Subsidizing Health Insurance: Tax Illusion and Public Choice for a Mostly Private Good

Abstract

The Affordable Care Act (commonly termed Obamacare) has and continues to experience substantial political and economic challenges to the “Exchange” market for individual (non-job-related) insurance it is trying to build to cover the uninsured. The promise to make insurance available to those who have already become above-average risks has resulted in high and growing premiums for Exchange coverage. Efforts to control the rate of growth of medical spending have been ineffective in curbing the growth of private sector spending. Furthermore, the cost of subsidies to the formerly uninsured has provoked taxpayer backlash to such an extent that repeal of the entire program almost succeeded. I explore whether there is a way to redesign subsidies and the distribution of methods to overcome these difficulties by developing insights contained on some of James Buchanan’s work, particularly his contributions to “positive political economy” and “fiscal illusion.”