There is a new book out, called Room to Grow. It is produced by the YG Network and has the implicit endorsement of the Republican leadership. The health care chapter is written by Jim Capretta. Here are the main elements:
- People who buy their own health insurance will be given a fixed sum tax credit, which averages about $6,000 for a middle aged family of four. The credit is more generous than the ObamaCare exchange subsidies for most individuals making more than about $20,000.
- People who get health insurance from an employer will not be eligible for these subsidies, however.
- A new tax will hit one in every four individuals who get health insurance at work: employers will no longer be able to deduct the cost of health insurance above a certain level (about $20,000 for family coverage in 2015).
- The tax credits are paid for by the new tax on employer-provided health insurance and by retaining the cuts in Medicare in the Affordable Care Act cuts that were originally intended to pay for about half the cost of ObamaCare.
- All the rest of the ACA, including its other revenue sources, is repealed.
- People who maintain continuous coverage cannot be discriminated against for pre-existing conditions; for others there will be risk pools.
- Capretta expects the plan to insure just as many people as Obamacare will insure, but at a lower cost.
What do we think of all this?
The Good. The best part of the plan is the fixed tax credit. This is an idea proposed by Mark Pauly and me in Health Affairs almost 20 years ago and virtually all economists favor it. It contrasts with tax deductions and exclusions (employer payments that are not counted in the employees taxable income). These unbounded tax subsidies encourage over-insurance because we can all lower our taxes by buying more expensive insurance. The fixed sum tax credit, by contrast, pays for the first dollars of coverage but beyond some point all remaining premium payments are made with after-tax dollars. This means that individuals wont buy another dollar of insurance unless they get a dollars worth of value.
Another good feature of the Capretta plan is that the tax credit is independent of income. It is universal, at least for people who buy insurance on their own. This contrasts with the Burr/Coburn/Hatch proposal, with which Capretta is associated and which he (curiously) promotes in the same chapter where he describes his own plan even implying that the two plans are essentially the same. (Theyre not.)
One of the worst features of the Senate proposal is that it phases out the tax credit quickly as income rises so that an individual earning $35,000 gets no tax relief at all. The sharp phase out also raises the implicit marginal tax rate for some people by as much as 37 percentage points. (See my description here.) Commendably, Caprettas proposal avoids all this.
One more good feature of the Capretta proposal is a one-time $1,000 tax credit for deposits to a Health Savings Account.
The not so good. Unfortunately, there are two big missed opportunities in the Capretta plan. It misses the chance to give people at work the same opportunities it gives to people buying insurance on their own and it misses the chance to replace the perverse incentives of managed competition with real insurance.
Consider an employee getting $20,000 of family coverage from an employer. Since the benefit is tax free, if this employee is in the 30% tax bracket (payroll and income tax combined) the tax subsidy is $6,000. But to get the entire subsidy, the employee has to obtain $20,000 of insurance. Now suppose we let the employee have the tax subsidy in a different way: He can have a dollar-for-dollar subsidy for the first $6,000 of insurance (just like what Capretta would offer people in the individual market), but all remaining insurance must be purchased with after-tax dollars.
Why is this a good deal for employers and employees? Because they can have the same tax relief they had before without having to buy expensive health insurance. When the last $14,000 of insurance is completely unsubsidized (all paid with after-tax dollars) the alternative is more take home pay. Any newly discovered efficiencies or economies or even a less generous package of benefits can be turned into more income for the employee without any adverse tax consequences. With this new and better way to subsidize health insurance, people at work can get 100% of the benefit of eliminating waste and eliminating insurance benefits that have marginal value.
Not allowing people at work to get the same kind of tax relief as people in the individual market is a huge missed opportunity.
Now lets look at the proposed cap on employer deductions for employee health insurance. Take an employee whose insurance costs $22,000. Capretta would allow the employer to deduct only $20,000. That makes that last $2,000 more expensive. If the employer continues to provide it, employees will get lower wages or less in other fringe benefits to offset that increase. The Capretta plan, then, eliminates some of the incentive to buy the last $2,000 of wasteful insurance. But it does so in a way that is all stick and no carrot. Moreover, it does nothing to encourage less wasteful buying for the first $20,000 and it does nothing to change incentives for all other companies where health plans cost less than $20,000.
One more thing: the cap on deductibility is not indexed to fully rise with health care costs. So eventually, it will impact all employer provided health insurance.
In terms of the politics of the proposal, its all pain and no gain for people who get health insurance at work. Employers and employees will have every reason to oppose it.
There is one other strange feature of this proposal. The Burr/Coburn/Hatch bill caps the amount of employer provided health insurance that can be excluded from an employees taxable income at 65% of the average cost of employer plans. Lets say the average plan costs $18,000. That means that only $11,700 would be excluded and the remaining $6,300 would show up as taxable income on the employees W-2 forms. That would make employees acutely aware of the cost of the last one-third of their health insurance. And it would give employers and employees an incentive to convert wasteful health insurance into more take-home pay at least for that third.
Under the Capretta version of this, however, employees never see anything. Its the employers deduction that is curtailed and employees are affected only indirectly. If transparency is the way to get better choices, this is another miss.
As for the health insurance marketplace, the Capretta approach leaves all the perverse incentives of managed competition in place. I have written many times that if you want the health insurance market to work and work well, you need real insurance with actuarially fair premiums. Thats what we have in the Medicare Advantage program. Seniors pay a community rated premium. But then Medicare adds to that based on an estimate of the seniors expected health care costsusing a formula with as many as 70 variables. We need to use this methodology within the health insurance exchanges. But instead of Medicare doing the risk adjustment, let the private insurers do it themselves. (More about this in a future Health Alert.)
The ugly. This is an election year. So any candidate who endorses the Capretta plan has to worry about what her opponent will say about it. That is not hard to predict. In abolishing about half of the ObamaCare revenue, the Capretta plan lowers taxes on insurance companies, drug companies, medical device companies and the top 1%. (Everybody gets his money back except the elderly and the disabled.) In imposing a cap on the deductibility of employer plans, the Capretta approach raises taxes on one in every four workers who gets insurance at work. In other words, the cost of insuring the uninsured is to be shifted from all the special interests that helped give us ObamaCare to ordinary employees and their families.
The bottom line: increased taxes on people who have health insurance in order to subsidize insurance for people who dont have it. If you think this is good politics, consider that about 97% of voters have health insurance. So one way of thinking about this proposal is to see that it raises taxes on people who vote in order to give health insurance to people who dont vote.
|John C. Goodman is a Senior Fellow at the Independent Institute. The Wall Street Journal and the National Journal, among other media, have called him the Father of Health Savings Accounts.|