enhanced subsidies are the ones that are set to expire. Because they were designed as a temporary measure to soften the blow of the pandemic – which is now over – they should come to an end, too.
Extending the subsidies would cost $350 billion over the next decade – an expensive and imprudent expansion of the middle-class entitlement state. According to the Congressional Budget Office, around one-third of the extra spending from the extended subsidies would go to households earning at least four times the poverty threshold – that means families of four earning six-figure salaries.
The cost of health care is one of the biggest problems facing the US government. But extending the expiring subsidies will make health care more expensive, not less. According to the American Action Forum, a center-right NGO providing research and analysis of economic and fiscal issues, premiums in the individual market will increase if the temporary subsidies are extended, owing to the additional demand for health insurance.
The Democratic Party is using the shutdown as an opportunity to demonstrate its commitment to providing more Americans with access to affordable health care. But this political impasse is not only about messaging. Democrats are wary of reopening the government before negotiating a subsidy extension because Trump might change his mind, or might not be able to get the House to agree to it.
Given that enrollment in the ACA exchanges is set to begin as soon as November 1, it would not be unreasonable to extend the subsidies for one year. That would prevent around four million people from losing coverage, as well as an abrupt increase in premiums for millions more. But if Congress decides to go down this route, then Republicans should hold firm: one more year only, not two or more.
Regardless of the outcome, this episode exposes two deep challenges facing the United States.
First, the health-care debate is too focused on expanding coverage and insufficiently focused on reducing health-care spending. This sidesteps the hard questions. Fifteen years ago, Democrats were confident that Obamacare’s subsidies were adequate to ensure broad coverage. What has changed?
More fundamentally, how much should middle-class US households have to pay for health insurance? What is a fair contribution? If the enhanced subsidies expire, the premium for a family of four earning $75,000 per year will rise to $5,865 – which is $3,368 more than if they are extended. To be sure, that family would feel the increase. But according to my calculations, average annual US health-care spending per household is around $37,000. From this perspective, that family may be getting a good deal.
The standoff over health-care coverage – which will likely end with some sort of extension of the enhanced subsidies – also illustrates the challenge of addressing America’s fiscal imbalance. In terms of budgetary policy, the conventional wisdom that the country’s two political parties are divided is nonsense. When it comes to taxing and spending, both the Democrats and the Republicans are willing to accept large structural budget deficits – that is, until some event forces them to pursue fiscally responsible policies.
