This article originally appeared on Real Clear Markets on April 11, 2017.
Is it really possible to provide market-based health coverage to all working Americans? Or is some form of public plan the only way to assure affordable coverage, as many liberals insist?
The House replacement for the Affordable Care Act (ACA), or Obamacare, foundered in large part because Republicans could not agree on fundamental design issues for structuring a subsidy for private coverage. The heart of the ill-fated plan was a refundable tax credit for the purchase of private health insurance; making the credit “refundable” meant money would be available to the nearly half of American households who pay no federal income tax. Essentially the credit was a voucher for private coverage.
Refundability set off alarm bells for many conservatives, however, especially members of the Freedom Caucus. Their primary concern was that a universal subsidy meant Republicans would be endorsing a huge new entitlement in the budget. With spending on entitlements having grown to 60 percent of total federal spending, they were not about to add another potentially uncontrollable spending program, especially as health spending (for the elderly and the poor) is already the largest driver of entitlement spending.
Yet if these conservatives insist that subsidies to non-taxpayers to buy private insurance are off the table, it is hard to see how private coverage could ever be affordable to millions of lower-paid families. Without that tool to help pay for private insurance, the pressure for a public program to cover families eventually will likely become unstoppable.
In theory, there are direct ways to limit total spending on such a subsidy system, although they have significant drawbacks.
One way would be to cap total spending and ration the number of individuals eligible to receive subsidies at any one time. That means many families would not receive any support to buy a health plan and thus likely could not afford adequate private coverage. We currently limit rent subsidies for housing in this way, meaning many low-income families end up on waiting lists. Creating a waiting list for affordable market-based healthcare coverage, however, would sharply increase the political attractiveness of a public plan.
Another way would be to try to reduce the per-family cost of subsidies. With this in mind, Freedom Caucus members, and others, argue for paring back or even eliminating the ACA’s “essential benefits package” – the federally required categories of medical services that health plans must provide. It is true that reducing what insurance covers will reduce the cost of coverage. However, it is unlikely that reducing benefits would make a big dent in premiums unless private sector plans could either cut back some very basic benefits, such as hospitalization or prescription drugs, or sharply increase the out-of-pocket costs to enrollees, thereby hollowing out their insurance. And for Freedom Caucus members this still leaves in place an entitlement, just a skinnier one.
Supporters of using subsidies to enable families to afford private insurance – including myself – would be much wiser to focus on designing subsidies that target money most effectively and economically to make private coverage affordable.
Many Republicans are attracted to the idea of providing a general tax deduction for coverage. But this fails a key efficiency design goal: the biggest benefits go to those who do not need help to pay for premiums and out-of-pocket costs while nothing goes to families that are paying little or no federal tax. A tax credit is much better as a tool because it can be crafted to provide greater assistance to those who struggle most to buy coverage. Yet unless it is refundable it, too, fails to make private coverage affordable for all.
For a refundable credit to be most efficient, and thus potentially least costly to the Treasury and general taxpayers, it has to make private coverage feasible for individuals and families facing high insurance costs and/or have the lowest incomes. A flat credit – that is, a fixed amount or a fixed percentage of costs that is available to all individuals – does not meet that efficiency goal. While a fixed subsidy has been popular in some Republican circles, the House Republican leadership bill adopted instead a refundable credit that was adjusted in two ways. The first was by age, which reflected the typically higher cost of coverage for older, generally sicker individuals (though the adjustment was not enough to compensate for the wider age-related premiums permitted in the bill). The second was by income, with the full annual maximum of $4,000 for a 60 year-old, but declining by 10 percent of each dollar of income above $75,000 for an individual.
In this way, the House Republican leaders actually began to go down a very similar design road to the one traveled by the Obama Administration: the ACA contains an income-related premium credit and a special out-of-pocket subsidy for those with modest incomes facing unusually high deductibles and copayments. So, despite the political grandstanding, both House Republicans and Obama’s Democrats concluded that for Americans to have access to affordable market-based private insurance, there has to be a subsidy that is available to non-taxpayers as well as taxpayers, that reflects local costs, and that provides most help for low-income households.
There is no getting away from these design principles if you prefer private insurance to a government plan. It should be no surprise, then, that Republicans in both houses came to exactly the same conclusion when, in 1993, they constructed a market-based alternative to the Clinton health plan – the last time the GOP in both houses took the steps needed to design a comprehensive legislative health reform proposal. The initial Republican legislation in 1993 used a sophisticated refundable credit based on a household’s total costs (premiums, out-of-pocket, and contributions to a health savings account (HSA)), as a percentage of its income – the higher the proportion, the higher the value of the credit. Moreover, this credit structure replaced the tax-free treatment of employer-sponsored coverage, and so applied a consistent subsidy principle to all sources of private coverage.
The good news in this for Republicans is that there are subsidy tools available to them to make private health insurance affordable for all working Americans. But to do that, and successfully withstand the long-term pressure to expand public coverage, they will have to get serious about design choices and commit to adequate support for working Americans.