Repeal and Replace

When Barack Obama was a candidate for president, he endorsed universal health insurance, but opposed forcing individuals to buy their own insurance.

As president, he signed into law a bill that violates both of these promises. The Affordable Care Act (ObamaCare) gives the federal government the authority to tell every American what insurance they must have, where they will get it and what they will pay for it. Moreover, even as it violates another campaign promise (“if you’re in a plan you like, you can keep it”), the most optimistic estimate expects 23 million people will remain uninsured once the new health reform law is fully implemented.

Now that the Supreme Court has declared the mandate constitutional, what’s next? Mitt Romney says “repeal and replace.” But what should we replace ObamaCare with? Republicans on Capitol Hill are being way too timid. They are endorsing only modest reforms that will not solve the more fundamental problems of cost, quality and access to care.

Here is my suggestion: Return to the two original ideas Obama said he was for: universal coverage without a mandate. How can that be done? Ironically, the first step is to consider a health policy idea proposed by Obama’s presidential opponent, John McCain.

The Current System: Most people who purchase private insurance today benefit from federal tax subsidies that total about $300 billion a year. Yet the system is completely arbitrary and unfair. The amount of tax subsidy any particular individual receives depends upon whether the insurance is obtained through an employer, what options the employer offers, the family’s tax bracket, and other factors. For a middle-income family facing a 25 percent federal income tax rate, a 15.3 percent Federal Insurance Contributions Act (FICA) tax and a 5 percent state income tax rate, the ability of an employer to pay premiums with pre-tax dollars is a subsidy worth 45.3 percent. Government is efficiently paying almost half the cost of the insurance.

Because the amount of subsidy depends on the employee’s tax bracket, the largest subsidies are given to people who need them least. In addition, the system encourages waste. The more expensive the insurance, the larger the subsidy. Also, since most of the uninsured do not have access to employer provided coverage, they get little or no tax rebate when they purchase insurance on their own.

Our system for taking care of the uninsured is also arbitrary and unfair. Although no one knows the exact number, it appears the uninsured pay about half the cost of the health care they receive from their own resources, leaving the other half as unpaid bills. Yet how much help people get depends on where they live, how many other uninsured patients are also seeking care and how much hospitals get from federal, state and local governments.

Under ObamaCare, tax and spending subsidies for private health insurance will become even more arbitrary and unfair. For example, a family earning just over $30,000 a year will get no additional tax relief for employer provided insurance. Yet the government will pay as much as 95% of the premium if the family gets insurance through a health insurance exchange. In the latter case, the family can get $20,000 more help from the government in some cases.

A Better Way: Suppose the government offered every individual a uniform, fixed-dollar subsidy for the purchase of health insurance, say $2,500 for every adult and $1,500 for every child. A two-adult, two-child family, then, would get $8,000. The credit would be refundable, so that it would be available even to those with no tax liability. This was essentially John McCain’s proposal in 2008. The idea was also included in legislation proposed by Sen. Tom Coburn (R-Okla.), Rep. Paul Ryan (R-Wisc.) and others.

To make the arrangement universal, however, one more step is needed.

If an individual chooses to be uninsured, the unclaimed tax credit should be sent to a safety net agency in the community where the person lives—in case he generates medical bills he cannot pay from his own resources.

To implement the program, all the federal government needs to know is how many adults and how many children live in each community. In principle, it will be offering every adult an annual $2,500 tax credit. Some will claim the full credit. Some will claim a partial credit (because they will only be insured for part of a year). Others will claim no credit. What the government pledges to each community will be $2,500 times the number of adults and $1,500 times the number of children. The portion of this sum that is not claimed on tax returns should be available as block grants to be spent on indigent health care at the local level.

Suppose that every adult in Dallas County chose to obtain private insurance, relying on a refundable $2,500 federal income tax credit to pay the premium. As a result, Dallas County no longer would need the money that previously funded safety net medical care. These funds could be used to fund the private insurance premiums, instead.

On the other hand, if all the adults in Dallas County changed their minds and opted to be uninsured, the $2,500 unclaimed credits would be available for safety net institutions.

Where would the federal government get the money to fund this proposal?

We could begin with the $300 billion in tax subsidies the government already “spends” to subsidize private insurance. Add to that the money the federal, state and local governments already spend on indigent care. For the remainder, the federal government could make certain tax benefits conditional on proof of insurance. For example, the $1,000 child tax credit could be made conditional on proof of insurance for a child. For middle-income families, a portion of the standard deduction could be made conditional on proof of insurance for adults. For lower-income families, part of the Earned Income Tax Credit (EITC) refunds could be conditional.

Is an $8,000 refundable tax credit for families adequate? The typical employer plan these days costs twice that amount. But in almost everyone’s estimation the typical employer plan is buying a lot of wasteful and unnecessary care. The $8,000 would pay for core, catastrophic insurance that we want everyone to have. Any additional coverage purchased by employees and their employers would have to be made with after tax dollars.

Every dollar spent on additional insurance would be an unsubsidized dollar. It would be a dollar that would otherwise be take-home pay. Given this new subsidy structure, it is highly likely that insurers would begin offering plans that cost $8,000 or close to it. Of course, these plans would have fewer options than the typical employer plan today.

To complete the idea of “uninsured coverage,” I would offer one other suggestion. Let Medicaid be open to everyone. That is, let families use their $8,000 tax credit (plus some additional amount contingent on family income) to buy into Medicaid. At the same time, let everyone currently on Medicaid have the opportunity to leave the program and apply their Medicaid dollars to private insurance.

Bottom Line: we can have a reasonable system that provides basic coverage to everyone without dictating what insurance people have to have, where they must get it and what they have to pay for it.