When is a subsidy a subsidy? Define Subsidy?

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In conversation, I often hear people complain about the Affordable Care Act, (ACA also known as Obamacare). One of the complaints is the subsidies.

For those of you who have missed this major news event for the last few years, the government will subsidize individual health insurance premiums by way of an Advance Premium Tax Credit (APTC) for individuals who earn less than 400% of the Federal Poverty level. These subsidies can be in excess of $1000 monthly!

Those that are complaining may not be aware that the government also subsidizes employer sponsored health insurance. According to a new report from the Congressional Budget office, (CBO) 57% of Americans under age 65 will receive employer sponsored health insurance. This represents about 155 million people.

It is important to remember that employer sponsored benefits are provided free of state and federal income tax for the most part. The CBO report estimated the value of employer tax favored benefits at $266 billion!

It would be overly simplistic to say that the Treasury would have $266 billion more if we eliminated the tax favored status of employer provided benefits. But by the same token we can’t ignore the fact that through our tax code we have decided to favor these benefits.

So, when we question the wisdom and finances of individual subsidies, it is logical to take it to the next level and determine if employer provided benefits should also be subsidized.

The ACA was designed with a foundation of employer provided benefits and a hope that this would continue to be the cornerstone of health coverage for those not covered by social insurance programs. This same CBO report estimates that by 2019 only 54% of the population will be covered by group benefits.

The authors asserted that the increased costs of group health coverage are driving this trend.

And of course, what drives the cost of insurance premiums? Utilization and cost of care! The more procedures or encounters we have, the more we spend. If the costs of those services increases, we are digging the hole deeper. It’s pretty straightforward. This column has talked about the prescription drug issues at length so no need to run that through the pill crusher any further.

Okay, maybe one more time. Can we just address the issue as framed by Brian Klepper in his column: “Consider Gilead’s cure for Hepatitis-C treatment, Sovaldi. At $1,000 per pill, the cost has wreaked havoc on health plan budgets and dramatically curtailed patient access to the drug. Meanwhile, the same drug is available for $11 per pill in Egypt and $4 in India.”

“A related head scratcher is Congress’ prohibition against Medicare negotiating drug prices. The government must pay whatever price is demanded on behalf of millions of subsidized patients using that drug. From the vendor’s perspective, it’s hard to imagine a better deal than having the purchaser let you set any price and then unreservedly guarantee that the bill will be paid.”

It’s interesting that under Medicare Part D the manufacturers are required to provide a 55% discount off the retail price of brand name drugs in 2016. This kicks in once the individual is into the “donut hole”, meaning the retail cost of their Rx has exceeded $3310. Of course, the problem with this is that there is ample room for the price to be inflated and then discounted.

This sort of game is much like Hilary Clinton declaring that part of her reform will require insurance companies to limit our copays for high priced Rx. That sounds great, but doesn’t do anything about the cost of the drugs. If the consumer pays less, but the cost of the service isn’t controlled, then the increase cost will simply be passed back in the form of increased premiums.

Health care economics is unlike any other segment of the economy. Well, maybe not…maybe the financial markets as demonstrated in the movie “the Big Short” could be comparable!

Margaret R. Beck

Margaret Beck CLU, ChFC, CEBS started her insurance practice in Redding in 1978. She is the founder of Affiliated Benefit Services where businesses and individuals are assisted in choosing proper products, compliance with complex benefit laws and claims issues once coverage is placed.

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