Health Reform: An Amicus Brief for the Court of Public Opinion

The Supreme Court will consider the constitutionality of the Affordable Care Act at the end of the month. We the public should be appalled.

It’s not that each side can’t come up with some good constitutional arguments. It’s that the suit is totally unnecessary, caused largely by the unwillingness of the major political parties to work together on anything. Like a divorce between two parties more invested in their fight than in the effect on those around them, it belongs in a domestic relations court that would refer the parties to a mediator.

In theory, the Supreme Court is considering the narrow question of whether the federal government can mandate that individuals purchase health insurance (and, to be technical, whether there really is a “mandate” or just a “tax”). In practice, the Court is responding to a fundamental failure of the legislative process to fix even the simplest of things. To understand the genesis of this failure and of the mandate, one has to go back a bit into recent history.

The modern debate over mandates came about during the Clinton administration, which centered much of its health reform efforts on requiring employers to provide health insurance. Such a mandate, as some of us noted at the time, would operate like a corporate tax passed through to individuals, effectively adding substantially to a minimum wage that had to be paid in the form of health benefits, but very unevenly.

Rather, we reasoned, the basic argument behind a mandate hinged on the individual: you, me, and the other folks down the street. Many people who could have paid for their health care did not. They spent their money on other things, avoided buying insurance, then went to emergency rooms that couldn’t turn them away or tried to buy last-minute health insurance when they got sick. Everybody else got stuck covering their costs.

This raises issues of both equity and efficiency. Should one moderate-income family be allowed to get free benefits for which a similar family pays? Should we encourage people not to buy insurance when they think they can go sometimes to the emergency room for free?

Further complicating the issue is the extraordinary cost of health care: the average annual price tag per household (including what they pay for others through taxes) tops $20,000. It’s now almost impossible to tax and spend our way toward universal care. The government would need to set a payroll tax rate surpassing 40 percent to cover all health costs.

So subsidies, or carrots, alone aren’t enough. A combination of sticks and carrots might get us a lot closer to universal care, partly because many people don’t like the idea of paying any penalty whatsoever.

But sticks have complications, too. We know the IRS and other agencies have huge problems collecting bills from the public, especially large ones. In practical terms, we simply can’t implement a mandate, only a modest penalty.

The simplest way to devise a stick, I recommended at the time, was to deny other benefits, such as a child tax credit, or low interest rates on student loans, or itemized deductions to those who did not purchase health insurance. This would be far easier to administer than a scheme of new health mandates or taxes.

And here’s the crucial point for the court debate: there is no constitutional debate over whether the government can set conditions on the receipt of benefits it provides. Done this more effective and easy-to-manage-way, there would be no court case to hear!

But Republicans and Democrats prefer to have their fight. In the hubris of the health reform legislation, Democrats created whole new systems of taxation and welfare, while ignoring the fundamental and difficult history of administering these systems.

Republicans, in turn, cast their attention on any fight they could win politically, legislatively, or in the courts, forgetting that in the early 1990s, they liked the individual mandate. If they win and get fewer or no penalties, after all, they will only add to the number of people who end up getting subsidized and for whom more taxes need to be collected. Democrats, in turn, didn’t like the individual mandate then. They thought that they could hide any new tax better when assessed on corporations.

As with so many other aspects of our deeply partisan divide, we’re having a needless fight over something easily resolved. The clean solution can’t be adopted because Democrats don’t want to admit they made any mistake in the Affordable Care Act and Republicans don’t want to fix any part of health reform. A domestic relations court would look at these sparring spouses and send them to a mediator. The Supreme Court decision likely will only confuse the real debate over how subsidies, penalties, taxes, and mandates must combine in any health program, old or new, Republican or Democrat, small or large.

Fixing the Nation’s Four-Tranche Universal Health System

U.S. citizens soon will be participating in a four-part, nearly universal, health care system. Medicare, Medicaid, employer-provided health, and the new exchange insurance policies all come with different government subsidies. Medicare is tied to age or disability and provides roughly the same amount of insurance to all recipients. Medicaid (and a related children’s health insurance program) also provides more or less equal coverage to all who get it, though it pays providers less for that coverage and, cliff-like, often cuts off beneficiaries who cross an earnings line. Subsidies for employer-provided health insurance are largest for those with the highest incomes and the most expensive policies. Meanwhile, the new exchanges created under health care reform would phase out subsidies for households as their income increased.

I find myself in that minority that is uncomfortable with both sides of the current health care debate. I support a more universal health care system but think this four-stream subsidy system is unworkable and unfair. I don’t want to go back to having tens of millions of uninsured people, and that could happen if some Republicans fighting health reform prevail by simply restoring the former three-tranche system. But it doesn’t help when some Democrats put all their political eggs in the new, still-unworkable exchange subsidy basket.

Both would be taking paths to dead ends—no surprise since neither party is looking hard at the whole crazy quilt system we have created, much less at how the numbers add up, how taxes cover costs, who pays and receives, and how the four subsystems interact.

Of course, you have to start somewhere. How the new exchange policies interact with employer-provided health insurance and, to some extent, Medicaid gets my vote because right now it’s where the rubber hits the road. Also, at some level it should appeal to Democratic concerns about extending coverage and Republican concerns about trying to use a market for health insurance.

First, some simple math that’s at the heart of health reform. Health spending now averages about 21 percent of households’ personal income (17 percent of GDP). Few believe we can afford to pay this much, yet we do. And, the percentage of income spent on health care is rising. We are already financing part of our health care costs by borrowing from China and limiting cash wage growth substantially. Meanwhile, the new health care legislation presumes that those in an exchange shouldn’t have to pay more than 10 percent of their income for a health insurance policy. The trouble is, we’re already paying a lot more than that to support the three-, soon-to-be four-, tranche system.

This decision to ignore the math has created far-reaching consequences:

• Those in the exchanges will get substantially higher subsidies than will many households that remain in the less subsidized employer-provided insurance market, as well as those on Medicaid.
• To prevent too many employees from getting the new subsidy, employer penalties and other tactics try to keep people within the less subsidized employer network. Even so, droves of employees—potentially tens of millions—are likely to shift out of employer-provided insurance over the next decade or two, especially as newer firms and their employees find it more profitable to get the exchange subsidies than the subsidies for health insurance provided by the employer.
• To try to prevent small employers from bearing the burden of the new system, yet more subsidies and exemptions from employer penalties were created but not distributed fairly according to need.
• To prevent states from shifting from Medicaid, which they help fund, to the exchanges, which they don’t, still more restrictions and incentives were designed.
• If, despite all these provisions, these incentives cause too many people to shift to the new, most generously subsidized tranche (the exchange), the four-stream system becomes even more unsustainable from a budget perspective. After all, every person who receives a higher subsidy will impose additional cost on government
• The exchanges don’t just handle health insurance. Rather, they are expected indirectly to operate an entirely new “tax” system that collects another 9 or 10 cents from most insured household for every additional dollar earned and a new “welfare” system that tries to determine in advance and at various later stages households’ eligibility for different subsidies.
• It may not be possible for various employers, exchanges, Medicaid systems, and the IRS (which is expected to verify income statements to the exchanges on initial applications, but not later amendments) to share all the data needed to enforce the new subsidies. Think about the logistics of updating the information every time an individual becomes eligible for a higher subsidy because he or she marries, divorces, gains a dependent, moves, changes jobs, and earns less over a stretch of time.

Clearly, to create an administrable system, we need some certainty about the size of the subsidy; to be fair, we need to make the subsidy about the same for all those with equal incomes. This suggests that we must give households throughout the middle-income range (and perhaps those in some Medicaid and higher-income ranges too) about the same level of premium support, while eliminating discrimination against workers with employer-provided insurance. Rather than clawing back the subsidy indirectly with a new, hard-to-administer tax, we must use the current tax system to provide fewer subsidies, on net, to those with higher incomes.

True, health care is now so expensive that it’s hard to provide a subsidy high enough to cover most of the cost of insurance. Therefore, we must turn to other alternatives to encourage people to buy insurance. That is one purpose of the new law’s so-called mandate—which is not really a mandate at all but a penalty for not buying insurance.

A penalty serves a second and related purpose. It deters people from avoiding insurance purchase when healthy on the expectation that they can buy it cheaply, relative to their costs, when sick. Otherwise, it will not be possible to maintain the popular health reform that prevents insurers from excluding those with preexisting conditions. If current “mandates” are considered unacceptable, a perfectly constitutional and partial fix that both parties could accept might be simply denying other tax and welfare benefits to those who don’t buy health insurance.

Concerned about administrative ease and fairness, few Democrats should like subsidizing some families more than others in the same income range or seeing enrollments in employer-sponsored insurance drop. And few Republicans should like the higher subsidies and state cost-shifting that cloud the true tax rates and mandates required to support the system.

The fundamental dilemma for both liberals and conservatives is that we simply can’t achieve a more universal health system without charging people for it, enforcing it, admitting to the explicit or implicit tax rates involved, and avoiding very large incentives (for individuals, employers, and state governments) to shift from one tranche of the system to another. Once both sides accept these basic facts and the fundamental arithmetic that drives them, they must turn to the types of amendments suggested here. Neither side is served well by the wishful thinking that pervades the debate over simply maintaining or abandoning the new health care legislation.

Individual Health Mandates and a Silly Court Battle

One of the most frustrating aspects of the health reform debate has been the extent to which many legitimate questions about what might work were ignored in favor of fights over ideology. As advocacy triumphed over expertise, those who promised more than they could deliver fought with defenders of an unsustainable status quo. At times, it was like watching two groups argue over whether to make a building entirely of steel or entirely of glass when neither approach works by itself. One result is that the new health reform still needs a lot of fancy structural work to stand and extensive plumbing to be usable.

Consider individual mandates. The term “mandates” is misleading (see http://www.urban.org/publications/1001325.html). The question is usually framed as whether we can force an individual to purchase insurance. But these mandates don’t really make anyone do anything. The more fundamental issue is whether we can or should penalize those who do not buy health insurance. If not, additional subsidies are the sole way left for government to encourage people to obtain insurance. And that gets very expensive very fast. If you buy my logic, individual mandates look more like a Republican alternative to higher taxes and larger subsidies than a Democratic push for larger government.

Since this key point wasn’t ironed out in the health care debate, it’s now up to the courts to decide. Thirteen states, led largely by Republicans, are asking the judiciary to determine whether government can require some of us who don’t buy health insurance to pay some tax. (Nobody is contesting whether government can force all of us to pay tax to provide health insurance for those who don’t buy it for themselves.)

If Congress hadn’t childishly decided that compromise is for sissies, this court battle could have been avoided. Instead of imposing a separable penalty or tax on individuals, health reform law could simply have denied the uninsured some other government benefits, such as child credits, subsidized interest rates on their student loans, mortgage interest deductions, or other supports. For those too poor to pay, batching benefits this way would have been administratively simple too: low-income folks could sign up for health benefits as a condition of getting their food stamps (now called supplemental nutritional assistance) or other benefits. All government subsidy programs set conditions for participation, so there would be no basis for a court battle.

Now if the Republicans win the court battle, which I’m told is highly doubtful, the law will probably just be amended to move in the direction I suggest. But there’s a practical reason to do it no matter which way the court battles go. Using current benefit programs to ensure compliance and penalize noncompliance makes it unnecessary to try to collect money from people who don’t buy insurance. Reducing future benefit amounts is far simpler than tracking down non-payers and trying to get money they may not have. The IRS learned this long ago when it adjusted withholding tables to ensure that most people would have enough income tax withheld and no more would have to be collected at year’s end.

Besides keeping taxes lower for all, penalizing individuals who don’t buy insurance would also

• be fairer to those who buy health insurance who now have to pay (through their taxes) the full freight for those with equal incomes who don’t;
• require people to cover some of the cost of the backstop “insurance” that Medicaid or new health exchanges provides when health care bills get too big to pay out of pocket;
• relieve some pressure on employer mandates, which work like minimum wage increases to discourage employment; and
• stick to reform’s promise of stopping insurance companies from excluding those with preexisting conditions—a reform generally favored by both Democrats and Republicans. Without penalties, the preexisting condition clause would encourage people to avoid buying insurance until they become sick

If political theater hadn’t overtaken horse sense as much as it has, Republicans could have compromised with Democrats on the design and use of individual penalties without either side caving on their key principles. They’d both realize that individual penalties help avoid some of the higher taxes, higher subsidies, higher minimum wages, exclusions for preexisting conditions, and other inequities born of alternative approaches. Legitimate conservative and progressive principles aren’t the health care reform problem now as much as lack of a shared interest in integrating these principles into a system that works.