The biggest mistake Hillary Clinton made 15 years ago was not endorsing Bob Dole’s health bill, which had more than 40 Republican co-sponsors. The Dole bill would have given her 70% to 80% of everything she wanted anyway, to say nothing of creating a huge bipartisan lovefest. Democrats would have held the Congress in 1994….. and, well, you get the picture.
Barack Obama is about to repeat that same mistake. The smartest thing Obama could do is endorse a bill [summary] sponsored by Sens. Tom Coburn (R-OK) and Richard Burr (R-NC), along with Reps. Paul Ryan (R-WI) and Devin Nunes (R-CA), [hereinafter called the Coburn bill]. Here’s why:
- Independent analyses estimate the Coburn bill would cut the number of uninsured in half, the same result that is expected under Obama’s plan.
- The Coburn bill is revenue neutral — requiring no net increased taxes or spending; whereas Obama’s plan will cost $1.5 trillion over 15 years and maybe more – even though they both achieve the same goal. (I’ll explain this truly fascinating result in a future Alert.)
- The Coburn bill makes coverage more universal by shifting tax benefits from those who earn more to those who earn less — precisely what Obama has committed to from the get-go.
- The Coburn bill liberates millions of poor people from Medicaid rationing and gives them access to the same kind of insurance middle-income families have, whereas Obama’s plan would do to reverse.
- The Coburn bill gives people strong incentives to control costs and they might actually work, whereas Obama’s $150 billion a year in extra spending will almost certainly add to health care inflation.
In some ways, this is the most “liberal” proposal on the table made by the most conservative senator on Capitol Hill; and it achieves all of Obama’s goals as well or much better than Obama’s own plan!
Why Not Me?
Since the Coburn plan is very similar to John McCain’s health plan, which I have discussed here, here and here, I won’t dwell on details — other than to explain two main features which are not well understood and which Mark Pauly and I proposed in a Health Affairs article more than a decade ago.
The Refundable Tax Credit. Right now the federal government encourages private health insurance primarily through the tax system — handing out as much as $300 billion in tax subsidies every year. Every dollar in health insurance premiums paid by an employer is excluded from employee income and payroll taxes. Take an employee in the 25% income-tax bracket. After avoiding that tax plus state and local income taxes plus the 15.3% (FICA) payroll tax, the tax exclusion for a middle-income family is worth almost 50 cents on the dollar. To make things even better, employees can often pay their share of the premium with pretax dollars as well.
But this system is extremely arbitrary. There is virtually no tax relief for people who work for the 40% of employers who do not provide insurance, for part-time workers or people not in the labor market, or for anyone else who for any reason must buy his own insurance. According to the LewinGroup, families earning $100,000 a year get four times as much tax relief as families earning $25,000. The biggest subsidy goes to those who least need it, and who probably would have purchased insurance anyway. The system is also wasteful. People can always lower their taxes by spending more on health insurance, and there is no limit to how bloated a health plan can be.
Under the Coburn bill, no longer would employers be able to buy insurance with pretax dollars. These payments would be taxable to the employee, just like wages. However, every individual would get a $2,300 credit (and every family would get $5,700) to be applied dollar-for-dollar against taxes owed.
The Coburn bill does not raise taxes, nor does it lower them. Instead, it takes the existing system of tax subsidies and treats everyone alike, regardless of income or job status. All health insurance would be sold on a level playing field under the tax law, regardless of how it is purchased. The impact would be enormous. For the first time, low- and moderate-income families would get just as much tax relief as the very rich when they purchase health insurance.
The Coburn bill would also encourage all Americans to control costs. The tax credit would subsidize the core insurance that everyone should have. It would not subsidize bells and whistles (marriage counseling, acupuncture, etc.) as the current system does. Since employees and their employers will be paying for additional coverage with after-tax dollars, everyone will have an incentive to compare the value of extra health benefits to the value of other things money can buy. When patients eliminate health-care waste, they will get to keep every dollar they save.
The tax credit would be refundable. People could apply $2,300 per person or $5,700 per family to the purchase of health insurance, even if they do not owe any income taxes.
The credit would be advanceable. Families would not have to wait until April 15 the following year to get their credit. They could obtain the subsidy at the time the insurance is purchased.
The credit would be transferable. Insurance companies and other intermediaries would be able to help families obtain their credit and apply it directly to health-insurance premiums.
Health Savings Accounts. Although the bill allows any excess tax credit (not used for insurance premiums) to be deposited in a tax advantaged Health Savings Account (HSA), this will happen very rarely. The reason: for most people, the tax credit will barely cover the cost of catastrophic insurance — leaving nothing extra for HSAs or anything else. As a result, the tax advantaged HSA will wither on the vine.
Still, I expect health savings to grow dramatically. The reason: since premiums for additional third-party insurance will be paid with after-tax dollars, third-party insurance and self-insurance will be on a level playing field under the tax law. Nobody will pay an extra dollar in premiums if it makes more sense to put that dollar in a savings account. The deposits to ordinary savings accounts will be made with after-tax dollars and any interest earned will be taxed at the rates applicable to other capital income. In addition, these accounts will be completely flexible — unlike the current, highly regulated HSAs.
Making the Coburn Bill Better. Having praised the bill to the hilt, let me acknowledge that it is not perfect. It could be improved in three ways:
- Create Roth IRAs. Ideally, after-tax deposits to a medical savings account should grow tax free — for the same reason that earnings on reserves of insurance companies accumulate tax free. They should be treated under the tax law the same way Roth IRAs are treated. [See further explanation here.]
- Commit to Safety Net Institutions. Hospitals fear they will be required to take care of the uninsured without the resources to do so. The answer: The Coburn $2,300/$5,700 amounts should be pledged to health care, not to just private insurance. If people choose not to be insured, the amounts should be made available to safety net institutions in their vicinity. [See further explanation here and here.]
- Encourage Personal and Portable Insurance Instead of Managed Competition. Last year’s version of the bill allowed buying insurance across state lines and encouraged a national market. This year’s version is completely different. It encourages states to set up highly regulated markets (called health insurance “exchanges”), patterned after the Federal Employees Health Benefit Program — exactly what Hillary Clinton wanted to create for the whole nation a decade-and-a-half ago. Michael Cannon at Cato has objected to this feature, as have others. My own analyses of the undesirable consequences of managed competition are explained here.The sponsors of this legislation are right to be concerned with the problem of pre-existing conditions. However, as I explained in another context, the answer is personal and portable insurance. If people own their own insurance and take it with them when they switch jobs or move into and out of the labor market, the problem never arises. It is for this reason that states should be encouraged to experiment with ways to transition to portability.
By contrast, managed competition exacerbates the difficulties of pre-existing conditions and makes the problem much worse than it otherwise would have been! Managed competition not only gives health plans strong incentives to attract the healthy and avoid the sick, post-enrollment it gives health plans strong incentives to overprovide to the healthy and underprovide to the sick!
The encouragement of a health insurance exchange parallel to the employer-based system is yet another reason why Obama should endorse the Republican plan. The opposition has fundamentally accepted his vision of a market for insurance. In both the exchange and at work, the price system will be completely suppressed. In the market for risk, no one will ever face a real price for anything.