Obamacare Subsidy Problems, Prospective MFN, and More

In today’s newsletter, I highlight a new op-ed in The Federalist that uses Paragon research to show how the Affordable Care Act’s subsidy structure penalizes workers who get employer-sponsored insurance, causes small employers not to offer health insurance, and punishes the upward mobility of those on Obamacare. I then discuss a timely Prognosis on most-favored-nation (MFN) drug pricing. I look at the welfare fraud in Minnesota that the New York Times labeled “staggering in its scale and brazenness.” And I close with a look at the latest decisions from CMS in drug pricing negotiations.

Extending Obamacare’s COVID Subsidies Will Accelerate Employers Dropping Coverage

Extending the COVID-era enhanced Obamacare subsidies would cost $40 billion a year. A new Paragon policy brief that I coauthored with John Graham, which we summarized in a Federalist op-ed, discusses how an extension of the COVID credits would worsen the federal government’s bias against employer-sponsored insurance, pushing more workers onto the taxpayer-funded exchanges.

The ACA’s flawed subsidy design penalizes workers who receive health benefits through employment. For people with employer-based coverage, premiums are excluded from income and payroll taxes. In contrast, ACA exchange subsidies are far more generous—and tied explicitly to not having an employer plan—creating a large financial reward for not receiving workplace coverage. Figure 1 from our policy brief illustrates how much larger the ACA subsidy is relative to the value of the tax exclusion of employer-based premiums for lower and middle-income people.

A 50-year-old earning $46,950 receives only a $2,760 tax break with employer coverage, but a $5,797 subsidy for an exchange plan under current law—or $7,656 if the COVID credits are extended. That’s a $3,037 to $4,896 penalty for having job-based insurance.

The gap is even starker for families. A couple aged 35 with two children earning $64,300 gets $5,904 in tax benefits with employer coverage, but $19,059 in subsidies on the exchange—or $22,017 with the COVID credits. That’s a $13,155 to $16,113 government preference for people without coverage through their employer.

These incentives are already eroding employer coverage among small employers (those with less than 50 full-time workers are not subject to the employer mandate penalties). In 2010, 92 percent of companies with 25 to 49 workers offered insurance; by 2025, only 64 percent did. When employers drop coverage, wages rise to some degree. But taxpayers absorb most of the cost through higher exchange subsidies, which in the aggregate have more than doubled since 2021. The enhanced subsidies also discourage work and upward mobility through steep implicit marginal tax rates as benefits phase out with additional income.

Rather than making these distortions worse, Congress should let the COVID-era add-on subsidies expire. Doing so would reduce the penalty on earned workplace benefits, slow the dumping of employer coverage onto taxpayers, and curb incentives that reward working less.

Most Favored Nation and Prescription Drug Pricing

U.S. patients have long paid disproportionately high prices for brand-name prescription drugs because foreign governments, especially in Europe, set relatively low prices. This means American patients and taxpayers effectively subsidize global pharmaceutical R&D.

To address this imbalance without harming innovation, Paragon’s Gabrielle Minarik, Ryan Long, and Jackson Hammond advocate a prospective most-favored-nation (MFN) pricing policy rather than the retrospective versions some have proposed.

• Retrospective MFN ties U.S. prices for existing drugs to the lowest foreign net prices already negotiated. This would slash manufacturer revenue (often by 30 to 40 percent), discourage future R&D, and risk ceding biopharmaceutical leadership to China.
• Prospective MFN, by contrast, would apply only to new drugs. Manufacturers would gain powerful negotiating leverage: they can credibly tell foreign governments that any excessively low price will automatically trigger the same low price in the massive U.S. market. Foreign nations then face a clear choice: pay more or risk delayed or denied access. In practice, this would tend to push foreign prices up and U.S. prices down while likely keeping total global revenue (and thus future R&D funding) roughly stable.

The Prognosis also highlights recent momentum: voluntary MFN deals with Pfizer, AstraZeneca, EMD Serono, Eli Lilly, and Novo Nordisk, as well as the United Kingdom’s decision to raise cost-effectiveness thresholds and accept higher launch prices.

Ultimately, Elle, Ryan, and Jackson conclude that a well-designed, prospective MFN policy—limited to economically comparable OECD nations and backed by strong U.S. intellectual-property protections—offers a reasonable path to lower American drug costs, elicit higher foreign contributions to innovation, and sustain U.S. leadership in life sciences.

Minnesota’s Medicaid Meltdown: Somali Fraud Exposes State Negligence

Government welfare programs often create a self-reinforcing cycle of negligence, incompetence, and willful fraud that leaves a trail of victims in its wake. The most recent example is out of Minnesota. City Journal was the first to expose evidence that Minnesota taxpayers were indirectly funding terrorism.

The networks of fraud work like this: fraudsters siphoned hundreds of millions from programs meant to aid vulnerable residents. Some of the schemes are truly shameless:

• In the Housing Stabilization Services (HSS) program, designed for the homeless, payouts exploded from $2.6 million to $104 million annually, with $61 million disbursed in early 2025 alone before the program’s August termination. Fraudsters billed $462 daily for nonexistent home care, leaving clients like a disabled man to die alone in his apartment.
• Autism service claims surged from $3 million in 2018 to $399 million in 2023, fueled by fake diagnoses and billed services. One woman is accused of defrauding the program of $14 million, bribing families with $1,500 monthly kickbacks per child.
• Worse, investigators trace stolen funds through hawala networks to Somalia, unwittingly financing Al-Shabaab terrorists via remittances. It’s part of a $250 million Feeding Our Future scandal, with over 70 indictments.

State negligence has been glaring. Despite whistleblower alerts, Minnesota ignored red flags. Of course, most of the dollars were coming from the federal government, so Minnesota’s state government did not have adequate incentives to protect taxpayer dollars.

U.S. Attorney Joe Thompson calls it “not just overbilling” but systemic theft, exceeding the state’s corrections budget. “What we see are schemes stacked upon schemes, draining resources meant for those in need. It feels never-ending,” Thompson said. “I have spent my career as a fraud prosecutor, and the depth of the fraud in Minnesota takes my breath away.”

More will come out about this story in the weeks ahead. But the lesson is clear: when policy creates incentives to manipulate and game programs, taxpayers will lose big. Compounding the problem and leading to supercharged fraud was extreme negligence by Minnesota’s officeholders. This demands federal oversight, program audits, and prosecution. On Monday, Treasury Secretary Bessent announced an investigation into this scandal.

Drug Price Negotiation Announcement

In 2022, the Inflation Reduction Act (IRA) empowered the Secretary of Health and Human Services (HHS) with authorities to set Medicare prices for pharmaceuticals through a pseudo-negotiation process. On November 26, the Centers for Medicare and Medicaid Services (CMS) announced the Maximum Fair Price (MFP) for the next 15 Part D drugs, set to go into effect starting in 2027. This is the second round of MFP-setting.

These 15 drugs were selected in January of this year by the Biden administration, and negotiations were conducted under the Trump administration. The selected drugs include three GLP-1s (Wegovy, Ozempic, and Rybelsus) and some cancer drugs.

As Jackson Hammond has explained, the government holds a strong upper hand in the negotiation. The IRA set a statutory ceiling for drugs—75 percent of the average manufacturer price for small molecule drugs that have been on the market for seven years and biologics that have been on the market for 11 years—and failure to reach an agreement results in the drug being excluded from Medicare or facing a 95 percent excise tax.

CMS claims seniors and taxpayers would have saved $12 billion if these prices had been in effect in 2024. However, Michael Baker at the American Action Forum suggests those estimates may be overstated given that 10 of the 15 drugs had existing manufacturer rebates that already created savings for taxpayers and seniors.