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Republican and Democratic Approaches to Health Reform: Is There a Dime’s Worth of Difference?

After the outcome of another election or two, Republicans might well have the chance to repeal and replace the Affordable Care Act (ObamaCare). What would they replace it with?

Dylan Matthews at the Wonk Blog the other day said there has been only one serious health reform proposal on the GOP side of the aisle in recent years. It’s called the Patients’ Choice Act, sponsored by Sen. Tom Coburn (R-Okla.) and Rep. Paul Ryan (R-Wisc.). This is essentially the health reform plan John McCain endorsed in 2008 ― the one that the Obama campaign spent millions of dollars attacking during the election. Matthews admits there “are real differences” between the two approaches. But he adds, “They aren’t huge ones.” He offers a chart that implies the differences are merely differences of degree, not of kind.

Really?

There are basically three criteria by which to judge a public policy: efficiency, equity and liberty. To what degree does the policy allow us to achieve a social objective at minimum cost? (Efficiency) To what degree does the policy treat people fairly? (Equity) And to what degree does it leave individuals free to make their own decisions? (Liberty)

With respect to efficiency, there are three things you need to know about our health care system:

  1. Virtually every serious problem we have stems from one and only one source: unwise government policies that create perverse incentives. When we act on those incentives, we do things that make costs higher, quality lower and access more difficult than would otherwise have been the case.

  2. The majority of those problems stem from one unwise policy in particular: the way the federal government subsidizes private health insurance.

  3. In judging reform proposals, therefore, the most important question is: To what degree does the reform remove the perverse incentives of the current system and replace them with better ones?

On these issues, I see the Republican and Democratic approaches as different as night and day.

Let’s call the whole thing off.

Consider what the current system of subsidies is all about:

  • People who obtain insurance through an employer are able to buy insurance with pre-tax dollars, whereas people who purchase insurance on their own are basically forced to purchase it with after-tax dollars. For a middle-income family, having to buy individual coverage almost doubles the after-tax cost of the insurance. This encourages people on their own to remain uninsured and to seek insurance through an employer if a family member happens to get sick.

  • Group insurance, however, is not portable. So the kind of insurance the government encourages all of us to have is the kind of insurance that does not travel with us from job to job and in and out of the labor market. This, in turn, virtually guarantees problems with pre-existing conditions and lack of continuity of care.

  • Further, the subsidy for employer-provided coverage is open-ended. This means people can always lower their taxes by buying more insurance. As a result, most Americans are over-insured ― leaving patients with perverse incentives to over-consume care and providers with perverse incentives to maximize against payment formulas. This is the principle reason why health spending is growing faster than our incomes in this country and elsewhere around the world.

  • Also, until recently the subsidy for employer-purchased insurance applied only to third-party insurance and not to self-insurance (say, through a Health Savings Account). This encouraged everyone to (wastefully) rely on third parties to pay every medical bill. This, in turn, destroyed price competition and quality competition and effectively suppressed normal market forces throughout the health care system. Although we now allow tax-advantaged self-insurance, the conditions are highly restrictive.

What does the Affordable Care Act do about all this?
It leaves every single one of those perverse incentives in place and adds new ones!

What does the Republican approach do? It eliminates every one of them by offering a fixed sum, refundable tax credit for the purchase of private health insurance. Every individual and every family would get the same amount of help from government, regardless of where the insurance is purchased ― at the office, in an exchange or in the marketplace.

People would no longer be encouraged to buy employer-specific, non-portable coverage. Because the subsidy is a fixed sum, it would apply only to the core insurance we want everybody to have. Any additional insurance would be purchased with after-tax dollars. People would be discouraged from buying an additional dollar of insurance unless it was more valuable than a dollar spent on other goods and services.

The Patients’ Choice Act also gives people greater flexibility in combining health care savings with third-party insurance.

With respect to equity, the current system of subsidies is arbitrary and unfair. It penalizes people who must purchase insurance on their own and it gives the greatest tax relief to those who least need it. A family earning $100,000, for example, gets six times the tax subsidy as a family earning $25,000.

What does the Affordable Care Act do about all of this?

It leaves the current inequities in place and layers on a whole set of new ones. A family of four at, say, 138% of the poverty level will be able to enter Medicaid and obtain coverage worth about $8,000 a year for free. Families that earn one dollar more will be able to go into a health insurance exchange and obtain, say, a $16,000 insurance plan in return for a premium of about $900 out of their own pockets. Yet, employees of the Hilton Hotel, earning similar incomes, get no new help from government and the tax relief they get from the current income tax system is less than $2,500.

By contrast, the Republican approach does not force families into Medicaid, and it gives everyone who buys private insurance the same help under the tax law.

With respect to liberty, the Republican approach is a defined contribution approach. People are given a sum of money to buy health insurance. They may add funds of their own to this amount. Suppliers of insurance will then be allowed to compete in the private marketplace to see what they can offer for premiums people can afford.

[Note: I would set the tax credit today at $2,500 for an adult and $8,000 for a family of four, which is roughly the CBO's estimate of the cost of new enrollees in Medicaid, and I would allow people to buy into Medicaid if they choose. I would also allow people to leave Medicaid, claim the credit and buy private insurance. I hope this will be a feature of the next iteration of Republican health reform.]

By contrast, ObamaCare takes a defined-benefit approach. The government intends to tell all of us what insurance we must have, whether it is affordable or not. Further, the ObamaCare approach double penalizes people who choose not to insure: failure to claim the credit means they will pay higher taxes and there is a penalty imposed on top of that.

Are these not “huge differences”?

If I could summarize them in one sentence, it would be this: The Republican approach is focused on getting rid of perverse incentives and treating everyone equitably, while the Democratic approach leaves the current system’s perverse incentives and inequities in place and adds new ones.

Here are a few more ways in which Coburn and Ryan differ from the Affordable Care Act.

Tax Fairness. Under the Republican approach, every individual and every family will get the same help from government:

  • Regardless of whether they work less than 30 hours a week or more;

  • Whether their workplace has fewer than 50 employees or more; and

  • Whether they are in a union or not.

Fair Treatment of Employers, Employees and Retirees. Unlike the Affordable Care Act, the Republican approach:

  • Would not encourage employers to avoid hiring new workers;

  • Would not encourage employers to drop health coverage for current employees or for their retirees;

  • Would not penalize employees and their employers if they work full time rather than part time;

  • Would not favor small over large business or vice versa;

  • Would not favor non-union over union firms or vice versa; and

  • Would not encourage outsourcing or labor saving technologies or in other ways discourage economic recovery.

No Mandate. No one would be forced to buy health insurance. People who turn down the tax credit and elect to be uninsured would have a higher tax bill, however. For families that pay income taxes, failure to insure would result in $2,500 in higher taxes for individuals and $8,000 for a family of four. They could either use these funds to buy health insurance or give them to Uncle Sam.

Universal Coverage. The Affordable Care Act is expected to leave 30 million people uninsured and the actual number is probably much greater than that. By contrast, under the Republican approach it’s hard to imagine anyone remaining uninsured. The reason: every adult can have at least $2,500 of health insurance for free. Every family of four can have $8,000 of insurance for free. Insurance at this premium may consist of very narrow networks and perhaps pay provider fees only a bit better than Medicaid. Still, it’s free. I’m sure some will turn down the offer anyway, however. I wish Republicans would deal with that eventuality by sending unclaimed tax credits to safety net institutions in the communities where the uninsured live. This would guarantee a form of universal coverage for everyone.

Minimum Bureaucracy. The Patients’ Choice Act is only 56 pages long. One suspects that the regulations needed to implement it would fall well short of the 20,000 pages needed to implement ObamaCare. Because the tax credits are the same for everyone, there would be no need for an exchange to verify income or establish that an applicant had not been offered affordable coverage by an employer or link electronically to five or six different government agencies. Uwe Reinhardt has written about the highly complex assignments the ObamaCare exchanges must carry out. So have I. By contrast, EHealth (a private online exchange that has allowed more than 3 million people to obtain health insurance) could handle the entire process under the Republican plan without spending millions of dollars on new technology ― as the Obama administration is doing.

Postscript: Matthews also compares ObamaCare to a Nixon plan, a Chaffee plan (and he might well have thrown in RomneyCare to boot) and here he has a point about similarity. Once you toss managed competition and managed care and perverse incentives headed in every direction into the public policy mix, all the health plans begin to look increasingly like each other, just as they look increasingly like the DMV.

Postscript #2: How can we pay for the Republican plan, especially given our frequent criticism of ObamaCare’s unsustainable cuts in Medicare and our dislike of ObamaCare’s taxes on capital? I believe it can be done with money already in the system (that is, with no new taxes) even after restoring some Medicare spending and reversing the taxes on investment income. I’ll expand on that in a future Alert.

SOURCE: NCPA

John C. GoodmanJohn C. Goodman is President of the National Center for Policy Analysis, Research Fellow at the Independent Institute, and author of the book Priceless: Curing the Healthcare Crisis.

The Wall Street Journal and the National Journal, among other media, have called him the "Father of Health Savings Accounts." Dr. Goodman's health policy blog is the premier right-of-center health care blog on the Internet.

It is the only place where pro-free enterprise, private sector solutions to health care problems are routinely examined and debated by top health policy experts across the ideological spectrum.

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