Why Republicans Don’t Agree On How To Replace Obamacare

(Photo by Drew Angerer/Getty Images)

 

By Dr. John C. Goodman

Originally posted at Forbes, April 2017.

 

Many conversations on the right involve people with one priority arguing with people with another priority. The result: folks often talk past each other because they are not talking about the same subject.

In general, there are three criteria by which to judge policy proposals: politics, economics and conservative principles.

Take politics. Pete Sessions (R-TX) is the member of the House of Representatives who is most responsible for the fact that Republicans are in the majority in that body. Sessions has been consistently saying for the last two years that the health care issue could cost Republicans the House.

This consideration should be paramount. If Republicans pass a replacement bill using reconciliation (requiring only 50 votes in the Senate) and then lose the House and the Senate in the next election, the Democrats will be able to completely undo the reform using that very same reconciliation device, once they are back in office.

On economics, three considerations are consistent with minimizing political risks and adhering to traditional Republican values: (1) spend money in a way that produces the most access to health care for the least amount of money, (2) remove perverse incentives that are encouraging insurers to engage in a “race to the bottom” and (3) create new incentives that solve our most serious problems without creating new ones.

In general, economic questions should be settled by economists. They rarely involve large political risks or issues of political principle.

Finally, principled health reform means reducing the role of government, empowering individuals and liberating the marketplace. And that’s all it means.

Let’s apply these three criteria to some issues that currently divide Republicans.

What should be done with Obamacare tax revenues? Under Obamacare, Democrats and special interests put close to $2 trillion on the table for health reform. Drug companies and insurance companies agreed to be taxed. So did big business and big labor. In almost every case, these parties thought they would come out ahead because of the expected benefits from Obamacare. There are also some taxes on people who didn’t agree to be taxed, however.

What should be done with all this money? An important Republican principle is that tax cuts are generally good. They put money in the hands of people who will spend it more wisely than government bureaucrats. But which people should get a tax cut?

The answer provided by the American Health Care Act (Ryan bill) is about as politically risky as you can get. The bill that would have repealed Obamacare taxes for the rich and the special interests (about $1 trillion) and in the process caused about 24 million to lose their health insurance, according to the Congressional Budget Office. Even though the bill would have kept the Obamacare subsidies for the next two years, 14 million would still have lost their insurance by the 2018 elections – half due to Medicaid cuts and half due to faulty design.

The bulk of the tax cuts were to go people who arguably are the least deserving: The folks who gave us Obamacare, who agreed to pay higher taxes and accept lower fees and who were not even asking for their money back. There was no political pressure to cut taxes in this way and no political reward for doing so. Outside the Beltway, even very sophisticated people don’t know how Obamacare is funded.

What’s the alternative? Use the same money for a tax cut, but tie the tax cut to health care.  Paul Ryan has long favored a universal tax credit for health care. That’s the kind of tax cut that puts money in the hands of ordinary people and reforms health care at the same time. A similar approach is imbedded in a proposal by Pete Sessions and Sen. Bill Cassidy (R-LA). There are also more modest tax cuts, described below.

What should be done with Obamacare’s cuts in Medicare spending?The other important source of Obamacare funding consists of cuts in fees for doctors and hospitals under Medicare.  Obamacare calls for about $850 billion in these spending cuts over the next ten years and imposes a long-term cap on Medicare spending – an entitlement reform that saves taxpayers more than $50 trillion. The doctors (AMA) and the hospitals (AHA) agreed to this Medicare global budget. So did AARP. Almost all the Democrats voted for it. Even if it is not completely adhered to, it will give Republicans huge leverage in all future budget wars. If this provision goes away, Republicans will never again be able to re-impose it – for all of eternity.

Although some Republicans would like to abolish these cuts (claiming that the abolition of all of Obamacare is a matter of principle), keeping them would seem to be consistent with good politics and traditional Republican values.

 

What should be done about employer plans? Obamacare has proved to be a little more than a nuisance for most employers. Self-insured employers have discovered they have broad discretion in meeting the Obamacare mandates and employers of low-wage workers have discovered that the law allows them to make their employees offers that are turned down because they are unaffordable. Also, economists on both the left and right are recommending that the employer mandate be dropped altogether, because the economic harm outweighs the good.

However, the group market is extremely important in replacing Obamacare. That’s because the premiums are lower and the coverage better. Also, the individual market is in danger of going into a death spiral in many states. However, almost all the Obamacare subsidy money goes to the individual market and many Republican plans, the AHCSA included, do the same. It’s a classic case of throwing good money after bad.

It is hard to see how there could be any political cost or any violation of Republican principles if the folks who work at McDonalds and Burger King were allowed access to the same tax credit at work that individuals get when they buy their own insurance.

And if there is no good reason not to do that, Republicans might consider more ambitious reforms. For example, Obamacare tax revenues might be used to correct the unfairness in employer-provided health insurance – where folks in the top 20% get six times as much tax relief as those in the bottom 20% for buying the same insurance. It could also be used to correct the unfairness in giving wildly different tax breaks to people with the same income, depending on whether they obtain insurance in the individual market or at work.

There is one political obstacle to be overcome: both large companies and large unions like the current system and fear any change from it. A way around that obstacle is included in the Sessions/Cassidy proposal: give employers a choice of staying in the current tax system or moving to a system that would treat everyone the same. That way, no one is threatened because no one has to change. For reasons that I have spelled out elsewhere, I believe almost all employers would opt to change.

What kind of tax relief for health insurance should we have? There is no moral difference between a tax credit and a tax deduction or a tax exclusion — the three common ways in which we subsidize health insurance. Hence there is no issue of principle involved. However, there is a practical economic difference. Tax credits allow the government to target its aid and give a fixed number of dollars to each taxpayer. Deductions and exclusions, by contrast, are open ended. People can always lower their taxes by spending more on health insurance. Also, roughly half the population doesn’t pay income taxes.

Some argue that a credit is easier to manipulate politically than a deduction or an exclusion – that it would be more likely to turn into an “entitlement.” That’s a political argument that turns out to have little empirical support. Work-related, child care tax relief was introduced as a deduction in 1954 and for the next 22 years stayed that way. Then, in 1976 the deduction became a credit and the amount was raised in 1981. But the amount of tax relief was not indexed and it changed not at all for the next 20 years. The amount was adjusted in 2002, but it is still not indexed and has not changed in the past 15 years.

You would think child care would generate enormous political pressure for more generosity, if anything does. But that hasn’t happened. Pressure for more largesse from government never ceases, but the form of tax relief doesn’t appear to be important in aiding or deterring it.

In my next post, I will cover four more divisive issues.

 

This article was originally published at Forbes on April 18, 2017. http://bit.ly/2p8RUqa