Executive Health Administration

Obamacare Subsidies: Intergenerational Equity and Economic Impact

[fa icon="calendar'] Mar 26, 2015 8:56:00 AM / by William D. Leach, Ph.D.

Social_Welfare_Spending_PieChartWhen insurance companies began pricing their Affordable Care Act policies in 2013, younger Americans were left holding the short end of the stick. True, young adults ages 18-to-25 were the first demographic to benefit from the 2011 phase-in of the health care law, which allowed adult children to remain on a parent’s policy. Some 2 to 3 million young adults joined the ranks of the insured under that provision. But policies for older Millennials and those without an insured parent were often priced comparably or higher than before Obamacare, even after factoring in federal subsidies. As Forbes columnist Scott Gottlieb put it, “Obamacare is asking young adults to effectively subsidize the healthcare costs of older Americans.” Looking at premium prices alone, young Americans seemed to have gained relatively little from the new insurance exchanges.

To gain broader perspective on the generational equity of Obamacare, it is helpful to place Marketplace subsidies in the context of the nation’s entire social safety net. In a previous post, I detailed how ACA subsidies compare to other entitlement programs in terms of average monthly benefit and total cost to taxpayers. To recap, the average Marketplace subsidy of $268 per month is a modest benefit relative to other programs, such as unemployment insurance, Social Security, Medicare, and Medicaid, which spend $800 to $1,500 per beneficiary per month, on average. Moreover, with a total annual cost of $30 billion, Obamacare subsidies are adding less than 2% to the total cost of America’s social welfare system.

Generational issues come into focus by ranking the various social programs according to age of beneficiary, as in the first two graphics below.

Intergenerational Equity

Marketplace subsidies are in the middle of the age distribution, with the average recipient being 42 years old. This is an approximation based on preliminary data from the 37 states using the federal exchange plus 10 state exchanges reporting as of January 15. Age distributions for the other programs are also approximations based on published data of varying granularity. 

Programs that mainly benefit older Americans tend to be much more expensive. This is true in terms of the average monthly cost per recipient, and even more so for the total cost of each program. Total costs are inflated for elder-focused programs primarily because of the number of persons served. According to a 2012 Pew Research Center report, nearly 100% of Americans over 65 have benefited from at least one major program, compared to about one-third of Americans under 30.   

The final graphic below summarizes this final point about intergenerational equity. About 57% of all welfare spending is devoted to programs with average beneficiary ages of 71 to 77 years. A mere 7% of spending goes to programs with average beneficiary ages of 8 to 13 years. The remaining 36% supports programs with average beneficiary ages of 30 to 53 years.

Thus, social policy in the United States represents a significant redistribution of wealth from middle-aged workers to older retirees and Medicare and Medicaid patients. This pattern repeats itself at the state level in the form of unfunded pension obligations, and again in local government through unfunded health care obligations.

Economic Impact of Obamacare Subsidies

Our senior-centric safety net has implications for the American economy. Twenty years ago, Italian political scientist Maurizio Ferrera noted that European countries differ in their approaches to social policy, with northern European states offering generous public benefits to children, parents, and working-age adults, whereas southern European states (Italy, Spain, Portugal, and Greece) emphasize government spending for pensioners. These southern states have proven the least resilient in the wake of the global financial crisis and recession. It makes sense that social welfare programs supporting work and parenthood would yield the highest economic returns. 

ACA subsidies fit this economically advantageous model. They subsidize health insurance policies purchased by gainfully employed working adults averaging 42 years of age. Their purpose is to help families live healthier, more productive lives, and raise healthier, more productive children. Arguably, programs that support the American workforce should be the mainstay of American social policy. What we have currently, however, is a patchwork of programs that increasingly echo southern Europe. When juxtaposed against other types of social welfare spending, Obamacare insurance subsidies emerge as a relatively inexpensive program that mainly benefits younger working families.









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Topics: Health Economics, Affordable Care Act

William D. Leach, Ph.D.

Written by William D. Leach, Ph.D.

Bill Leach teaches in USC's online master’s program in Public Administration at the Sol Price School of Public Policy.

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