Even if you don't qualify for ACA subsidies, you probably still benefit from them

12/15/2014 01:28:00 PM
I explained why over at The Incidental Economist:
"with these healthier (less costly) individuals dropping out of the market, adverse selection leads to inefficiently low levels of insurance and higher insurance premiums.

A subsidy like the ones offered on the ACA exchanges shifts the demand curve up, so that the premium at which individuals will buy insurance equals their willingness-to-pay plus the subsidy amount. This, in turn, shifts the intersection between demand and AC to the right, in the direction of more coverage and lower average cost, lowering premiums for everyone.

The classical model where subsidies increase prices relied on having an upward-sloping marginal cost curve. The forces that cause upward-sloping MC curves in most markets didn’t totally disappear for health insurance markets–we can imagine that loading costs generally increase as more people buy insurance–but they are dwarfed by the size and heterogeneity in actual healthcare expenses, producing an overall downward-sloping MC curve. Thus, when in the presence of adverse selection, subsidies not only reduce the cost of insurance to those who receive them, but to everyone in the market."
You can find the whole thing here. To illustrate the theory, I also have a (very simple) algebraic model of adverse selection here.