Costly COVID-Era Subsidies Threaten Government Shutdown

A government shutdown looms as the debate over subsidies for health care continues on Capitol Hill.

The 2010 Affordable Care Act contained premium tax credits designed to make health insurance “more affordable.” Those credits were increased significantly during the COVID pandemic under the Inflation Reduction Act. As The Wall Street Journal Editorial Board explained:

The Inflation Reduction Act’s enhanced subsidies enable Americans who earn between 100% and 150% of the poverty line—$15,650 and $23,475 for an individual—to qualify for zero-premium health coverage and reduced deductibles.

Now, many in Congress are threatening to shut down the government if these enhanced rates (set to expire at the end of 2025) are not extended.

At a cost of $350 billion over the next five years, continuation of the enhanced subsidies is not a small ask. Instead of extending this extremely flawed health insurance market, policymakers should be looking at ways to fix it. True affordability comes from unleashing market forces—deregulating interstate insurance sales, expanding health savings accounts, and empowering consumers—not from endless federal handouts.

The current COVID-enhanced subsidies distort the health insurance market by driving up premiums. According to the Kaiser Family Foundation, average individual market premiums rose 4.5% last year alone, outpacing inflation. A 2024 study from the Mercatus Center at George Mason University estimated that enhanced subsidies correlated with a 15-20% premium spike in expansion states. The rise in prices applies to exchange plans as well.

In a recent article, Dr. John Goodman of the Goodman Institute noted the impact on premium costs:

According to eHealth, last year the average premium for a family of four in the exchanges was $23,968. Adding the average premium to the average deductible brings the total to $27,025. If the family is not getting a subsidy, that’s the amount they can expect to spend before they get any benefit from the plan!

Extending the higher Inflation Reduction Act subsidies would pour gasoline on this fire. Insurers, sensing guaranteed government backstops, would have little incentive to compete on price. As baby boomers retire and healthcare spending balloons (projected to hit 20% of GDP by 2030 according to CMS data), working-age taxpayers will foot ever-increasing bills on their behalf.

The ACA subsidies don’t just cost money—they also warp behavior. By making “free” or dirt-cheap plans the default, they nudge millions into over-insured, one-size-fits-all plans that discourage shopping or pursuing alternatives like high-deductible plans paired with Health Savings Accounts (HSAs).

The ACA subsidies also act as a barrier to innovation. Private sector solutions like direct primary care, health care sharing, and telehealth expansions are not options when subsidies favor traditional insurers. Some also argue the exchange plans prevent patients from accessing the best care and may encourage fraud.

Shutting down the government over COVID-enhanced ACA subsidies is a misguided policy approach. Instead, lawmakers should reform Obamacare and allow states to experiment. Options like block grants and cross-border insurance sales give states the opportunity to do what they do best—function as laboratories of democracy.

With a focus on empowering patients with more information (hospital price transparency), boosting HSAs with catastrophic coverage, and pursuing innovations like direct primary care, we can ensure Americans control their health care, not Washington bureaucrats.