Two cheers for the GOP’s Burr, Hatch and Upton alternative to Obamacare

As I argued recently, it’s high time for the GOP to move away from going-nowhere votes to repeal the Affordable Care Act (ACA or “Obamacare”). It is better to adopt the strategy of achieving a more conservative vision of health through structural– and potentially bipartisan– amendments to the ACA.

Earlier this week three key GOP lawmakers offered a plan that could do much to move such a strategy forward, even though its stated aim is to repeal and replace the ACA. The sponsors are Senator Richard Burr (R-NC), Senate Finance Committee Chairman Orrin Hatch (R-UT) and House Energy and Commerce Committee Chairman Fred Upton (R-MI).

Put aside for now the lawmakers’ statement that the first thing to do is to repeal the ACA. Whether or not that is politically feasible, the important thing is to focus on the core elements of the proposal as potential vehicles for broad-based reform. Below I discuss some of the most important elements that could help achieve such reform.

The Plan Embraces Income-Related Tax-Credits and Subsidies

The plan proposes age-adjusted, refundable and advanceable tax credits for buying health coverage or services for individuals with incomes of up to 300 percent of the federal poverty level ($35,010). Refundability means non-taxpayers would receive the equivalent of tax relief. The credits can rise to as much as $11,110 for older families and would be indexed (to the consumer price index (CPI) plus one percent). This is an important departure from other GOP plans that would provide a flat subsidy or a broader tax deduction, both of which would not provide enough help for some, while providing overly generous breaks to others. Health costs on average rise with age. So in embracing age-adjusted credits, the plan accepts the general approach of offering more help for households with higher health costs.

The specific credit design is imperfect but an important step to finding common ground with supporters of the ACA’s subsidy system. Better would be a refundable credit linked more directly to actual insurance and out-of-pocket costs and household income. I proposed such a concept more than ten years ago, with a maximum family credit then of $12,000. To be sure, income-based and cost-adjusted credits can be complicated to administer, as ACA supporters now know. But by taking this step, the GOP plan opens the way to a future agreement.

Reforming the Tax Treatment of Health Care

In an earlier version of this new GOP plan, Hatch and Burr tackled the regressive and overly generous individual tax relief for employer-sponsored health coverage by placing a tight cap on the “tax exclusion.” That cap was linked to the average cost of plans, and the cap would have been $11,250 for family coverage. They proposed using the resulting tax revenue to make health tax relief more equitable.  

Regrettably, the new plan raises the cap above the thresholds even for the badly designed ACA “cadillac tax” on high-cost plans. A better approach would be to keep closer to the earlier caps and fold the tax exclusion changes into more general tax reform as well as health credits. In that way, the “pain” of a tax cap could be offset by the “gain” of, say, income tax rate reductions at the same time as funding a health tax credit. Remember that Hatch is Chairman of the Senate’s tax-writing committee and so has a big say in tax reform. In addition, linking a tax cap to regional differences in the average cost of health coverage would help account for geographic cost variations.

Encouraging State Flexibility and Medicaid Reform

The plan provides several opportunities for states to adapt and experiment, allowing federalism to work. For instance, states could auto-enroll individuals eligible for tax credits into insurance plans (a more acceptable approach than a mandate). And while the plan would move Medicaid towards a capped “allotment” for states, combined with greater flexibility – an anathema to many liberals – it would also encourage Medicaid-eligible individuals to use funds to enroll in private health insurance. So the plan does open the door to a serious and needed debate over the future of Medicaid. That debate should center on redesigning Medicaid to address the needs of different groups of beneficiaries in different ways.

Still, the GOP plan could have moved much more decisively towards state-led reform. In fact, within the ACA itself is a provision that allows states to propose radical changes in the basic provisions of the statute. Rather than seek to repeal that provision, known as Section 1332, the plan sponsors would have been much wiser to have proposed strengthening it.

To be sure, the proposal has attracted liberal criticism, with some critics raising design concerns that need to be addressed. But the Burr-Hatch-Upton plan is an important proposal from leading GOP lawmakers and includes approaches that contain the basis for agreement. If the White House and congressional Democrats are willing to look seriously at several of its central provisions, they will see opportunities for addressing the impasse over the ACA and achieving health coverage goals that are widely shared.

For the other side of the argument, you can read this commentary from my colleague Henry Aaron.