By John C. Goodman
Originally posted at The Hill, June 2015
After five years of internal wrangling and bickering and inaction, it seems as though Republicans in Congress are inching closer to doing what most people had thought was impossible: a sensible, workable alternative to the Affordable Care Act.
What’s the evidence? A series of proposals from different parts of the party hierarchy are signaling agreement on four main ideas.
A Flat Rate Health Tax Credit. The ObamaCare tax credits have allowed millions of Americans to have access to health insurance they otherwise could not afford. But for all the good they have done they have three very bad characteristics. First, the phase out of the tax credits creates very high implicit marginal tax rates. In some cases, families can lose thousands of dollars in subsides by earning a single dollar of additional income. Second, millions of families who basically live paycheck-to-paycheck are asked to guess their annual income a year in advance. This last time around, 3.4 million people had to pay hundreds of dollars in extra taxes because they guessed wrong.
Third, the main reason why the federal exchange still isn’t complete and why so many states have spent hundreds of millions of dollars in an often fruitless effort to create their own exchanges is the need to verify income and other characteristics of the buyers. Unfortunately, no one has yet figured out how to get the computer systems in different parts of government to talk to each other. If you don’t have to verify anything, the private firm EHealth could sign up everyone almost effortlessly, with off-the-shelf technology.
Here is the emerging Republican answer to all three problems: make the tax credit completely independent of income. This is a feature of proposals in the House by Reps. Paul Ryan (R-Wis.), Fred Upton (R-Mich.) and John Kline (R-Minn.), by Reps. Tom Price (R-Ga.) and by Pete Sessions (R-Texas) in a soon to be announced proposal. A bill sponsored by Sen. Bill Cassidy (R-La.) in the Senate would make the subsidy independent of income for all but very high income earners.
No Mandates. Under ObamaCare, individuals are fined if they don’t have insurance and employers are fined in they don’t offer it. Every Republican proposal so far has called for the elimination of these mandates. ObamaCare defenders say that without a mandate, only sick people would by health insurance. We have the same potential problem in Medicare, and we have found better solutions. Seniors who don’t sign up for Medicare Part B and Part D when they are first eligible face higher premiums. Those who don’t sign up for Medigap can be “medically underwritten” and charged a premium that reflects their true expected health care costs. The proposals by Cassidy and Sessions explicitly endorse the Medicare approach.
A Flexible Savings Account. Most Republican plans would make it easier to obtain one and easier to use one. The Price plan would have the federal government match the first $1,000 deposited to a Health Savings Account (HSA). The Sessions’ HSAs are Roth accounts – with after-tax deposits and tax free withdrawals for non-health care spending.
Equal Tax Subsidies for Everyone. Huge problems are caused when the federal tax subsidy for health insurance is substantially different at work and in the exchange and every health economist I know thinks the subsidy should be the same – regardless of where the insurance is obtained. Many in the Republican Party are on board with that. In 2008, Sen. John McCain’s (R-Ariz.) health plan would have replaced all the current tax subsidies with a uniform tax credit, available to everyone – at work, in the marketplace or in an exchange. Some of Obama’s own advisers wanted to adopt the McCain approach, but they were overruled for political reasons.
Under the Cassidy and Sessions bills, a uniform tax credit would be offered to everyone, even those who obtain insurance at work. People wouldn’t be able to double dip however. If they receive a tax credit, any tax subsidy they get from the ability of the employer to buy insurance with pre-tax dollars would be clawed back.
A House Republican Policy Committee proposal resurrects a George W. Bush administration idea: Replace all current tax subsidies with a health standard deduction. The subsidy is capped and is the same regardless of where insurance is obtained.
For all the talk about ObamaCare reforming the healthcare system, it is remarkable to consider how few incentives have been changed. For example, the 149 million Americans who currently get health insurance at work can still lower their taxes by buying more insurance. And with more insurance they will consume more health care.
By extending a fixed tax subsidy to all these people, a Republican alternative would do more than improve ObamaCare.
It would fulfill the promise of reforming the entire health care system.