Last week, the Trump administration announced that it planned to end a subsidy-payment program created by Obamacare.
The so-called “cost-sharing” subsidies are used to lower co-pay totals and deductibles for consumers who qualify due to low incomes. The subsidies, of course, can only be used on healthcare expenses, and thus are essentially direct payments to insurance providers. According to congressional analysts, the subsidies are expected to total $7 billion in 2017, and $10 billion in 2018.
In his announcement of his effort to cut the subsidies, President Donald J. Trump portrayed the subsidies as a type of bailout for insurance companies, and as yet another taxpayer-supported boondoggle.
To a certain extent, Trump is right. The subsidy program is just another wealth transfer from the taxpayers to large corporations. And yes, health insurance companies might be more likely to go out of business if they did not receive subsidies. Looked at in this way, we might call the subsidies “bailouts.”
This fact was driven home all the more when numerous insurance companies and industry groups, in response to Trump’s announcement, complained bitterly about being cut off from their expected subsidies.
In an economy with relatively free markets, these demands for subsidies could be easily dismissed as just a cash grab from private companies looking to benefit off the sweat of the taxpayer.
The problem is, the U.S. healthcare market has nothing resembling even a moderately free market. The sheer volume of mandates and regulations imposed on health insurance providers is so immense that without subsidies, many goods and services would simply disappear. In other words, without subsidies, there would not be enough demand in the marketplace to allow for providers to cover their costs of providing their more modestly priced insurance policies.
Government Creates a Price Floor for Health Insurance
In our current economy, many types of health care insurance have been declared illegal. For example, when Obamacare was adopted, it added a variety of new mandates for coverage, including a full list of so-called “essential health benefits.” While it is true that many state governments had already mandated many different sorts of coverage, Obamacare upped the ante, and also raised minimum requirements to a new uniform nationwide standard. Lower-priced types of coverage that did not cover pregnancy or mental illness were then prohibited by law.
Naturally, this increased the cost of obtaining health insurance, just as a new national mandate that all beef be organic and grass fed would greatly increase the price of meat.
Given a choice between basic coverage at a relatively low cost — and much more elaborate coverage at a high cost — the federal government mandated the higher-cost coverage.
The result, in effect, was a government-imposed price floor on health insurance below which providers can not sell insurance.
In a functioning marketplace, providers have an incentive to provide their goods and services to the mass market at the lowest prices possible. This is, of course, how companies like Ford Motor Company, Sears, Wal-Mart, and Amazon got rich. They figured out how to make goods affordable to as many people as possible.
Our modern regulated healthcare market, however, makes it illegal to drive down costs to a level that more consumers can afford.
After these prohibitions are in place, providers can no longer offer their product at the same low prices. If they tried, they’d go out of business.
If the federal government subsidizes them, though, providers can sell goods at an artificially low prices, while having the taxpayers pick up the rest.
Not surprisingly then, the subsidy program is an essential part of the Obamacare plan. Without the subsidies, prices for health insurance would climb quickly, or providers would simply leave the marketplace—as many have done already.
Decades of Intervention in the Marketplace
These mandates are just one of many ways that government policy has driven up prices. For anyone who obtains his health insurance outside a employer-provided plans, costs have been driven up for decades by federal policies and tax codes that favor employer-based plans over non-group plans. At the same time, government healthcare programs such as Medicare and Medicaid subsidize additional demand which drives up prices for all consumers of health care.
None of this is new. Contrary to claims made by many Republicans and conservatives that Obamacare represents a new frontier in health care, Obamacare only represents a continuation of established trends.
Nevertheless, the creation of new subsidy programs under Obamacare signal that we’re now being forced to admit that 60 years of government meddling in health care has finally made it totally unaffordable for a sizable portion of the population.
Already Socialized Medicine
The presence of these subsidizes might also be regarded as a helpful reminder that the United States is already far down the road of socialized medicine.
The fact that the U.S. chooses the subsidize private companies—rather than provide health services directly through government agencies—hardly demonstrates that the United States has anything we might honestly call a marketplace in healthcare.
Even before the advent of Obamacare, the U.S. healthcare system was already dominated by the government sector. In 2013, according to the American Journal of Public Health, two-thirds of healthcare costs were already funded by some sort of government program. This total is only expected in increase in the near future.
The study also concluded that per capita government spending on health care in the U.S. was the highest in the world. A similar 2014 study, conducted by the World Health Organization, concluded that per capita government spending in the U.S. placed only behind Norway, Luxembourg, and the Netherlands.
Obviously, these aren’t statistics that should lead anyone to the conclusion that the U.S. is a leader in market-based solutions in healthcare. The future of socialized medicine is already here.
Trump’s plan to cut subsidies does nothing to address this problem. In fact, a plan to remove these subsidies might serve to do little more than drive what little remains of the private sector out of the healthcare sector. The next step would be to move toward something like Berniecare with an expansion of Medicare or other government programs.
There are real pro-market reforms that could be made to move things slowly back in the direction of markets. But Trump’s plan to abolish Obamacare subsidies isn’t one of them.
Ryan McMaken is an editor and economist with the Mises Institute.