Repeal and Replace

Many pundits on the left appear to believe the Republican Party’s solution for those with health problems who can’t get insurance is to tell them to drop dead.

For instance, consider the argument of health care consultant Michael Millenson, who recently wrote, “[N]o Republican presidential candidate has ever presented a serious plan to cover all the uninsured. . . . The difference between Democrats and this generation of Republicans—unfortunately including even the GOP Doctors Caucus—is not at its core a disagreement on what government can legitimately do to help create universal access to health care for the 50 million Americans without it, but whether the goal itself is worth pursuing.”

Millenson must have slept through the last election, in which Sen. John McCain’s (R-AZ) health care plan was more radical and even more progressive than ObamaCare. I’ve never seen any serious health care policy wonk deny that. The Obama campaign spent more money attacking the McCain health care plan during the election than has ever been spent for or against a public policy idea in the history of the republic. In fact, it is probably no exaggeration to say that Obama successfully turned the election into a referendum on the McCain health care plan.

The McCain vision was based on a bill sponsored by Sen. Tom Coburn (R-OK) and Sen. Richard Burr (R-NC), along with Reps. Paul Ryan (R-WI) and Devin Nuns (R-CA). That bill, in turn, was based on an idea Mark Paul and I proposed in a Health Affairs article more than a decade ago.

What makes this Republican approach so radical is that it would replace all government tax and spending subsidies for the purchase of private health insurance with a fixed-sum tax credit — essentially giving every American the same number of dollars to apply to their health insurance, regardless of where they obtain it.

Ending Unwise Subsidies

Under the current system, federal, state, and local tax subsidies for private health insurance approach $300 billion a year. The distribution of these dollars is arbitrary, unfair, and wasteful.

How much help a family gets from government depends on such factors as its tax bracket, the type of health care plan the employer chooses, and state and local tax rates.

The subsidies are also regressive. According to the Lewin Group, families earning more than $100,000 a year get nearly six times as much tax relief as families earning $25,000. We give the most encouragement to buy health insurance to those people who least need encouragement and probably would purchase it anyway.

In addition, people can always lower their taxes by spending more on health insurance, and there is no limit to how bloated a health care plan can be.

Punishing Individual Ownership

Oddly enough, we place special burdens on people who must purchase their own insurance. Essentially, they must pay taxes first and buy the insurance with what’s left over.

For a worker facing a 15.3 percent (FICA) payroll tax, a 25 percent income tax rate, and a 5 percent state income tax, having to buy health insurance with after-tax dollars essentially doubles its cost.

Special burdens also are placed on part-time workers and the self-employed.

Consider that one in five workers are part-time. Employers usually do not offer these workers health insurance. And federal law makes it difficult for employers to give them a choice between wages and health insurance.

The self-employed are now able to deduct health insurance costs on their income tax returns. Unlike other workers, however, they get no relief from the 15.3 percent payroll tax. For many, the payroll tax bite is larger than the income tax.

A Fair Approach to Reform

These problems can be solved by an approach that treats everyone alike, regardless of income or job status.

It should start with these basic ideas:

• The current system of tax and spending subsidies would be replaced by a tax credit of, say, $2,500 per person or $8,000 for a family of four for the purchase of health insurance.
• The subsidy would be refundable—everyone gets it, even,those who do not owe any income taxes.
• Families can obtain the subsidy in the year in which the insurance is purchased and would not have to wait until April 15 the following year to get their credit.
• Insurance companies and other intermediaries would be able to help families obtain their credit and apply it directly to the health insurance premiums.

Under this plan, people who must purchase their own insurance (including part-time workers and the self-employed) would get just as much tax relief as those who obtain insurance through an employer.

The tax credit would subsidize the core insurance that everyone should have. It would not subsidize all the bells and whistles, as the current system does.

Since employees and their employers would be paying for additional coverage with after-tax dollars, everyone would have an incentive to compare the value of extra health care benefits to the value of other things money can buy.