In an April, 2001 opinion piece in the Wall Street Journal, Center on Longevity Faculty Affiliate Dan Kessler examined the unintended consequences of a little-discussed part of the healthcare reform bill—the over $100 billion per year subsidies the government will provide to help purchase health insurance. Kessler, the David S. and Ann M. Barlow Professor of Law and Senior Fellow at the Hoover Institution, presented the following example:

“A family of four headed by a 55-year-old earning $31,389 in 2014 dollars (134% of the federal poverty line) in a high-cost area will get a subsidy of $22,740. This will cover 96% of an insurance policy that the Kaiser Family Foundation predicts will cost $23,700. A similar family earning $93,699 (400% of poverty) gets a subsidy of $14,799. But a family earning $1 more—$93,700—gets no subsidy.”

What Kessler points out is what economists call “notches”—large discontinuous changes in benefits. Prior economic research has shown that such notches incentive people to work less so as not to exceed income thresholds. Kessler also points out that because the subsidies are so large relative to income that when taxes are included even smoothing out the notches could imply that for every additional dollar earned by families in the subsidy range only twenty cents would come back to the family as additional spendable income. Kessler’s conclusion is straightforward:

“The only fix is to drastically reduce or eliminate the premium subsidies. As the 2012 elections approach, voters will have to decide: For middle-income families, should economic success be determined by work and savings, or by participation in a government program?”

Read the full article at The Wall Street Journal

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