Expanding Obamacare Subsidies Will Make Inflation Worse

Senate Democrats are pushing the use of reconciliation to expand Obamacare subsidies. To pay for these expensive handouts, they are looking to impose price controls. This bill would worsen surging inflation and potentially increase healthcare costs and premiums.  

In the American Rescue Plan (ARP), President Biden and congressional Democrats expanded Obamacare subsidies – specifically the advanced refundable premium tax credit – by increasing benefits for households at every income level and expanding them to households earning more than 400 percent of the federal poverty level. Because these enhanced benefits are set to expire later this year, Democrats are attempting to extend them through 2025. This two-year extension alone would cost $74 billion.  

The proposed reconciliation framework includes a few pay-fors, the most substantive being price controls on prescription medicines. Specifically, the bill would give the Health and Human Services Secretary the authority to “negotiate” the price of prescription drugs on behalf of Medicare. In reality, the Secretary would simply determine the price they deem acceptable and impose a steep tax of up to 95 percent on companies who charge more.  

In 2023, the Secretary would be able to determine the prices of 10 prescription drugs. The determined price would go into effect in 2026. The number of drugs the HHS Secretary could set prices for would then increase to 15 in 2028 and 20 in 2029.  

These drug price controls would allegedly raise around $101.8 billion. Drug price controls will discourage investment and innovation in drug development, leading to fewer cures and life-preserving medicines. As a result of the Democrat price controls, a July 8 CBO report found that “about 15 fewer drugs would be introduced over the next 30 years.” Still, this is likely a massive underestimation. 

In order to raise more money, the bill would also impose an inflation rebate and a few changes to Medicare Part D. The plan will raise nearly $300 billion in total. 

This bill would worsen surging inflation.  

The drug pricing provision – the largest revenue raiser – would be implemented in 2026, as mentioned. The Obamacare subsidies, on the other hand, go into effect immediately. In this way, the government would spend at least $74 billion over two years all before any revenue is collected to pay for the bill’s provisions.  

The consumer price index increased by 9.1 percent on an annualized basis in June, setting yet another 40-year high for the seventh time under President Biden. Inflation is now costing American households an extra $635 a month.  Even if prices stopped increasing altogether, the average American household will spend $7,620 more this year due to inflation. 

As a result, Americans have gotten increasingly pessimistic about the current state of the economy and economic outlooks. About 44 percent of Americans expect the U.S. economy to be in recession next year while 25 percent expect the U.S. economy to continue slowing next year. Only 13 percent of Americans believe the U.S. economy will be growing in that time. Only 22 percent of Americans think that the current economy is good while 75 percent say it is bad – a new high for the Biden presidency. 

The federal government’s reckless spending is largely to blame for surging inflation. Democrats’ ARP passed in March 2021 while the U.S. was already in recovery, spending $1.9 trillion on paying people not to work, fully refundable tax credits, and, as mentioned, Obamacare subsidies. Certainly, spending even more on these initiatives will exacerbate inflation.  

Not only would this contribute to short-term inflation, which is currently crushing the American people, but it would likely add to the federal debt in the long run.  

Once these expanded subsidies have been in place for five years total, it will be extremely difficult to get rid of them. To make matters worse, the expanded subsidies under this bill would expire ahead of the 2024 presidential election, increasing the pressure to extend them again. These Obamacare subsidies could be made permanent, costing $220 billion over 10 years.  

Ironically, prescription drugs are one of the few spending categories that is not driving inflation. Prescription medicine prices rose only 0.1 percent in June, and 2.5 percent in the last year. Democrats would be smart to focus their efforts on issues voters care about—like inflation – rather than policies that would exacerbate those issues. 

Subsidies could actually increase healthcare costs and premiums.  

These expanded subsidies have already led to higher healthcare costs and premiums for American consumers. Because the subsidies limit the amount that households pay for a benchmark exchange plan to a percentage of their income and the rest is paid by the government, insurers lack any incentive to lower premiums or costs. A 2022 CBO report confirmed that premiums for exchange plans are rising more quickly than originally anticipated.  

Not only do these subsidies exacerbate costs, but they also provide little benefit to those who need assistance in securing health coverage. A CBO report notes that nearly 75 percent of this drastic new spending was spent on individuals who already had health insurance, with little of the spending going towards reducing the number of uninsured Americans.  

It’s unclear that the bill will accomplish anything outside of exacerbating inflation and killing medical innovation. Lawmakers should reject this costly piece of legislation.