Initial thoughts on Obamacare 2.0
By Scott Sumner
Tyler Cowen directed me to several commentaries on the new GOP health care proposal. My initial impression is mostly negative, as the GOP seems to have avoided tackling the biggest problem in health care, excessive costs due to subsidy and regulation. Here’s Ezra Klein:
It’s worth noting that the GOP’s main idea for reducing health care costs — ending or capping the tax break for employer-provided insurance — has been left out of this legislation. There is simply no theory of cost control in this bill at all.It’s worth noting that the GOP’s main idea for reducing health care costs — ending or capping the tax break for employer-provided insurance — has been left out of this legislation. There is simply no theory of cost control in this bill at all. . . .
A core Republican complaint when Obamacare was passed was that the law delayed many of its provisions in order to reduce public outcry and manipulate the CBO’s score. The GOP bill is similarly aggressive with such tricks, delaying changes to the Medicaid expansion until 2020 and pushing Obamacare’s tax on expensive insurance plans out until 2025.
The biggest problem with our current health care system is cost, and one of the biggest drivers of excessive costs is the tax deductibility of employer provided health insurance benefits. This tax provision essentially means that the Federal government absorbs about 40% of the cost of health care for Americans with private health insurance (and of course a far higher share for those on Medicare, Medicaid, etc.)
Some libertarians are confused about the “Cadillac tax”, which isn’t really a tax in the ordinary sense. Rather it essentially removes the government subsidy to health insurance currently provided to the most expensive health care plans. The original hope of reformers was that over time health care inflation would cause this tax to affect more and more health care plans. It was the single best provision of Obamacare, and now the GOP has delayed it until 2025. That tells me that Congress has no intention of ever allowing the tax to be implemented. The delay of the Medicaid reforms until 2020 also leads me to doubt that they will ever be enacted, and in any case they’ve been greatly watered down, with high spending states now losing only 1/4th of their extra Medicaid spending. This still might be a net plus, but it’s a very small one.
What about GOP plans to lower health care costs through reduced insurance market regulations?
Because Republicans aren’t even trying to win Democratic votes, they’re stuck designing a bill that can wiggle through the budget reconciliation process (another thing they complained about Democrats doing). That means they can’t make major changes to insurance markets like repealing Obamacare’s essential benefit standards or allowing insurance to be sold across state lines. That last part is particularly striking, given that it was one of President Trump’s five demands in his speech last week. I’ve always been skeptical about the savings Republicans could wrest by changing those regulations, but now they can’t get those savings at all — which means sacrificing a key part of their theory of cost control.
Unlike Ezra Klein, I believe that deregulation could have produced big savings. It’s a pity the bill won’t contain these ideas. The original purpose of insurance was to protect against unexpected catastrophic expenses, like treatment for heart disease or cancer. It makes no more sense for insurance to cover the cost of giving birth than it would to cover the cost of buying your first house or car.
I’m 61 years old and have used health insurance many times. Never once was it for an activity for which I actually needed health insurance, and many of my health care expenses would never have been chosen without government subsidized health insurance. To take one minor example, when I was much younger I found out that daily wear contacts costs $600/year. At first I wasn’t going to adopt them, even though they are more comfortable. The cost was too high. But when I found out that the Federal government would pay 40% of the cost, I said to myself—“A dollar a day, why not?” Are eyeglasses a medical “emergency” requiring insurance?
Avik Roy is slightly more favorable toward the proposal, but still finds lots of problems:
As I wrote last month, the AHCA creates a steep benefit cliff between those on Medicaid (subsidizing approximately $6,000 per patient per year), and those just above the poverty line who will get tax credits of about $3,000. People just below poverty will be strongly disincentivized to make more money, effectively trapping them in poverty.
Unlike in the February 10 leaked draft, in which the tax credits were available to everyone regardless of income, the AHCA begins to phase them out for those earning $75,000 a year, or $150,000 for joint filers. For every $1,000 in earnings above those thresholds, the value of the credit phases down by $100. Hence, for a single 40-something, the credit would phase out at $105,000 in income.
Amazingly, these thresholds are far more generous than Obamacare’s. Obamacare’s tax credits phase out at 400 percent of the Federal Poverty Level, or $48,240 in 2017. The AHCA’s tax credits would phase out somewhere above 850 percent of FPL.
It takes a certain ingenuity to simultaneously make the poverty trap worse, while making the benefit scheme more regressive. Usually there’s a clear equity/efficiency tradeoff. Admittedly at higher incomes there is less of a disincentive to earn more money, but overall I don’t see how these changes improve things. And this might also result in less Medicaid reform than otherwise:
The irony is that the AHCA’s stubborn insistence on a flat tax credit has put its promising Medicaid reforms in jeopardy. As I noted above, the Medicaid expansion offers enrollees subsidies of about $6,000 per year. The ACA exchanges, wisely, carry that subsidy along and phase it out gradually at 400 percent of FPL. By creating a benefit cliff, the AHCA gives Medicaid expansion states a strong incentive to oppose repeal of the Medicaid expansion. If the AHCA simply used the above table to means-test its tax credit, states could walk away from the Medicaid expansion, knowing their residents would have robust options for private health insurance.
And with repeal of the health insurance mandate, the death spiral is intact—but now it will be “owned” by the GOP:
Worse still, the bill contains an arbitrary “continuous coverage” provision, in which those who sign up for coverage outside of the normal open enrollment period would pay a 30 percent surcharge to the normal insurance premium. This surcharge is an arbitrary price control. While 30 percent represents an approximate average of the additional health risk of late enrollees, the 30 percent provision incentivizes those who face much higher costs to sign up, forcing insurers to cover them at a loss. This seems like a recipe for adverse selection death spirals.
There is one sort of good provision in the bill; it would repeal the tax increases for Obamacare:
The American Health Care Act repeals nearly all of Obamacare’s taxes, save the postponement of the Cadillac tax. But Obamacare’s tax hikes comprised about 60 percent of its funding for the law’s coverage expansion. So the $2 trillion question is: does the AHCA explode the deficit, or is it relying on steep Medicaid cuts to keep the deficit in line? We won’t know until the CBO scores the bill.
But even this is a mixed bag, as the deficit will get larger, and some of the extra taxes (such as an extra 0.9% payroll tax on high wage earners and taxes on medical equipment) were good ideas, indeed those taxes probably should have been even higher. The big gain here is eliminating the 3.8% tax on investment income.
As far as my overall reaction, Peter Suderman put it best:
In general, it’s not clear what problems this particular bill would actually solve.
Cynics like Matt Yglesias will probably say something like, “It’s intended to solve the problem of America’s rich paying too much taxes.” I’d like to disagree with him, but the GOP bill doesn’t give me much ammunition.