By John C. Goodman
Originally posted at Forbes, November 2016
There are two things you need to know about Congressman Tom Price’s views on health policy: he believes in universal coverage and he believes in tax credits.
Why is that important? For one thing, these two issues have been dividing Republicans and conservatives for the better part of three decades. For another thing, as the new Secretary of Health and Human Services, Tom Price will be the point man for the Trump administration on matters affecting health.
In case you haven’t noticed it’s been almost seven years since the passage of the Affordable Care Act (Obamacare), and in all that time the GOP has not proffered an alternative that most Republicans have been willing to support. One of the sticking points is the idea of a tax credit – basically a dollar-for-dollar reduction in taxes owed for the first so many dollars spent on health insurance. The other dividing line is whether universal coverage should even be a public policy goal.
Republican dividing lines. Critics argue that tax credits are the camel’s nose under tent. Once they exist, they can easily be manipulated – raising the amount of the credit for favored beneficiaries and favored health plan designs and lowering the amount of the credit for everything else. The tax credit potentially could become just one more way in which government regulates our behavior.
What’s the alternative? A tax deduction. That’s certainly a far more common way we give tax relief, but there are four big problems with it. First, the value of a deduction rises with the taxpayer’s tax bracket. That means that the highest income folks get the biggest tax breaks, while the roughly half of the population that doesn’t even pay income taxes gets no relief at all. With a deduction, we end up giving the most tax relief to those who least need it. Second, the only real purpose for a tax break for health insurance is to encourage everyone to be insured. But the cost of health insurance doesn’t rise with income. As a result, a tax deduction gives too much subsidy to high-income earners and too little to low-income earners, even though both are essentially buying the same product.
Third, a tax deduction gives people a perverse incentive to spend too much on health insurance and when they over-insure, they spend too much on health care. With a tax deduction, people can always lower their taxes by spending more on health insurance. Conversely, they will be penalized with a higher tax bill if they buy more conservatively.
Finally, it’s just as easy to manipulate deductions in the tax code as it is to manipulate credits. This form of tax relief is no real protection against the desire on the part of politicians to control our behavior.
There is no practical way to achieve universal coverage by giving everyone a tax deduction for health insurance. The tax relief must be in the form of a credit and it must be refundable – allowing people access to it even if they owe no taxes. Yet refundable tax credits and the idea of universal coverage in general strike many in the Republican Party as socialism.
The Price Health Plan. Unlike other Obamacare critics in Congress, including Paul Ryan and the Republican leadership in both the House and the Senate, Dr. Price has his own bill. He hasn’t just been talking. He has been legislating.
Price is of the view that we are going to end up subsidizing the health care of the poor and the indigent one way or the other. We can do it through cost shifting and subsidies conferred on impersonal hospital bureaucracies or we can give the money to the people and let the bureaucracies compete for their patronage. The Price tax credit would be refundable and it would vary by age. But unlike the Obamacare credits, Price’s credit would be the same, regardless of income.
That last feature is huge. The most important reason why the exchanges have been so dysfunctional is the need to verify income. The Obamacare exchange computers were supposed to be able to talk to the IRS computers to verify how much people make – so they could determine how much subsidy enrollees are entitled to. Seems no one bothered to ask whether such computer-to-computer conversations are even possible. Turns out, they aren’t.
Another annoying feature of Obamacare is the requirement that people guess how much income they will earn over the next 12 months. If they guess too high, their subsidy will be too low and they can get a refund next April 15th. But if they guess too low, the reverse will happen and they will get hit with extra taxes. About 3.4 million people faced higher taxes this year because their guess of how much they would earn last year was too low. (H & R Block) The average penalty for those wrong guesses was $580. (H & R Block)
Under the Price plan, insurance vendors would have no reason to care how much people earned – since earnings would be irrelevant. Enrolling people in health plans would be so easy that a firm like eHealth could do it online at the drop of a hat.
Also, without Obamacare’s mandates, insurers would be able to scale the package of benefits they offer to fit the value of the credit. This is especially important for those at the lower end of the income ladder — who don’t have extra cash to buy more generous coverage. With this “defined contribution” approach rather than Obamacare’s “defined benefit” approach, there would be no reason for anyone to be uninsured.
Under Obamacare, there are 33 million people who are still uninsured and a study by the Centers for Disease Control estimates under the current system that number won’t change much in the years ahead. The Price approach to health reform, by contrast, could bring us a lot closer to the goal of universal coverage — even while spending less money.
Making the Price Plan Better. In repealing Obamacare, the Price plan (like almost all Republican plans) abolishes all the Obamacare revenues. So, in order to fund the Price tax credits, a new source of revenue is needed. To obtain this revenue, the Price plan sets a limit on how much employer paid insurance can be excluded from employee income — a Republican version of the Cadillac plan tax. Yet the much lower Obamacare Cadillac tax was so hated that I believe every single Republican in the House of Representatives voted to repeal it. For that reason, I think this way of funding health reform will never fly. To have a viable alternative to Obamacare, Republicans in Congress can repeal the Obamacare regulations. But they will need to keep the Obamacare revenues and use them to pay for their version of a tax credit.
Also, the Price plan as currently structured, offers no subsidy to people working at fast food restaurants and in other low-wage jobs – workers who look to their employers for insurance, if they are to be insured at all. Like Obamacare, the Price subsides only flow to people who buy in the individual market. Yet if universal coverage is the goal, people who rely on insurance at work need to get just as much help as people who buy insurance on their own.
Put differently, to achieve Donald Trump’s goal of universal coverage, the credit itself will need to be universal. It will need to be available to everyone, regardless of where they obtain their insurance – at work, in the marketplace or in an exchange.