• Erosion of what?

    I guess I’m not done with subsidy erosion. There is enough wiggle room in that term to not know for sure what it means. Does it mean reduction of subsidies as a proportion of premium? Or, reduction in subsidies as a proportion of income? (At this pace I’ll be posting on the definition of “is” sometime next week …)

    Rather than remind you of or quote from the content of my post earlier today, read it first. I’ll wait.

    So, now you know that benchmarks for vouchers (or subsidies — same thing) can be determined in a fixed way but the subsidy itself can “erode” if the fraction of that benchmark that the government pays declines. So, what if we make sure that fraction stays fixed. Does that mean there is no erosion?

    Yes, it does, but only in the sense that there is no erosion relative to premiums. The subsidy as a fraction of the premium is fixed. That does not mean there is no erosion relative to something else:  income.

    If the government pays x% of premiums, individuals pay (100-x)%. If premiums go up faster than incomes then (100-x)% of premiums also goes up faster than incomes. Thus, the amount someone has to pay in his or her share of premium goes up faster than income. That’s erosion, but of another sort. Still, it is the crucial sort, the one we should be talking about. If individuals can’t afford higher premiums then what’s the point of the subsidy? If we let it erode relative to what people can afford why did we provide a more generous one in the first place (from which to erode from)? It’s self-contradictory.

    But that is what some subsidy programs would do. The ACA’s would, as would that proposed by the House Republicans for Medicare.

    Is there any example of subsidies that are set in such a way that there is no erosion relative to income? I am not aware of any subsidized US health program for which the beneficiary pays a nonzero contribution* that stays a fixed proportion of income. Is there one in the US? Anywhere? (In Medicare Part D, the subsidy is a fixed proportion of premiums (not income), as they are set by the market through bidding.)

    * I say “nonzero contribution” to exclude the trivial cases of Medicaid and the VA, for which enrollees may pay zero premium. That’s a fixed proportion of income — no erosion there — but not what I’m talking about.

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    • It seems then that the main issue is the increase in premiums. If the status quo is maintained there will always be eventual subsidy erosion, either of the paid fraction or of the beneficiary’s income. Therefore, the two issues of rising health care costs and stagnating wages need to be addressed for subsidies to be effective over time.