By John C. Goodman
Originally posted at Forbes, May 2016
It’s been six years since the passage of the Affordable Care Act (ObamaCare) and it’s still unpopular with the voters. Hardly a week goes by without the discovery of new problems and new victims. Yet Republicans in Congress still don’t have a credible alternative.
Paul Ryan says he wants an alternative. Donald Trump does too. Republicans in the House are actually trying to come up with something. But if past Republican proposals are a guide, there is a danger they will propose something most people see as ObamaCare lite. There is even a chance they could propose something that is more unpopular than Obamacare itself.
Here are eight ideas Republican health reformers should avoid if they want to be successful in the November elections.
Bad Idea: Taxing Health Insurance. One of the most unpopular features of Obamacare is the Cadillac plan tax — equal to 40 percent of the cost of each employee’s health benefits to the extent they exceed $10,200 for individual coverage and $27,500 for family coverage. Although it was originally designed to apply to only the most expensive health plans, through time inflation will push every health plan beyond these thresholds. Yet despite its unpopularity, numerous Republican plans have proposed their own Cadillac tax and in almost every case the Republican tax is more onerous than the Obamacare tax!
The Cadillac plan tax is a way of putting limits on wasteful spending, generated by the fact that employers can pay health insurance premiums with pre-tax dollars. (For someone in the 50% tax bracket, spending a dollar on health insurance is preferable to receiving a dollar of wages, even if the insurance is worth only 51 cents.) But it is a crude and highly ineffective way of combatting the core problem. For one thing, it only affects those plans that are at the thresholds. For every other plan, the perverse incentives are just as bad as they were before. Even among plans that are subject to the tax, it only affects the last few dollars spent (those above the threshold). For spending below the threshold, the perverse incentives remain.
This is what I call an “eat-your-spinach” reform. Everybody loses from it, except the IRS.
A better way to constrain health care spending is by giving everyone a dollar-for-dollar tax credit for the first dollars of spending and no tax relief on the last dollars. By pushing the tax benefits up front, we would be subsidizing the core insurance we want everyone to have while allowing them to acquire additional benefits with after-tax dollars – dollars that could otherwise be take-home pay.
Allowing employers to choose the tax credit option instead of the current system is a win/win reform that is about ten times more effective at controlling wasteful spending than a Cadillac tax.
Bad Idea: Shifting Taxes from Special Interests to Ordinary Workers. One of the ways Obamacare is funded is by taxes imposed on the very industries that helped create Obamacare – drug companies, health insurance companies, big business, big labor, etc. A number of Republican plans would repeal these taxes and make up for the revenue loss with a heavy Cadillac tax on middle income workers. How many votes is that likely to attract in November?
Bad Idea: Keeping Obamacare’s Race to the Bottom in the Individual Market. In the (ObamaCare) exchanges, health plans are trying to attract the healthy and avoid the sick. On the theory that healthy people buy on price and only sick people pay a lot of attention to other details, the plans are featuring sky high deductibles and very narrow networks of doctors and facilities (the only ones who will accept rock bottom fees) in order to keep premiums as low as possible. So what are Republicans proposing? In most cases the Republican plans are just as bad! The race to the bottom is caused by regulations that give insurers perverse incentives. Additional regulation might actually ameliorate some of these bad outcomes. But considering the natural Republican aversion to regulation, odds are that the Republican market for individual health insurance would be even worse than under Obamacare!
The answer is what I call “health status risk adjustment,” a free market approach to making the healthy and the sick equally attractive to all health plans.
Bad idea: Tax Subsidies That Are Arbitrary, Regressive and Unfair. Under Obamacare, most people who earn a below-average wage get a bigger tax subsidy in the exchanges and most people who earn an above-average wage get bigger tax subsidy if they obtain insurance at work. Moreover, families at about the same income level get tax relief from the government that differs by as much as $10,000 or more, depending on where they obtain their health insurance. Also, businesses and whole industries are restructuring – not in response to economic factors, but in response to government health care subsidies.
Most Republican plans are not as bad as Obamacare on this score. But they are arbitrary and unfair and they (along with Obamacare) give most of the tax subsidies at work to those who least need help.
The answer: a uniform tax credit that is the same for everyone, regardless of where they obtain health insurance — at work, in an exchange or in the marketplace.
Bad Idea: Tax subsidies That Raise Marginal Tax Rates. Because the Obamacare Tax subsides phase out as income rises, they increase marginal tax rates by 10 percentage points for middle-income workers and at certain cliff points, workers can lose thousands of dollars in subsidies if they earn one more dollar of income. Moreover, because the Obamacare subsidies vary as income varies, the exchanges are required to verify income with the IRS. They also must verify Medicaid eligibility with state Medicaid plans. Yet these tasks are virtually impossible relying on computer-to-computer communication.
Unfortunately, some Republican plans have all of these same problems. In fact under one highly publicized plan, marginal tax rates would be higher than under Obamacare.
The answer is a uniform tax credit that is independent of income and is available regardless of Medicaid eligibility. With this approach, all of the computer problems with the exchanges would vanish and a firm like EHealth could enroll everyone with off-the-shelf technology in a heartbeat.
Bad Idea: A Tax Credit that is So Skimpy That Even Medicaid-like Plans Become Unaffordable. An acceptable tax credit needs to be roughly equal to what the federal government now spends on well-managed, privately contracted Medicaid plans. That’s about $2,500 for an adult and $1,500 for a child. Yet many Republican plans set the credit at about half that amount. That means that Medicaid will be more attractive than private insurance for low-income families; and those that don’t qualify for Medicaid will either be uninsured or enrolled in plans that do not cover basic health care needs.
Bad Idea: Abandoning the Health Care Safety Net. Under Obamacare, emergency room traffic – especially at safety net hospitals — is higher than ever. Yet these hospitals are going to get less money from government. In general, there is no provision in Obamacare to insure that safety net institutions have the resources they need to meet the needs of uninsured and underinsured patients. And here is a surprise: just about every Republican proposal I have seen is just as bad!
The answer: send some portion of unclaimed tax credits to the localities where the uninsured live. Let money follow people. If everyone in Dallas County obtains private insurance, all of the federal subsidies go to private insurance. But if everyone in Dallas County decides to be uninsured, all the federal money goes to Parkland Hospital and other safety net institutions.
Bad Idea: The Wrong Kind of Health Savings Account. The idea behind Health Savings Accounts is relatively simple: third-party insurance and individual self-insurance (by means of a savings account) should be on a level playing field under the tax law. So if premium payments are excluded from taxable income, deposits to an HSA should also be excluded; if premium payments are deductible, deposits to an HSA should also be deductible. In the case of a tax credit for health insurance, premium payments at the margin are being made with after-tax dollars. Therefore, deposits to the HSA should also be made with after-tax dollars.
Such an account is called a Roth HSA. This is an account with after-tax deposits and (for non-health care purposes) tax free withdrawals.
Finally, remember Goodman’s Law: When people start thinking about health policy, their IQs tend to fall about 15 points. (Yes, that’s true of me as well.) So to our friends on Capitol Hill, we say: resist this tendency.