Building Bipartisan Health Care With Conservative Bricks

by ed dolan

ed dolan, the creator of Ed Dolan’s Econ Blog, is the author of Introduction to Economics.

Illustrations by James Fryer

Published August 4, 2017

 

Republicans now control both chambers of Congress and the White House, yet they are finding it very difficult to fulfill their pledge to repeal and replace the Affordable Care Act — the dread Obamacare — which Republicans successfully painted as big government run amok during the 2016 election campaign. For the time being, the Democratic leadership seems content to watch Republicans twisting slowly in the wind. That may not last indefinitely, though.

For one thing, Obamacare is far from perfect by anyone’s reckoning. Without changes requiring both Republican and Democratic input, Obamacare could eventually fail. For another, substantial numbers of voters from both parties are becoming impatient with partisanship as usual. A Morning Consult/Politico poll taken in March found that 72 percent of Democratic voters, 71 percent of independents and 75 percent of Republicans thought the parties should work together more on health care reform.

Just what kind of health care plan might draw enough bipartisan support to pass the Senate and not then get shot down by the House? Certainly not a variation on the Re-publican approach of reducing subsidies aimed at the poor, middle-aged and medically vulnerable, and then using the savings to eliminate the special health care taxes levied on high-income households. Indeed, no Obamacare replacement could draw significant Democratic support unless it moved to-ward the goal of universal, affordable health care — not away from it. At the same time, since Republicans control the committees and leadership in the House and Senate, any reform would have to start with ideas that have an acceptable conservative pedigree.

The practical question, then, is whether it is possible to build a system from conservative bricks that can stand on bipartisan turf. Here are three conservative ideas that, together, might do the job.

 
Procedures and drugs cost more — often several times more — in the United States than in other countries where incomes and costs of living are comparable in other respects.
 
Universal Catastrophic Coverage

The first is universal catastrophic health care coverage, an idea that has had a conservative imprimatur for decades. Martin Feldstein, who served as Chairman of President Reagan's Council of Economic Advisers, proposed a universal catastrophic coverage plan as early as 1971. And Milton Friedman endorsed it in an article written for the conservative Hoover Institute in 2001. An up-to-date version of such a plan is described by Kip Hagopian and Dana Goldman in National Affairs, successor to the neoconservative Public Interest.

Universal catastrophic coverage would provide everyone with health insurance that has a high deductible but no annual or lifetime caps. Ideas vary on how to set the deductible. Feldstein's original proposal suggested a deductible equal to 10 percent of family income. Hagopian and Goldman suggest a somewhat more generous variation: a deductible equal to 10 percent of the income a family earns that is in excess of the amount that would qualify it for Medicaid.

For example, a family of four in a state that took advantage of the Medicaid expansion offered by the Affordable Care Act would qualify for Medicaid with an income under $40,000, approximately 133 percent of the official poverty line. If the family's actual earned income were $75,000, their "surplus" income would be $35,000, so their deductible would be 10 percent of that, or $3,500. For a family with a million-dollar annual income, the surplus would be $960,000, so the deductible would be $96,000. The catastrophic coverage itself could be provided directly by the government, at either the federal or state level, or purchased from a private insurer using a voucher or tax credit sufficient to cover the premium.

Universal catastrophic coverage could also be paired with health savings accounts for paying for routine health care needs and minor emergencies. Such accounts allow people to spend pretax dollars for out-of-pocket health care costs. They have existed since 2003, so they would need only minor tweaks to make them consistent with universal catastrophic coverage.

Introducing such coverage would protect families from the threat of medical bankruptcy and from the risk of losing access to medical care altogether if they could not otherwise afford (or chose not to buy) private insurance. And the large deductible would contain the cost to government. At the same time, it would have important indirect effects on the individual-insurance market.

With everybody covered by such policies, the individual-insurance market would deal only in supplemental coverage; the limit beyond which catastrophic coverage came into force would cap the maximum exposure of private insurers offering policies. If those policies themselves had deductibles or co-pays, the maximum exposure would be smaller still. As a result, premiums for supplemental policies would be lower than for policies now sold on the Obamacare exchanges, which must cover both routine and catastrophic needs with no caps.

Consider other advantages. Start with the reality that nobody would be forced to do anything: many healthy people with steady incomes would probably choose not to buy supplemental insurance, preferring the certain savings on premiums to the reduction in exposure to medical bills. On the other side of the same coin, their unwillingness to buy insurance couldn't lead to the feared "death spiral" in which the failure of healthy people to buy coverage raises premiums for everybody else – and that in turn leads more healthy people to opt out. Nor could healthy people game the system, free-riding on the Affordable Care Act's pre-existing-condition guarantee, which they know will let them buy coverage later if they develop a costly health problem.

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Decoupling Health Care from Employment

A second conservative reform with the potential to draw bipartisan support would be to end the tax-free status of employer-sponsored health insurance. As of 2015, 49 percent of Americans received health coverage through employers, more than Medicare and Medicaid combined. Such insurance has serious drawbacks, as outlined below. If those drawbacks were more widely understood, an end to this approach to providing insurance would be far more palatable to the general public.

The special tax treatment of employer-sponsored insurance goes back to the Second World War. Employers, frustrated by wartime wage controls, competed with one another to attract scarce workers by offering fringe benefits such as health care coverage. After the war, laws were passed to confirm that employees would not have to declare the value of various fringe benefits as income when paying taxes. It didn't seem like a big deal at the time. Since then, though, the exclusion of employer-sponsored health benefits has grown into the largest tax expenditure in the federal budget, reducing tax revenue by an estimated $235 billion in 2017.

Most Americans, I suspect, view this special status for health insurance premiums as a sensible perk. But the critics have a point — or rather points:

1. Employer-sponsored health insurance is inequitable. Suppose the cost of health insurance to your employer is $10,000 per worker. If that were taxed as ordinary income, you would pay more tax — but just how much more would depend on your tax bracket. If your taxable income is $200,000 a year, putting you in the 33 percent bracket, the exclusion saves you $3,300. If you earn $35,000 a year (landing you in the 15 percent bracket), the exclusion saves you just $1,500, which raises a question without a good answer: why should higher-wage employees get a bigger tax break than lower-wage earners? Actually, the inequity is often even greater, since employers usually provide more-generous health plans to top executives.

2. Employer-sponsored health insurance is unfair to minimum-wage workers. In most cases, both employers and workers can gain by adding health benefits and then reducing money wages by an amount that splits the tax benefit. In practice, it is not necessary to reduce wages to divide the benefit. Instead, workers or their unions negotiate compensation packages that slow the growth of cash wages while increasing the share of health benefits. However, for workers who are earning the minimum wage, there is no room for negotiation. Wages for such workers cannot be cut and must rise when the legal minimum increases. As a result, the entire cost of such insurance falls on employers – which is one reason why minimum-wage jobs rarely include health benefits.

3. Employer-sponsored health insurance is a special burden on small businesses. Providing health care can be a large problem for small employers. Large employers can afford to self-insure, cutting out the middleman without having to worry that the average employee's medical bills will go through the roof. But small businesses must buy a group policy from an insurance company, since they can't risk being stuck with the catastrophic cost of one or two very sick employees who run up six-figure medical bills.

4. Employer-sponsored health insurance can lead to job lock. Job lock is said to occur when fear of losing benefits available from employers makes workers reluctant to change jobs, to retire or to leave employment for work as an entrepreneur or independent contractor. The Affordable Care Act mitigates the problem by guaranteeing that people who leave or lose a job can still buy individual coverage for as long as they wish. But before the Act, workers with pre-existing conditions were out of luck – and could be out of luck again, if it is repealed.

5. Employers have a poor record as health insurance administrators. One might expect that as administrators of their employees' health coverage, corporate managers have strong incentives to minimize the cost and maximize the quality of what they pay for. But that doesn't seem to be the case. The health care economist Uwe Reinhardt has concluded that employers have failed dismally in cost-containment, adding to, rather than moderating, the rise of health care costs.

To make employer-sponsored health insurance both more equitable and less conducive to inefficiency, many reformers propose replacing the exclusion of such benefits from taxable income with a fixed tax credit. Roughly speaking, the current tax expenditures on the exclusion would be enough to give every adult of working age a tax credit of about $1,200. Because it would be a credit, not a deduction or an exclusion, everyone would get the full benefit regardless of his or her income tax bracket. The credit could also be advanceable, so that cash-strapped workers could use it to meet current premium payments.

A credit of $1,200 a year is less than a third of the cost of an average bronze plan on the Obamacare exchanges today, but the picture would change dramatically if universal catastrophic insurance and individual tax credits were introduced together. Then, supplemental individual policies would have much lower premiums than even the least costly plans now sold on the Obamacare exchanges. It would be realistic to expect that a $1,200 credit would cover at least half the cost of an individual supplemental plan. Indeed, some advocates of this approach think that insurers would offer limited supplemental plans with premiums that matched the tax credit.

Many supporters of tax credits would give recipients the right to deposit them directly in health savings accounts instead of being used to buy supplemental insurance. The combination of those accounts and universal catastrophic insurance would make the option of going without supplemental insurance more attractive for people with steady incomes.

 
 
Controlling Costs through Transparency and Competition

A third conservative reform would make use of markets to contain health care inflation. Both instituting universal catastrophic coverage and eliminating employer-sponsored insurance would be easier if the costs of health care were lower. It's no secret that health care costs are higher in the United States than in other affluent countries despite the fact that, by many measures, the U.S. system produces inferior outcomes. A study from the Commonwealth Fund found that the United States ranked fifth out of 11 high-income countries in the quality of health care but only 11th in terms of efficiency. As a result, the United States has more cost-related problems of access to health care than any of the other countries surveyed.

In some cases, high U.S. costs follow from a tendency to perform greater numbers of costly tests and procedures. Births by C-section — which are much more common in the United States than in many countries with lower mortality in deliveries — are often cited as an example. However, high prices appear to be a bigger problem. Procedures and drugs cost more — often several times more — in the United States than in other countries in which incomes and costs of living are comparable in other respects.

Several approaches to controlling health care costs have drawn bipartisan support. One of the least controversial would be to encourage greater price transparency. As the Commonwealth Fund explained:

It's no secret that the U.S. health care market is unlike any other market: patients rarely know what they'll pay for services until they've received them; health care providers charge different payers different prices for the same services; and privately insured patients pay more to subsidize the shortfalls left by uninsured patients. What's more, prices for health services vary significantly among providers, even for common procedures such as laboratory tests or mammograms, although there's no consistent evidence showing that higher prices are linked to higher quality.

The fund goes on to note that some employers and insurers are taking action to encourage providers to be more transparent in their pricing, and lists 30 states that have policies to encourage these practices. Recently, Representatives Michael Burgess (R-Texas), a physician, and Gene Green (D-Texas) introduced legislation to promote greater price transparency.

Consumers have not always made use of health care price information when it has been available. That is understandable in an environment in which most people received job-based coverage that required only modest deductibles and co-pays. However, that already seems to be changing as employers are imposing greater out-of-pocket costs on employer-sponsored-insurance beneficiaries. A system that introduced universal catastrophic coverage and replaced such insurance with individual tax credits and health savings accounts would encourage comparison shopping.

Another approach that has drawn bipartisan support is to encourage greater competition among health care providers and insurers. One prominent target of reformers: government policies that make it easier for pharmaceutical makers to charge U.S. consumers more than they charge elsewhere. Currently, drug companies have little fear that Americans will turn to cheaper sources of the same medicines because importation is illegal — and thus, as a practical matter, limited to small purchases by Internet-wise individuals (which the FDA is inclined to ignore). Recently, senators Bernie Sanders and Ted Cruz debated policy issues on CNN. A proposal to allow importation of drugs was one of the few points on which they agreed.

Pharmaceuticals are not the only area of concern when it comes to competition in health care.

Both mergers among hospitals and between hospitals and physician groups have the potential to reduce competition and raise prices. At the same time, as detailed in a study from the Mercatus Center at George Mason University, 36 states have laws that give regulators the power to limit the entry of new hospitals and the expansion of old ones. Even when consumers have a choice of two or more hospitals, barriers to competition in both price and quality persist.

Greater transparency and competition would be especially valuable for people who choose to pay out-of-pocket costs from current income or from health savings accounts, rather than buying supplemental insurance. As things stand, people without insurance are often charged higher prices than those insurance companies negotiate with providers. However, individuals may not even be able to find out what those lower prices are, let alone have enough bargaining leverage to be given admission to the club.

 
The troubled effort to repeal the Affordable Care Act made it very clear that Republicans as well as Democrats value access to affordable health care – and don’t much care about the ideological underpinnings.
 
Good, but is it Good Enough?

Fully implemented and funded, the three-part reform described here would improve on Obamacare both in terms of coverage (a key consideration for Democrats) and personal choice (a key consideration for Republicans). It is a good plan — but is it good enough?

Not for all conservatives. Some of them would reject it as too broad and too costly — after all, universal catastrophic health care coverage would be hugely expensive. Others oppose the whole idea that government should treat health care as an entitlement. Still others might endorse each of the parts of the proposal in principle, but fund them so inadequately that they would not work as intended. Nor would this approach be good enough for all liberals. Many would prefer a simpler single-payer system that gave the government enormous leverage in cost control — perhaps something like the Medicare for All plan proposed by Senator Sanders during the presidential primary campaign.

But I would argue that, in spite of the bitter partisan battle over Obamacare, universal health care is coming. Indeed, the troubled effort to repeal the Affordable Care Act made it very clear that Republicans as well as Democrats value access to affordable health care — and don't much care about the ideological underpinnings. It is time to stop fighting universal care and start trying to make it work.

Understandably, many Democrats would prefer to build a better system on the hard-won foundation of Obamacare than to start afresh. Still, there could well be considerable Democratic support for a plan that truly covers everyone and is bulletproof from attacks from the political right. If the Republican leadership wished to restore its legitimacy as a party that gets things done, universal catastrophic coverage, replacing employer-sponsored insurance with individual tax credits, and measures to improve transparency and competition could very well constitute a winning formula.

ed dolan image 4

Republicans now control both chambers of Congress and the White House, yet they are finding it very difficult to fulfill their pledge to repeal and replace the Affordable Care Act — the dread Obamacare — which Republicans successfully painted as big government run amok during the 2016 election campaign. For the time being, the Democratic leadership seems content to watch Republicans twisting slowly in the wind. That may not last indefinitely, though.

For one thing, Obamacare is far from perfect by anyone's reckoning. Without changes requiring both Republican and Democratic input, Obamacare could eventually fail. For another, substantial numbers of voters from both parties are becoming impatient with partisanship as usual. A Morning Consult/Politico poll taken in March found that 72 percent of Democratic voters, 71 percent of independents and 75 percent of Republicans thought the parties should work together more on health care reform.

Just what kind of health care plan might draw enough bipartisan support to pass the Senate and not then get shot down by the House? Certainly not a variation on the Republican approach of reducing subsidies aimed at the poor, middle-aged and medically vulnerable, and then using the savings to eliminate the special health care taxes levied on high-income households. Indeed, no Obamacare replacement could draw significant Democratic support unless it moved toward the goal of universal, affordable health care — not away from it. At the same time, since Republicans control the committees and leadership in the House and Senate, any reform would have to start with ideas that have an acceptable conservative pedigree.

The practical question, then, is whether it is possible to build a system from conservative bricks that can stand on bipartisan turf. Here are three conservative ideas that, together, might do the job.

main topic: Health
related topics: Public Policy