Here’s What’s Wrong With BBB Lite

The congressional leadership has given up on a $3.5 trillion (or was it $5.5T?) “Build Back Better” spending bill and whittled it down to a much less expensive alternative. There are two main components: extending subsidies for people who buy health insurance in the (Obamacare) exchanges and regulating drug prices.

Here is what’s wrong with those proposals.

Throwing good money after bad.

The American Rescue Plan, enacted in March 2021, increased Obamacare subsidies for those already receiving them and created new subsidies for the previously unsubsidized part of the market for two years. That means that more low-income buyers are now paying little to nothing for insurance and the maximum contribution has been reduced from 10% of income to 8.5%, even for people who are above 400% of the poverty line.

The new spending proposal would extend those subsidies for two more years.

Yet Obamacare is a flawed program that has made health insurance unaffordable and unattractive for millions of people. Instead of fixing these flaws with sensible (bipartisan) reforms that need not cost the taxpayers an extra dime, the new proposal would double down on a colossal mistake.

Currently, the Obamacare deductible can be as high as $8,550 for an individual and $17,100 for a family. If you combine the average premium that people without subsidies paid last year with the average deductible they faced, a family of four potentially had to pay $25,000 for their health insurance plan before receiving any benefits. This is like forcing people to buy a Volkswagen Jetta every year before their insurance kicks in. For families living paycheck-to-paycheck, this is like not having health insurance at all.

The primary (advertised) purpose of the Obamacare exchanges was to insure the uninsured with private insurance. But the program has done a miserable job of achieving that goal. As Brian Blase notes at the Health Affairs Blog, the Congressional Budget Office (CBO) expected that 25 million people would be enrolled in the exchanges by now. Yet enrollment, on an annualized basis, has been stuck at around 10 million people since 2015. In 2020 it was 10.4 million people.

If we compare the number of people who had individual insurance before the enactment of the Affordable Care Act with its number today, enrollment has increased by only 2 million. Blase says that works out to a cost of $25,000 for every newly insured person.

And it gets worse. Since employer coverage has dropped by about the same number as the increase in individual coverage (mainly because of Obamacare), the Affordable Care Act has resulted in the federal government spending almost $50 billion in taxpayer subsidies every year with virtually no net gain in private insurance coverage.

One way to evaluate the worth of a product is to see if it can survive the market test. That is, are buyers willing to spend their own money to cover the cost of the product being offered? A Kaiser Foundation study estimates there are almost 11 million people who have elected to remain uninsured even though they qualify for subsidies in the exchanges. Meanwhile, the unsubsidized part of the market has been in a death spiral – losing almost half of its enrollment (45%) between 2016 and 2019.

All told, we have a clear indication that what Obamacare is offering is not what people want. And that should not be surprising. Obamacare-type insurance is not what people chose to buy before Obamacare became law.

Moreover, about 90 percent of the higher-income people who were targeted to get the extended new subsidies in the American Rescue Plan already had obtained coverage elsewhere. The result: according to CBO analysis, this reform will cost taxpayers $18,000 for every newly insured person! In other words, expanded Obamacare is almost as wasteful as original Obamacare.

In addition, the extended subsidies are highly regressive. As Dr. Blase has pointed out in a Galen Institute study, most of the new money is going to people who appear not to need it. For example, a 60-year-old couple with two kids making $212,000 is receiving a benefit of $11,209. In contrast, a family of four making $39,750, regardless of the age of the couple, is receiving a benefit of just $1,646.

Denying people the drugs they need.

Despite common perceptions, we are getting our best health care return from spending on drugs. In comparison to just about anything else we do in medicine, the benefits per dollar of cost from drug therapy is much higher than it is for doctor or hospital therapies. If anything, we are underutilizing drugs and paying less than their social value, on average.

Unfortunately, most congressional districts contain a hospital and quite a few doctors – but no drug company. Perhaps for this reason, many members of Congress favor drug price controls – but no controls on hospital or doctor billings.

The ultimate targets are the most expensive drugs, and these, of course, are the drugs that are the most innovative and the most socially valuable. Reducing the payoff from these types of drugs means that fewer of them will be produced, and that will have medical consequences.

University of Chicago economist Tom Philipson has studied the latest House of Representatives’ version of drug price controls, which is very similar to one being considered right now in the Senate. The results are sobering. Philipson writes:

In a new report, we find the revised plan will reduce R&D spending by 18.5 percent or $663 billion through 2039 resulting in 135 fewer new drugs. This will generate a loss of 331.5 million life years in the U.S., a reduction in life spans about 31 times as large as from COVID-19 to date. (See the technical paper here.)

That doesn’t mean there are not real problems that need correcting, however. A study of 28 expensive specialty drugs found that among Medicare enrollees covered by Part D drug insurance, the out-of-pocket spending by patients ranged from $2,622 to $16,551. And those are annual costs!

Congressional Democrats are proposing to lower the catastrophic exposure to $2,000 for Medicare enrollees for all drug purchases under the Part D program.

The problem is not that government is spending too little money on the elderly. The problem is that the money it does spend is poorly allocated. In a proper insurance arrangement, people self-insure for small expenses which they can easily afford from their own resources and rely on third-party insurers for very large expenses that would have a devastating impact on their finances.

Medicare does the reverse. It pays for small expenses that almost any elderly enrollee could afford, while leaving seniors exposed for very large bills that could literally bankrupt them.

Instead of spending more taxpayer money,­­­ Medicare could instead be redesigned to cover all catastrophic costs, leaving patients with the responsibility to pay for smaller expenses. This would give seniors complete protection against potentially bankrupting drug costs, while leaving them free to economize on low-cost drug purchases – without relying on any more taxpayer money.