How ACA subsidies became a lifeline for millions of Americans

Some Obamacare subsidies are set to expire at the end of this year. This could double premiums for many enrollees. How a government subsidy that was intended to be temporary, became something millions of Americans cannot live without.

Jonathan Gruber, professor of economics at MIT. He was one of the architects of the Affordable Care Act.

Douglas Holtz-Eakin, economist. President of the American Action Forum.

The version of our broadcast available at the top of this page and via podcast apps is a condensed version of the full show. You can listen to the full, unedited broadcast here:

Part I   

MEGHNA CHAKRABARTI: On March 23rd, 2010, President Barack Obama and then Vice President Joe Biden approached a White House podium. They were met with a standing ovation.

Biden spoke first.

JOE BIDEN: I can't think of a day in the 37 years that I've been a United States Senator, in the short time I've been vice president. That it is more appropriately stated, this is a historic day.

CHAKRABARTI: Biden then continued.

BIDEN: History is made when men and women decide that there is a greater risk in accepting the situation that we cannot bear than in stealing our spine and embracing the promise of change.

CHAKRABARTI: Then President Obama took the podium to declare a new era in American health care.

BARACK OBAMA: Today after over a year of debate. Today, after all the votes have been tallied, health insurance reform becomes law in the United States of America. 

CHAKRABARTI: Obama and Biden were announcing the passage and imminent signing of the Affordable Care Act into law.

Now, the ACA was controversial from the start, not from the moment of its signing, but from the very moment years earlier that President Obama had decided to make the ACA his signature legislative effort. In fact, zero Republicans in the House and Senate had voted in favor of the ACA. And just one day before Obama signed the law, then House minority leader John Boehner did not relent on his attack.

JOHN BOEHNER: Today we're standing here looking at a health care bill that no one in this body believes is satisfactory. Today we stand here amidst the wreckage of what was once the respect and honor that this House was held in by our fellow citizens. And we all know why it is so. We have failed to listen to America, and we have failed to reflect the will of our constituents.

CHAKRABARTI: 15 years later, the Affordable Care Act enjoys general favorability among adults in the United States. According to this false KFF Health Tracking Poll, 64% of Americans have a favorable opinion of Obamacare. But the political and economic debate over the federal subsidies that keep the ACA functioning have  become even more intense.

Recall, the recent record-breaking government shutdown lasted as long as it did because Democrats were demanding that ACA subsidies continue into the new year. Currently, they are temporary and set to expire. At the heart of the issue is that ACA subsidies are temporary at all. They were temporary from the start, and this was the issue at play at a Senate finance hearing last week.

STEVE DAINES: At the center of this discussion today is the future of the expiring Obamacare COVID era subsidies. It's important to note that Democrats establish these enhanced subsidies on a temporary and purely partisan basis during the pandemic under President Biden and elected to have an expire at the end of this year.

CHAKRABARTI: Republican Senator Steve Daines there, he said subsidies and the debate about them highlights core failures of what's frequently called Obamacare, core failures in his view. He noted that as he saw it, the expiring subsidies have a negative effect on the system as a whole.

DAINES: More than a decade after its implementation Obamacare remains unaffordable, fundamentally broken, and increasingly reliant on massive recurring taxpayer bailouts.

CHAKRABARTI: Republican Senator Ron Johnson of Wisconsin highlighted the two different ways each party sees the subsidies.

RON JOHNSON: What is happening here is the subsidies aren't going away. And our colleagues on the other side of the aisle are making it seem like all these subsidies are going away. No. We're just going back to the incredibly flawed original design of Obamacare.

CHAKRABARTI: So here's the question. How did Obamacare subsidies, and particularly the enhanced ones that were passed during COVID, how did they go from being something that was supposed to be temporary to something that millions of Americans cannot live without?

So that's what we're going to talk about today and joining us first is Jonathan Gruber. He's a professor of economics at MIT, and he was one of the architects of the 2010 Affordable Care Act. And he joins us from Cambridge, Massachusetts. Jonathan Gruber, welcome back to On Point.

JONATHAN GRUBER: Meghna, it's great to talk to you again.

CHAKRABARTI: So I'd like you to actually tell us the story. Because these subsidies come in two chunks, right? There's the original Obamacare subsidies, and then there's the ones that were enhanced during COVID. We'll get to both of them, but take us back to 2010. When did the idea that the government needed to play some kind of financial role in the Affordable Care Act?

When did that first come up, and how was it thought about?

GRUBER: Meghna, we're sitting here in Massachusetts. Let's go back further than that. It came about in Massachusetts, when we set up our first in the nation universal health care coverage plan, also known as Romneycare. And we realized that you cannot expect to get towards universal coverage unless you make health care more affordable.

And the natural way to do that is to set up government payments to make that health care more affordable. In Massachusetts, we did it by lowering the cost that people had to pay for insurance. At the federal level, the idea instead was to rely on a mechanism that is endorsed by both parties, which is to have tax credits that individuals can get to offset the cost of their insurance.

CHAKRABARTI: Okay. So is it more appropriate to call them tax credits or subsidies? Because they have slightly different connotations.

GRUBER: They are tax credits, that is the appropriate name for them. They subsidize, that is make cheaper, the cost of health insurance, but they are tax credits.

CHAKRABARTI: Okay. So I understand your Massachusetts example because that absolutely did happen before Obamacare.

And interestingly the sort of genesis of the idea came out of the Heritage Foundation, if I remember correctly. Because the idea was everyone should have quote-unquote skin in the game regarding health insurance in America. And this was a way to get that. When the ACA was first being built, if I can put it that way, Jonathan. Was there any other method or means by which to help people afford health care on the ACA marketplace? Was there any other way that was brainstormed or thought about?

GRUBER: Yes. I think there was, first of all, there was a huge debate about the numbers themselves. So we ended up with a schedule.

And let's be clear how this worked. Meghna, this is very important. Before the enhanced subsidies, we had what was called a sliding scale schedule. And the way the schedule worked was if people were very poor, they would pay nothing for health care. Then as their income rose, and let's use specific numbers.

So let's take, let's use today's dollars. As someone, as an individual's income got above 150% of the poverty line, which today is about $23,000, they'd pay a small percent of their income, it would rise until at three times the poverty line or about $45,000 for an individual today. They would pay about 8.5% of their income for health insurance.

After four times the poverty line, the tax credits would go away, and they would pay the full price on the exchange. That's how they worked. There were other options considered. Another option considered, first of all, there was a lot of debate over those numbers. Second of all, another option considered was, no, let's not make a percent of income.

Let's make a percent of the premium, let's say 50% off or 60% off, or 70% off. The problem with that is that it doesn't directly address affordability. If you want to really target affordability, you want to target the percent of income that people pay for insurance.

CHAKRABARTI: Okay. Let's just get straight to affordability now then, because you heard the senators, Republican senators in those clips that I played saying, it's done nothing for affordability overall, not just for people on the Affordable Care Act, but for Americans in general, they claim it actually has added to the cost of health care overall.

GRUBER: Look, it's very important, Meghna, to separate two types of insured, of privately insured. First of all, with the government insured, let's leave them out.

The vast majority of privately insured people get their insurance from their employer. And employer insurance was largely unaffected by the Affordable Care Act. So Republicans use terms like it's raising the price of insurance. They are being misleading, because it's largely not affecting the price of employer provided insurance.

Indeed, since the Affordable Care Act, over the decade after, the price of employer provided insurance grew at the slowest measured rate in history. Whether the Affordable Care Act can claim credit for that or not is debatable, but certainly it didn't increase those costs. The costs that are directly affected by the Affordable Care Act, are the cost of buying insurance on the individual market, which before the Affordable Care Act was a broken entity.

Before the Affordable Care Act, insurers could actively discriminate against the sick and kick them out if they wanted to. That ended with the Affordable Care Act. As a result, what you had was premiums that compared to those who were in the market beforehand, might have gone up. Because those in the market beforehand were just the healthy people.

They kicked out all the sick people. That's why we needed to have subsidies to make it affordable. In fact, if you look at the data, the rate of growth of premiums in the individual market since the ACA is slower than the rate of growth before the ACA. Before the ACA, premiums in this market were growing at about 12% a year. Since the ACA, it's been below that.

No, they're completely wrong that the ACA's made it more expensive, and they're also wrong as the nothing for affordability. I just described how what the ACA did was protect Americans below four times the poverty line. So that's up to about the medium income in America. Protect them from having to pay an unaffordable share of their income for health insurance.

What the ACA did was protect Americans below four times the poverty line.

Jonathan Gruber

CHAKRABARTI: Okay. So you brought up that 400% of the federal poverty rate. Let's talk about that for just a minute before we have to go to our first break. Jonathan, a lot of people look at that now, and the fact that in the enhanced subsidies coming out of COVID, that you can be making more than 400% of the federal poverty level and still get subsidies from the government.

And just on principle, they object to that.

GRUBER: Meghna, I hear you. So that's why it's useful to move from percent of poverty, which is abstract, to real numbers. The poverty line for an individual is $15,500, let's call it $15,000. Four times the poverty line is therefore $60,000. Let's talk about someone who's an individual buying health insurance in my zip code here in Lexington, Massachusetts. On the exchange, the price of health insurance for a 60-year-old like me in my zip code is about $10,000 a year.

Okay? That means if my income was $60,000, without these subsidies, I would pay 16% of my income for health insurance. Now we can debate if that's affordable or not, but certainly if you say it that way, it doesn't seem like a waste to help those people out. This cliff was real, it was an issue with the original way we set up the law. That there were people, especially older people in high-cost areas, who would have to pay very large shares of their income for health insurance.

What the Biden subsidies did was say, no, we are going to cap for all Americans the percent of income they have to pay health insurance, not cap the cost.

Bill Gates has not helped. Okay. The venture capitalist, the rich venture capitalist has not helped.

We're going to cap the percent of income.

What the Biden subsidies did was say, no, we are going to cap for all Americans the percent of income they have to pay health insurance, not cap the cost.

Jonathan Gruber

Part II

CHAKRABARTI: Professor Gruber, let me get to something that you just said before the break, that the 400% of poverty benchmark means it's about, for an individual, that's about $60,000 a year.

That's what you said a little earlier. Yes?

GRUBER: Yeah, that would be the income level at four times the poverty.

CHAKRABARTI: Got it. Okay. I just wanna, I actually believe that we do have to talk about the numbers specifically, as you said. So I just wanna be sure that I'm relating them correctly. Okay. So that $60,000 a year, if it's the median income in the United States for an individual, that means that it's right there.

Like half of Americans earn $60,000 or less. Half of Americans earn $60,000 or more. It's right there for --

GRUBER: No that would be more like a median income in Massachusetts. That would be above --

CHAKRABARTI: Oh, you're talking about Massachusetts. Okay.

GRUBER: That would be above the median income, four times the poverty, the median income for an American is probably more like three times the poverty line. That would be above the median income.

CHAKRABARTI: Okay. Thank you. See, this is why I wanted to go over this again. Thank you for those corrections, so nevertheless, we are talking, we aren't talking about people who are living in poverty as defined by the federal government.

And to be fair, we're not talking about Bill Gates either. We're talking about that middle or lower middle-class Americans. Again, I just get to this point that there are many people, many in Congress, who think that if you are earning four times the poverty level or $50,000, $60,000 as an individual, that you should not be subsidized, that you are not living in poverty and therefore should be able to find some kind of care or insurance that works for you.

That it's not the federal government's business to be helping middle Americans. Instead should be focusing on people who really can't get by.

GRUBER: Look, that is a legitimate argument. This is why we should have rational public policy debates, which we no longer have. We should have rational public policy debates over questions like, What is a legitimate thing to ask someone to pay for health insurance? And that's why if Republicans want to stand up and say it is appropriate for someone at four times the poverty level to pen 16% to 20% of their income on health insurance, then they can make that argument, let 'em make it. That's not wrong, that's a fact.

We should have rational public policy debates over questions like, What is a legitimate thing to ask someone to pay for health insurance?

Jonathan Gruber

But to just make statements like, Oh, people at four times poverty don't need help. That's a meaningless statement. We need to define what the help is and we define what happens if they don't get it, and then let's have that debate.

CHAKRABARTI: So there's another thing. I'm looking at some data from KFF, Kaiser Family Foundation, who does a lot of very rational analysis on all things health care, right?

And they put out analysis, actually just in September 30th of this year. And they said that since the passage of the enhanced premium tax credits, enrollment in the ACA marketplace has more than doubled. So this is since COVID, from 11 to over 24 million people, and they say the vast majority of those people are receiving the enhanced premium tax credit. And looking at their graph here, it's more than 80%, it's about 85%, 87% there. Can you explain that, why it jumped so much?

GUBER: Sure. So Meghna, let's go back. Do you remember the numbers I said that under the original ACA people were paying a small share of income starting around the poverty line.

What the Biden subsidies did was two things. It provided the cap, but it also lowered the percent that people paid along the way. Let me give you a simple example. Take someone who is at two times the poverty line. So still, that's an individual making $30,000 a year. Certainly, lower middle class, if not poor.

Under the old ACA system, they would pay 6.5% of their income for health insurance. So someone at $30,000 would be paying like $600 a year. Okay. Or sorry, about $1,000 a year. Under the new system, they would pay 2% of their income, which is about $600 a year.

So basically, you have a situation where everybody got to pay less. As well as there was no cap. You got rid of this cliff at four times poverty, so yes, pretty much everyone was affected. In particular, what's very important is people below one and a half times the poverty line. These are people who are poor, okay?

They used to have to pay 2% to 4% of their income. That's not a lot of money, but it's something. That went to zero. Why does that matter? It's actually particularly timely because President Trump just this morning announced a potential deal, which would involve making sure everybody pays something. Now you might think, sure, everybody should pay something, but let's remember the amount of money you're getting is tiny from these folks.

And it turns out zero has a big effect on people's decisions. It turns out when you make something free rather than $5, a lot more people take advantage of it. So what Biden did was really three things. He made it truly free for the poorest people, which boosted, take up a lot. He made it cheaper for the lower middle-income people and he capped it for the middle income to upper middle-income people.

CHAKRABARTI: The question though, with that context in mind is how long can it remain feasible for the federal government to do this? Because this is from the Congressional Budget Office and they did an analysis that compared the cost of subsidies in 2022. And then 10 years out, presuming that there was no expiration, I think of the enhanced subsidies in 2032.

And the CBO said in 2022, the government spent $89 billion. And by the time we get to 2032, it's going to rise to more than $110 billion. Presuming that we have a steady kind of increase there even beyond that. The argument is that it's just going to become unaffordable for the government to continue these subsidies.

GRUBER: Meghna, you know what's fascinating with this debate is affordability is not a term we know how to use in economics. Affordability is in the eye of the beholder. You just described a $20 billion increase over 10 years. $20 billion is tiny. President Trump just gave $3.3 trillion to the wealthiest Americans, $3.3 trillion.

In a government that can afford to have a tax break worth $3.3 trillion for the wealthiest Americans, you're telling me that society can't afford to pay $20 billion more for subsidies or can't afford if we extend these over a whole decade. That's $350 billion. That's a lot of money, Meghna. I'm not arguing. Now that's something we should debate, but for a party, the Republicans that just passed a $3.3 trillion tax cut for the rich, to say we can't afford $350 billion that goes primarily to people below median income in America. That's just hypocritical.

CHAKRABARTI: You've said the ... words rational debate a couple of times, and that's what I'm hoping to have in this hour in the absence of such rationality on the Hill.

Jonathan Gruber, stand by for just a second, because now I'd like to bring in Douglas Holtz-Eakin. He is an economist and president of the American Action Forum, and he was the former director of the Congressional Budget Office from 2003 to 2005. Douglas Holtz-Eakin. Welcome back to On Point.

DOUGLAS HOLTZ-EAKIN: Thanks for having me.

CHAKRABARTI: Okay, so let me first get your sort of top line view here. Are the enhanced COVID era tax credits for health care, should they be extended or not?

HOLTZ-EAKIN: I don't think so. I think they should be reformed. And I want to second Jonathan's call for rational debate. It's sadly missing in our debates right now.

There's a very real question which he raised and which I think is the right question, which is, what do you think is the appropriate level of subsidy for health insurance? And recognize that the federal government subsidizes basically every health insurance policy in America. Medicare is subsidized, Medicaid is subsidized.

The Affordable Care Act is subsidized. Employer sponsored health insurance is not taxed under the income tax and is thus subsidized through the tax code. So we have a completely irrational, uncoordinated set of subsidies. It would be nice to figure out what we're trying to do in this area and rationalize it.

We have a completely irrational, uncoordinated set of subsidies. It would be nice to figure out what we're trying to do in this area and rationalize it.

Douglas Holtz-Eakin

CHAKRABARTI: Okay. I'm going to come back to that in just a moment. But Douglas if I may, let's get to the other thing that I had asked Jonathan about, and that is this sort of political and philosophical belief that if you are earning significantly more than the federal poverty line that health care subsidies, shouldn't be the government's business to keep you insured.

HOLTZ-EAKIN: A fact that helps me think about this is that the United States spends about 17% of its income on health care. It's rising towards 20%. So if you want to have the enhanced subsidies cutoff that something is affordable when it's at 8.5% of your income, there is no way that we can all have affordable health insurance simultaneously.

It just can't be done because we're spending 17%. So it's fair to say that when someone's making $93,000, six times the federal poverty line, that perhaps maybe they should be out of the subsidies. And we have to figure out how high up we're willing to go in the income distribution and how generously, and there's not been ever a bipartisan conversation on that topic.

The Affordable Care Act was done on a party line. Democratic votes, the enhanced subsidies done on a party line. Democratic votes. It's time to have the debate. There's more than just Democrats in the United States.

CHAKRABARTI: Yeah. So let me ask you, I don't know if you have a specific benchmark in mind, but if the federal government is --

HOLTZ-EAKIN: I don't; to be honest, I would just love for someone to have a reasonable talk about it. (LAUGHS)

CHAKRABARTI: It's okay, because I was going to ask you, maybe this was just a kind of a gauche question, but if not 400%, then what? But maybe that's not the right question to ask.

HOLTZ-EAKIN: I think it's closer to 400 than 600. Absolutely.

CHAKRABARTI: Okay, so let me just actually also take a step back here and ask about why, whether you're a Democrat or Republican, why certain people see government subsidies in different ways.

Because obviously the Republican party's deeply concerned about the rising cost of Obamacare subsidies. But at the same time, as Jonathan pointed out, there's been giant tax breaks for the wealthy. And I was also thinking about the other day the defense budget, which is now almost a trillion dollars.

Half of that goes to defense contractors. And we recently saw that those defense contractors did billions of dollars of stock buybacks. And so some people look at that and they're like, that's taxpayer money going directly to the shareholders of defense contractors, with just the federal government being the middleman.

And they don't see much difference between that. And as the Republican party argues, that Obamacare subsidies are just payments directly to insurance company bottom lines.

HOLTZ-EAKIN: Yeah. People have different values and that's clear all the time. But also I think people can be deceived about the superficial aspects of how the money gets transferred and not look at where it actually lands.

If we were to give the Obamacare subsidies to individuals, something the president floated in a social media posting. And give it to everyone who's in the Affordable Care Act and let them buy the policies they want, that's what he suggested. Right now they're buying the policies they want and then we give the money to the insurance companies to support them.

You could give the money to the individual and then they would say, I would like the policy I have, and give it to the same insurance company. Why does it matter what route it takes on the way? It doesn't. So again, I have found this discussion quite frustrating.

Because I think it misses the point that you could probably make the argument for much bigger subsidies as Jonathan did at the low end of the income distribution, and then phase them out more rapidly and not spend more money, but just reshape the way you want to do it. That's the right conversation to have.

CHAKRABARTI: Yeah. Okay. So let's go to that and Jonathan, I'm gonna bring you back in here.

I have to admit; I have become so habituated to the irrational baseline of conversation on Capitol Hill. That I have a hard time trying to think through what the right questions to ask may be to reform this debate into something that could actually lead to a thoughtful pop and maybe even realistic way forward with health care costs in America.

HOLTZ-EAKIN: So Meghna --

CHAKRABARTI: Yeah, go ahead.

HOLTZ-EAKIN: If I can interrupt just for some context, I think one of the things that's going on here is that people haven't recognized it. Health care spending in general is rising fairly rapidly right now. It grew at about 4% a year, for a while, it was 7.5% in 2023. It's going to be over 8% in 2024. I'm not exactly sure what it is this year, but if national health care spending is rising that fast, the insurance just covers the cost of that bill. So the insurance is going to go up as well, whether it's employer or ACA. And I think people have missed that context.

This isn't about just the insurance. We have a larger health care issue to address.

CHAKRABARTI: Were you listening in on our editorial meetings last week, Douglas, because this is literally what I wanted to move the conversation towards. That the problem is it's just too expensive. And what do we do about that? And I promise you I'll get to that, but Jonathan Gruber, let me pull you back here and ask you what are the questions that do need to be asked regarding the government's role in the overall cost of health care?

GRUBER: A great question. First of all, it's good to speak with you, Doug, as always. Let me just correct one thing that's very important. The ACA is a bipartisan bill that was written by a committee of three Republicans and three Democrats, and only after it was largely written in the Senate Finance Committee after the Tea Party  ... meetings of summer 2009 did Republicans fully back off the bill.

But if you look at the ACA today, I can point out elements that were put in there by Republican staffers. Okay? This was a bipartisan bill that was made partisan when the Tea Party revolted against it. So let's be very clear about that.

If you look at the ACA today, I can point out elements that were put in there by Republican staffers. ... This was a bipartisan bill that was made partisan.

Jonathan Gruber

Second of all, Meghna, there's two separate issues you raise, which are really hard and interesting issues.

The first issue is health care cost versus health insurance premiums. And the health care cost debate is a huge, large debate that honestly is largely driven. I think Doug will probably agree with me on this, by provider behavior and by health care prices. Not by the insurers, but by the literal health care sector.

So that's a separate debate we can get into, but that's separate from, in some sense we're talking about now, which is the other question, which is what is affordable? And economists don't have an answer to this. We don't, Doug and I have different views, but neither of us are right. Economists don't.

That's why we really like to figure out a way to get an informed public debate on this.

To have people say, okay, look, is it worth, what does a public feel is appropriate people to pay? And because honestly, economists don't have any answer to this, other than their gut about this feels affordable, this doesn't, but there's no right answer on that.

CHAKRABARTI: I think a lot of people would say, at the very least, affordable is less than 20% of GDP, Jonathan.

GRUBER: Yeah. Look, I think, if we talk, if we turn to health care costs, Doug's right. We're at about 17.7% of GDP. By the way, we can afford that as a nation, that is not unaffordable. We are affording it.

Now the difference is that a lot of that comes to the public sector and we're unwilling to raise the taxes to raise that. We are 14th in the world in taxes relative GDP, if we raise taxes enough to pay for all our health care spending this year. We would raise, move to maybe 11th in the world in taxes, a share of GDP.

Okay. It's not a question of affordability as a government, it's just a question of are we willing politically to raise the taxes we need and should we, once again, I'm not taking a stand on what we should spend in health care. I'm just saying the notion that we're now unaffordable is wrong at the same time.

Part III

CHAKRABARTI: Okay, so gentlemen, let's just dive headlong into a solution space here. And Douglas, I want to go back to something you said earlier. Because I don't actually think enough Americans really realize the importance of what you said. Is that in some way, shape, or form, the federal government is subsidizing everybody's health care in America, or at least almost everyone. Obviously, there's Medicaid, CHIP and Medicare. Those are big ones and known, they're the subsidies through the ACA.

But then because employer-based health care or employer-based health insurance is not taxed by the federal government, that is a form of a subsidy itself. And I'm going back to the CBO report here that I quoted to Jonathan earlier. Support for employment-based coverage by the federal government in 2022 was $316 billion.

They estimate that by 2032 it's going to rise to $612 billion. That's almost 50%. That's almost doubling, which is way more than the rate of increase for ACA subsidies. I don't know, is there some pressure that the federal government can put on the private health sector through maybe reducing the amount of subsidies for employer-based insurance?

HOLTZ-EAKIN: That's quite a tale I can tell you. In a former life, I was the policy advisor just then, Senator John McCain, when he ran for President against Barack Obama and lost. And a key part of that loss was that he proposed for the first time eliminating the non-taxation of employer sponsored insurance and to essentially give everyone in the United States a refundable tax credit of the type that's in the ACA.

It was incredibly unpopular, and history will show he lost. If you want to go there carefully, because that's a genuine subsidy. It's the largest subsidy in the tax code. And something that a lot of people have thought for a long time ought to be eliminated. The Affordable Care Act itself had a disguised version of eliminating that called the Cadillac Tax.

It would have been a tax on extremely large health care plans. And was so unpopular in the abstract that Cadillac Tax was never implemented.

CHAKRABARTI: Yeah. That went down in flames with unions. I remember that clearly.

HOLTZ-EAKIN: Yeah. So I hear you. And while standing at a blackboard, I would endorse what you just said, but the reality on the ground is that's a very popular subsidy that is hard to touch.

CHAKRABARTI: And so then where do we look for in terms of changing the government's role in subsidizing the health care? Because to your point earlier, it's not really the subsidies that are the issues, but it's the cost overall, but they're linked also. There's this idea that if the government's going to forever keep the spigot on, there's no incentive to reduce cost.

HOLTZ-EAKIN: I agree. And so my call, which may be in vain, is that we sit and think hard about a person, their income, their health status, and say, regardless of where you reside in the system, employer, small business, ACA, Medicaid. Let's give the same support to you regardless of where you are. And we may not get to that perfect construct, but let's rationalize it to the extent possible, so that people don't have their subsidies changed abruptly when they change where they are in the economy.

And because when you change the subsidies and change their health insurance, you change their care. And these transitions are not good for people's overall health care. We really do need to get back to a debate that gets down to health care and the quality of the care.

CHAKRABARTI: Oh, interesting. I just want to be sure I heard you right.

So an idea that you just presented was, it's really more about the individual, like as you said, your health status, maybe your income, where you live, et cetera. And then that would be determinative of how much subsidy or support you get from the federal government.

HOLTZ-EAKIN: I think that's a more important set of determinants than the label on your head. Yeah.

CHAKRABARTI: Okay. Jonathan Gruber, what do you think about that?

GRUBER: Look, what's amazing about health care debates from the get-go is how much health care experts agree on things. There really is not a lot of space among thoughtful health care economists on what we should do to the system. There's no thoughtful health care economists who thinks the employer tax subsidy would be part of a well-designed system.

As Doug said, it's incredibly hard to get rid of it. But there's just broad agreement. There's broad agreement that it's silly to have a system where the amount of subsidy you get, the amount you pay, varies depending on where you get your insurance from.

So I agree with Doug. If we could start over, we would have a system that really was in some sense, the brain in many ways, the brainchild of the Heritage Foundation back in the day, which would be an individual based system where we'd have what we call cradle to grave exchanges, where everyone would have, we would decide what people should have to pay as a percent of their income for health insurance.

We decide that as a society. People would pay, then they get to choose what insurance they want. There's technical details to work out, but that would be a great place to go. I think that to get there, and I think it's not implausible, someday we could get closer to that, but to get there, we need to begin to engage in the debate about what is affordable and not saying things like, people should get nothing if they get above X. And we should say, okay, here's the amount of money people should have to pay of their income for health insurance.

Let's lay that out. And let's have that discussion as a society. And that's why the debate over the Biden extended subsidy should be taking that form.

CHAKRABARTI: I want to just come back to something. Because I just, I don't know. I don't think that this is discussed enough, and forgive me for repeating this, gentlemen, but essentially everybody in the United States is getting a subsidy of some form, in some form or another from the federal government. If it's through your employers, it's because the employer doesn't have to pay as much tax. Ultimately, that's a cost to American taxpayers as a whole, because that is tax revenue being lost. And I'm just still really amazed by how it is the second largest source of a health care subsidies from the government.

Medicaid and CHIP are the No. 1 in 2022. That was $462 billion. And for employer-based coverage support from the federal government, $316 billion. For ACA subsidies was only $89 billion. So that's what we're talking about here. If everybody is getting some kind of assistance, whether direct or indirect, Jonathan, is what you said a little earlier, like if we could start all over again, it would be just like a giant ACA marketplace for everybody. And you would get whatever subsidy your personal situation warranted.

This is why in some sense the idea of repeal and replace the ACA never worked. Because there was no alternative, because the ACA was the Republican plan. Okay.

It was introduced by Republican governor here in Massachusetts, Mitt Romney. It was written in the Senate Finance Committee by a committee of three Democrats and three Republicans, and it basically was a plan of putting health care on individuals and that's where we should move.

But you're absolutely right. But by the way, Meghna, the tax break is the third largest. You forgot about Medicare, which is even larger.

CHAKRABARTI: Oh, I'm just looking at the CBO, so maybe, I want to be sure that I am not reading the CBO graph incorrectly. This is from a report that they put out in 2022. They said that federal insurance subsidies for people under, oh, it's under the age of 65.

Okay. Never mind. That's why, my apologies.

GRUBER: Okay. So it's Medicare. Then Medicaid. But you're right, people do not appreciate the enormous amount of money we spend. And let's be clear about, and people might understand this tax break, let's just be clear for one second, because the idea is when MIT pays me in salary, I get taxed. When MIT pays me in health insurance, I do not.

That amounts and that does not make sense. Does not make sense. Because first of all, the richer you are, the bigger tax break you get. That doesn't make sense. Second of all, it encourages me to get more generous health insurance because that's not taxed well, my salary is. So economists across the spectrum say we should get rid of this.

It's just been an unviable challenge because a people on the right don't like it because it means raising taxes. It's really ending a tax break, but it looks like raising taxes. People on the left don't like it because unions have very generous health insurance plans that they want to have continued to be subsidized.

So it's unfortunate that this is really the number one thing economists would agree on, and it just has served, seemed to be politically impossible to go after it.

CHAKRABARTI: Douglas, let me ask you again, just being in the 'What if?' space of debate and conversation, how would this kind of alternative plan that you've brought up here, how would that actually function in reality?

Would it still have to be all under, it's the federal government still just giving money to people, right?

HOLTZ-EAKIN: Sure. They're federal subsidies. As Jonathan mentioned, the Heritage Foundation a long time ago had this vision of cradle to grave ACA-like exchanges. That certainly was the construct that John McCain supported.

And I think the right way to interpret what happened there is that the American people are extremely cautious and they want to have a proven construct before they'll leap away from the employer sponsored insurance. And they're just not gonna do it. I thought it was the right thing to do.

The American people are extremely cautious, and they want to have a proven construct before they'll leap away from the employer sponsored insurance.

Douglas Holtz-Eakin

It was a radical reform. But the experience left me being a raging incrementalist. I think we need to take this one step at a time and we don't get to just start over.

It's too scary to people. Yeah. So to bring us back to where the debate is now, it would be great if there could be a serious discussion about the insurance that is the Affordable Care Act.

We're not going to solve all the health care problems in one fell swoop. Think about the structure of that market. There are some real heavy restrictions on age ratings, how much you can charge different people, different ages, essential health benefits. Medical loss ratios that were part of the original ACA that we might want to revisit after many years and perhaps loosen a little bit. Because the reality has been that the ACA is a market of people who are poorer and sicker than average.

And so it's a relatively expensive place to begin with, and giving insurers a way to manage those costs might be overdue.

CHAKRABARTI: Okay. One of the great pleasures of being on this show is we have really smart people who come up with phrases that I want to make into t-shirts. And 'I am a raging incrementalist' is the newest one for me. But Jonathan, so pick up on what Douglas said, like within the ACA marketplace itself, what areas of sort of relaxation or loosening would you be open to.

GRUBER: Yeah, this is where I think there's the biggest gap between people on the right and the left, which is I think that basically loosening is not going to be a major solution here. For example, everybody says, oh, we should allow people to buy less generous insurance coverage. What does that mean?

Does that mean it doesn't cover prescription drugs? Does that mean it doesn't cover the hospitals, then doesn't cover the doctor? Once you have those things, you basically have health insurance. Okay. You can certainly, we have plans on the exchanges with $8,000, $9,000 deductibles. I guess you got a plan of a $15,000 dollar deductible if you want, but there's not a lot of space to make insurance cheaper.

By making it skimpier, we already have very skimpy insurance options available to people. It really, in some sense, what we need to be discussing if we want to take this on, is the underlying cost of health care, which are really driven a lot by the fact that we have, we are the only nation in the world with a free market in health care.

Every other nation regulates the prices that are paid for health care. Every other nation pays less.

We are the only nation in the world with a free market in health care.

Jonathan Gruber

CHAKRABARTI: Yeah. Can I just jump in, Jonathan, because this is such an important point when the biggest issue, and I agree completely, is that it's just too expensive. So we only have three minutes left.

So I want to keep this as brief as possible. But let's go back to the Massachusetts example because I clearly remember that Romneycare was called here in Massachusetts, was from the start, said to be the first step in a two-part plan about health care in the state of Massachusetts. First step, get everyone insured.

Second step, drive down the cost. The second step has never happened. There have been pilot programs here or there, having more people being insured. It's like above 90% in Massachusetts. That didn't drive down the cost. We have an example right here of how even having subsidized health care has not contributed meaningfully to making health care cheaper for everybody.

GRUBER: Look, it's ironic given the enormous fight and the 15-year battle of the Affordable Care Act, that was the easy part. Okay. That was spending money to cover people. That's the easy part. The hard part is addressing what the famous health care economist Uwe Reinhardt's first law, which is health care costs equal health care income.

If you want to lower health care cost, someone's going to take it on the chin. And that is something we're not very good at in America. We're not very good at creating losers, even if it's in the larger interest, even if those losers are massively rich and still would do quite well, we're not very good at doing that.

So I think that's the second step is much, much harder. Here's the good news, Meghna, we can afford 17% of GDP in health care. We can afford 20% of GDP. We can't afford 40%, so we don't have to lower where we are today. We just have to grow more slowly. So the orthopedist making $750,000 a year. He doesn't have to stop making $750,000 a year.

It just can't keep on going up at 7% a year. It's gotta go up at 3% a year. That's where we have to focus our energies. Let's not fight the unwinnable fight about lowering people's incomes. Let's fight the potentially winnable fight about looking to the future. Can we constrain the level of growth?

Because that's the real fight we have to have.

CHAKRABARTI: Yeah. And I think the other issue that hasn't been spoken of yet, but I really want to, is that middle Americans are not making enough money. Like there has been a 40 year long, I would say, inadequate increase overall in the wages of working Americans.

But Douglas, I'm going to give you the last word here for people listening. Who are feeling the rage now of your raging incrementalism.

They do have a say in this, obviously, right? They can contact whoever their members of Congress are. What sort of concrete proposal would you have them bring to their members of congress?

HOLTZ-EAKIN: I think you should have some idea what fraction of income is an appropriate amount to pay for health insurance. Can't be zero. We can't all pay zero. Doesn't have to be 17%. We don't all have to pay full freight. Where in between do you land and that's the starting point for just how big the subsidies are going to be.

The first draft of this transcript was created by Descript, an AI transcription tool. An On Point producer then thoroughly reviewed, corrected, and reformatted the transcript before publication. The use of this AI tool creates the capacity to provide these transcripts.