DAVID HENDERSON: Why We Can’t Conclude that Obamacare Plus Subsidies are Good for Low-income People.

Assume that the federal government forces someone to buy a health insurance policy that is priced at $10,000 a year. Assume that the person’s income qualifies him and his family for a subsidy of $6,000 to buy that policy. The cost to him, therefore, is $4,000. If he values that policy at more than $4,000, he is better off. But if he values it at less than $4,000, he is worse off. . . .

Many factors contribute to making our hypothetical $10,000 policy worth much less. There are three main ones: (1) the ban on pricing for pre-existing conditions, (2) the ban on pricing a policy for a younger family at less than one third the price of a policy for an older family, and (3) required coverages that people must pay for in their insurance premium but that many people would value very little, if at all. . . .

All three factors can combine to make the value of the insurance policy well below its price. Let’s say that the family values the insurance at $3,500. That family is worse off because it is paying $4,000 net of the subsidy. The family can do a little better if one family member works less in order to increase the subsidy. But we cannot, like Krugman and Blinder, naively conclude from the fact that a family member chooses to work less that the family is definitely better off. All we know is that the government dealt the family a hand that could be very bad. The family has no choice but to play the hand it was dealt. By working less, the family makes the hand less bad. But we can’t say for sure that the hand is good.