A number of commentators have incorrectly concluded that the ObamaCare subsidies insulate buyers from higher premium and premium increases, because the subsidies cap out-of-pocket spending as a percent of income. (See Jonathan Cohn, for example.) To explain why this view is wrong, I posted this comment at Marginal Revolution:
1. The premium the individual pays is not fixed as a percent of income. The subsidy is fixed, based on the second lowest silver plan premium and that amount is based on income. But the consumer is free to buy any plan. Remember, the second lowest priced silver plan may be a really lousy plan. It might have a very narrow network, for example. So, all the plans are competing against each other, with one fixed subsidy and an array of premiums. The premium an insurer charges will matter very much.
2. After 2018, the out-of-pocket premium for the second lowest priced silver plan will no longer be fixed as a percent of income. Premium subsidies as a whole will grow no faster than GDP + 0.5%, the same rate of growth that is in the Obama budget for Medicare.
Tyler Cowen reposted it and the comments that follow are very interesting, including an explanation of a Vickery auction (which is how the pricing works in the exchange). Bill Vickery BTW was my teacher at Columbia.