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Left: Rate Shock Doesn't Matter, Because Other People's Money Will Pay For It

June 19, 2014

By Avik Roy

Over the past twelve months, there has been an energetic debate among health policy researchers about the extent to which Obamacare will increase the underlying cost of individually-purchased health insurance: what observers have come to call “rate shock.” Yesterday, the Manhattan Institute published the most comprehensive study yet on the topic, analyzing premium data from 3,137 U.S. counties, and finding an average rate hike of 49 percent. In response, left-wing bloggers are trying out a new talking point: that rate shock doesn't matter, because taxpayer-funded subsidies will bear the higher costs.

There are a number of reasons why the underlying cost of health insurance matters. First: not everyone is eligible for subsidies. If your income is above 400 percent of the Federal Poverty Level, you don't qualify. Second: subsidies don't always make up for rate shock. If your underlying premiums go up by $200, and Obamacare gives you a subsidy for $120, your net cost has still gone up by $80. Our interactive map explains the interaction of these factors for every U.S. state—just click on the “Who Qualifies?” and “Your Decision” tabs and see for yourself.

Third: subsidies aren't free. They're financed by taxes: not just taxes on “the rich,” whoever they are, but on average Americans. So if Obamacare increases the underlying cost of insurance, taxpayers are hit with a double whammy: higher insurance costs for themselves, and higher taxes to subsidize those costs for other people.

Some on the left are dismissive of higher costs

I'm struck by how contemptuous the left can be about these issues, especially given the moral obligation of government to spend taxpayer dollars in the most efficient possible manner.

I've emphasized the importance of the underlying cost of insurance in nearly everything I've written about the “rate shock” topic. The lead paragraph in yesterday's article explains that our analysis was of “the underlying cost of individually-purchased health insurance.” But that wasn't good enough for Brian Beutler of The New Republic, who complained on Twitter that I didn't use the word “subsidies” frequently enough for his tastes.

The loudest promoter of the “rate shock doesn't matter because subsidies!” argument is Steve Benen, a blogger for MSNBC's The Rachel Maddow Show. Benen described the Manhattan Institute analysis as “deceptive” because many people “are buying coverage subsidized through Obamacare.”

It's one thing to explain that subsidies will defray the cost of Obamacare-based plans for certain low-income people: they will. But it is economically obtuse for Benen to argue that studying the underlying cost of health insurance is “deceptive.” It's especially remarkable given that Benen regularly contends that there is a vast “wonk gap” between the right and the left—in the left's favor.

Apples, oranges, and other fruits

A more interesting—albeit problematic—argument comes from three researchers at the University of Pennsylvania, Mark Pauly, Scott Harrington, and Adam Leive. In a paper for the National Bureau of Economic Research, they argue that comparing pre-Obamacare and post-Obamacare premiums is an “apples to oranges” comparison, because Obamacare forces plans to cover a broader range of services, with more financially generous benefits, than most states had previously required.

There are two principal flaws with the “apples and oranges” argument. First: it is precisely the cost of Obamacare's regulations—in the form of higher premiums—that I and my Manhattan Institute colleagues are attempting to analyze. If Congress passed a law requiring every new car sold in the U.S. to have a hybrid engine, the price of cars would go up, because hybrid cars cost much more than conventional ones. Even if you think hybrid engines are awesome, you wouldn't be able to get away with arguing that it's “apples and oranges” to compare prices in the old, conventional car market to the new, hybrid-mandated one. The mandate is responsible for the higher cost.

Second: health insurance plans, and the benefits they contain, are extremely complex. Two plans might have the same deductibles and co-pays, but one might have a broad network of physicians to choose from, and another a narrow network. One plan might emphasize the usage of generic drugs; another might allow more usage of costlier, branded ones. Etc. etc. So doing an “apples to apples” comparison, in the true sense of the term, is empirically difficult if not impossible.

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