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.
President Barack Obama and House Budget Committee Chairman Paul Ryan (R) have laid out different approaches for curbing growth in health care costs. One would empower government-appointed officials to constrain health prices and services by, for instance, strengthening the power of the Independent Payment Advisory Board (IPAB) created in 2010’s health-reform legislation. The other would provide Americans with premium support up to some dollar limit to cover their health insurance purchases. Both count on efficiency improvements as well. The political debates have quickly centered over whether Obama is heading toward ever-more cumbersome government regulation and price-setting and whether Ryan is opening up unregulated markets that would deprive many of needed health care.
It’s not that simple, though. Three questions are actually at issue:
(1) How should budget constraints be applied?
(2) Should automatic budget growth for health care programs (particularly, Medicare) finally be reined in?
(3) Should government health program budgets be limited even if neither side gets its way?
The president and the House Budget Committee chair disagree on the answer to the vital first question (which I’m not going to address). But President Obama and Chairman Ryan have more in common than first meets the eye. They face similar hostile fire and essentially jump into the same foxhole by answering, “Yes” to question 2. And, I conclude that until question 3 is answered with a firm “Yes,” they’ll probably never get out of the foxhole, obtain real budget discipline in health care, and achieve the efficiencies in health care delivery they are seeking.
Why are the president and the chairman coming to similar conclusions on getting health care into a budget? Unlike most government programs, government health programs—notably Medicare for the elderly and tax subsidies for the nonelderly—typically have squishy open-ended budgets. You and I and our doctors basically decide what everyone else should contribute to our well-being. In a sense, every time we mutually agree to some procedure or decide to try some drug, we’re voting to increase others’ taxes or premiums—often, to the benefit of providers and at no marginal cost to us. (This original sin of health insurance design also distorts decisions within the health care sector by, for instance, favoring chronic care over cures and specialization over general practice.)
Absolving that original sin requires operating alternative health care programs within a limited budget. Keep in mind that such budgets can be increased, but then they have to compete with other budget priorities. But if you simply compare a higher open-ended budget with a lower limited budget, the first will always look richer—providing more services to patients and compensating providers better. That’s the simplest explanation for why New York Times reporter Robert Pear finds that many Democrats and Republicans oppose President Obama’s effort to strengthen an independent board. And it’s the simplest explanation for why many Democrats oppose Congressman Ryan’s plan. Both approaches create losers relative to current law, and politicians hate picking the losers.
Yet, each approach could have exactly the same budget. In other words, the choice between approaches has nothing to do with which one reduces spending growth rates the most.
This takes us to question 3. While we squabble over which approach to take, the open-ended health budget is partly responsible for the potential downgrading of U.S. government debt, excessive borrowing from China and other countries, and the scheduled starvation of education, transportation, children’s programs and other public goods that don’t have open-ended, automatic growth built into them. As health care’s share of total spending or revenues goes up, other shares must go down: essentially, our current health policy depends on either robbing Peter to pay Paul or borrowing from Wen Jiabao.
What’s more, neither side will probably ever prevail entirely. More likely, we’ll to continue to have a hybrid system, as we have had for over half a century. We’re not suddenly going to figure out some perfect government-run set of subsidies for channeling or regulating close to one-fifth of the U.S. economy. Even if we did, that system would probably be wrong for the very different health economy of the next decade and the one after that—changing technology and the fickleness of voters aren’t going to go away. In today’s economic environment, getting one’s political way— whether it’s Obama’s or Ryan’s—can no longer be allowed to hold sound budget policy hostage.
So let President Obama’s supporters win elections and rein in Medicare accordingly. Or let Ryan’s supporters win elections and have their way. But whoever prevails should be held accountable for setting limited or capped budgets. Limited or capped budgets can be increased, but only through votes that require formal decisions that these programs deserve priority. That applies not only to Medicare, but also to all health subsidies, including tax subsidies, Medicaid, and the new exchange subsidies.
Budget constraints for health will chafe politically, especially compared to today’s open-ended health budget that simply shunts the natural frictions of competing for limited resources onto the nonhealth budget and the deficit. But good budget policy entails a side advantage for health policy. Many of the efficiency improvements that might give us more bang for each health-care-buck will be implemented more readily if providers and consumers must live within a budget.
Yes, let’s have the worthy debate over premium support versus greater regulation using the federal government’s market power—while admitting that a regulated system can be made to resemble a premium support system and that a premium support system requires regulation. But here’s the bottom line: let’s apply normal budget principles and constraints whether one side wins the debate or neither triumphs and the result is political compromise and the continuation of a hybrid health care system.
This column was originally posted in the American Square. The American Square is rooted in the belief that our country needs to engage in vigorous, honest, and civil political debate to address the enormous challenges we face. On the site, ordinary citizens of all political, economic, ethnic, and geographic backgrounds discuss government and politics, learn from experts and peers, and find areas of agreement and disagreement through respectful dialogue. We are kicking off the discussion with a focus on fiscal issues. To get started, sign up at TheAmericanSquare.org.
What do you pay in Medicare taxes? And what Medicare benefits can you expect? This issue—potent now that the first baby boomers are turning 65—was highlighted recently by Ricardo Alonso-Zaldivar in a widely read Associated Press story.
It’s no secret that early generations of Social Security beneficiaries got more out of the system than they paid into it. Beneficiaries in the 1940s and 1950s paid very low Social Security taxes for only a few years, then retired and received benefits for the rest of their lives. Until recently, in fact, almost all generations of retirees fared rather well. After all, the combined employer and employee tax rate for Old Age, Survivors, and Disability insurance, or OASDI, was kept low relative to benefits that would later be received. That combined rate equaled only 3.0 percent of earnings in 1950 and 6.0 percent in 1960, and it didn’t rise to its still-inadequate level of 12.4 percent until the late 1980s. Since most of these revenues weren’t saved, the increased OASDI tax rate supported ever-rising transfers to beneficiaries.
The most recent waves of retirees getting Social Security can make a stronger case that they have paid for their benefits. The complication is that their Social Security taxes mainly supported their parents in retirement, and the only way they can do as well in a money-in-money-out (at times partially funded) system is to foist higher tax rates on their children.
But let’s leave Social Security aside for the moment to consider an even bigger problem of the same stripe. Past and current retirees, and most working-age adults, will never pay for all their Medicare benefits. The government’s Medicare costs now top 3 percentage points of GDP and are headed to above 6 percentage points of GDP by 2055. But Medicare taxes and escalating premiums cover ranges from about 51 to 58 percent over time. To pay for the rest, we borrow from China and elsewhere, and use up ever-larger shares of income tax revenues, leaving ever-smaller shares for other government functions. Bottom line: without reform, current workers would continue to shunt many of their future Medicare costs onto younger generations, just as their parents did with Social Security.
Medicare’s problems, of course, extend well beyond Social Security’s. True, both systems must grapple with longer life expectancies and lower birth rates—thus reducing the number of taxpayers relative to beneficiaries. But Medicare also suffers from excessive cost growth. Structured like much other health insurance, Medicare essentially lets us consumers deal with doctors over what someone else (in our government or private insurance system) will pay. For years, numbers that Medicare actuaries and many others have been crunching have pointed to the system’s unsustainability. Sadly, the lack of agreement on an alternative has led us and our elected representatives to blink when it comes to tackling this core structural problem.
Not only does this current structure lead to more borrowing from abroad, it saddles future generations with most of the costs of all those marvelous, expensive discoveries from which we hope to benefit in retirement.
A better type of hip replacement comes along. A new drug for congestive heart failure. A more effective treatment for prostate cancer. Sign me up! Yes, these are real advances, and who doesn’t want insurance to cover them? The trouble is, the older among us are not required to work longer or pay for more than a minor share of these extra benefits. Providers, in turn, have come to expect ever-larger shares of national income as a reward for science’s leaps.
Oh, and by the way, most of us have a backup insurance policy in Medicaid. Indeed, the majority of people who end up in nursing homes for long periods turn to Medicaid for support.
What about government’s “trust funds”? Alas, they were never meant to cover future costs, and they can’t. Most of the money comes in only to go right back out. For one shining moment after the 1983 reform, when baby boomers had not yet started leaving the workforce, a slight surplus materialized. But the surplus represented only a tiny fraction of future obligations and will soon disappear (for Social Security, see figure 3 in http://www.urban.org/url.cfm?ID=412095).
In Medicare, payments to doctors, for instance, have come mostly from income taxes or borrowed dollars. While payments to hospitals mainly came from the Medicare tax, even that system has been so underfinanced that significant deficits are expected in the future. Without reform, we’ll continue to ask China and younger taxpayers to pay for those shortfalls.
In many ways, the numbers on lifetime benefits and taxes represent nothing more than another view on why our entire budgetary system is out of whack. This is not an economic problem that leads to a political one, but a political problem that threatens undesirable economic consequences. Only political reform of how we make economic decisions—addressing inconsistent promises for low taxes and high benefits that people have come to expect—can move us away from a system where promised benefits supposedly rise forever faster than GDP and where future, not current, workers must be left to bear most of the costs and consequences.
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.
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.
Should Medicare set prices for what it covers? Should it determine what services it will cover? During the health reform debate, these questions have dogged attempts to reduce unsustainable Medicare cost growth.
At the most basic level, the questions are silly. Of course Medicare sets prices. Of course it determines what services it will cover. It just doesn’t do it very well—for reasons ranging from limited administrative power to constant political interference. Consider: it doesn’t pay $1 million for every new drug that is invented, so some limits are in effect. It doesn’t usually pay for gym memberships, even though many health researchers believe that that service is more cost effective than are many medications. But every single service a doctor or hospital might provide either is covered or not covered and has a set fee.
For decades now, Republicans and Democrats have united to prevent Medicare from setting prices or covered services within an overall budget. Republicans argue against government controls. They’re messy, often unfair, and can stifle growth. Democrats have long averred—though less prominently in the current health debate—that government shouldn’t be controlling only Medicare costs. Then recipients of Medicare might get lower-priced services than those with private insurance.
Behind these arguments are Republicans’ tendency to favor free-market solutions and Democrats’ penchant to favor Medicare (and equal health care) for all. Never mind that insurance markets are highly regulated and unequal amounts of health care can always be purchased on the private market!
Between two simple and politically unobtainable extremes—no government control and total control of health care—lies reality. Any progress toward health reform requires the debate to rest there as well.
But Democrats and Republicans act like two parents letting their kid play in traffic while they debate what activity the kid should pursue indoors. See http://www.urban.org/url.cfm?ID=901183.
Basic budget principles require that every government program should operate within a budget. That budget constraints are always impure and arbitrary is no excuse to avoid them. Housing subsidies go to the first in line. Food stamps are limited in amount and not closely keyed to recipients’ varying dietary needs. Earned income tax credits are generally not available to low-wage workers without kids. Spending on roads and schools can differ wildly from the true costs of what’s needed. These programs must compete with each other for scarce dollars, while current voters and legislators must choose which gets more money and which do not.
Medicare dodges the budget constraints that most programs face simply by giving everyone—patients, doctors, patients, drug companies, and other providers—much of what they want without considering the consequences for the broader society. I say “much” because some very weak constraints are in force. But Medicare mostly operates as an open-ended system, continually accommodating our natural desire for more and better health care and providers’ desire for more income and profits. Compared with most government programs, only in Medicare and a few other government-run health programs can we, the customers and providers, bust the budget by simply demanding or providing more and more.
My preferred solution? Give Medicare recipients something like vouchers. By their nature, vouchers are for a set amount that’s then adjusted annually like other programs adhering to basic budget principles. But whether you alternatively advocate Medicare for all or getting government out of the health care business, all of us must recognize that ’til kingdom come we’ll be moving from compromise to compromise in health care, just as we do in education and transportation or most other government domains. There simply is no one right answer for all time.
Given continual changes in political power, what we must agree upon is that whatever options are chosen must be budgeted. Waiting for our own ideal reforms is no excuse for an unprincipled budgetary approach to whatever Medicare we’ve got. Congress is still free to change the budget. And setting and sticking to a budget doesn’t preclude major reform. What a budget does do is remove the current unaffordable default of letting consumers or providers decide for themselves to add to the health budget and thus force education and other government programs to compete for the leftovers.
One of the real reforms aimed at “bending the cost curve” in the current health debate was to empower a Medicare commission or other body to limit some prices and make recommendations that would be given priority in the congressional legislative process. But Congress has already decided that for this round it will limit severely the power of any commission for fear that the elderly would then oppose the expansion of insurance coverage for the nonelderly. As a result, the basic Democratic-Republican alliance for uncontrollable Medicare cost growth remains alive, and the debate over real Medicare reform has been deferred, but not for very long, to the soon-to-come struggle over getting the overall government budget under control.
An old congressional hand once confided that tax legislation usually looks like sausage making, but, compared to health legislation, it starts to look like French cooking. His main boeuf? The extraordinary amount of hand waving in health bills due to the questionable assumption that administrators can solve problems the legislation can’t.
This round of health reform certainly fits the pattern. As currently drafted, the reform almost defies what we have learned about what can be administered. For starters, no information system right now can accommodate Congress’s desire to provide a subsidy anywhere from $100 to $20,000 for families with incomes ranging from almost nothing to roughly $80,000.
Health reform is not just about health care. It’s as much about welfare and taxation as it is about health. Health reformers imperil their legislation if they ignore decades of practical experience from administering comparably complex laws and systems.
Under Congress’s current plan, families and households would receive subsidies pegged to their income, marital status, number of children, and cost of insurance. To determine your subsidy in 2016 on the basis of your 2016 income, however, is pretty hard since you haven’t yet earned it. The idea is to rely on your tax returns—not some onerous welfare-type application. But your 2015 returns often aren’t filed until April 2016. So Congress has decided that your 2014 income tax return is the go-to source for info on your income- and family-status eligibility in 2016.
The IRS is supposed to verify your income claims to insurance exchanges, but the details still have to be worked out on what to do when claims are off by a little or a lot, how tax audits or amended returns would lead to later collections or payments, how confidentiality is protected, and how the insurance exchanges and the IRS would trade data as people switch policies and exchanges, and switch from an exchange with a subsidy to employer-provided insurance that doesn’t qualify for the new subsidy, and back again.
Optimistically, let’s assume that this tortuous process goes smoothly. We still have a problem! Over the course of a year, well over a third of workers suffer a bout of unemployment, leave the workforce, enter it, partially retire, move to part-time employment, get married, get divorced, have a child, or have a child leave home. Congress is worried about the $90,000/year family that doesn’t get a subsidy and that suddenly becomes a $50,000/year family that deserves $10,000 in subsidies. Thus, it’s allowing people to “reapply” when their family circumstances change significantly—when, say, household income drops by 20 percent.
Who’s going to investigate claims of a drop in income or a change in family status to determine eligibility? And what standard will be used? What documents will be provided, and who will audit the millions eligible to reapply?
In the welfare, Food Stamp, and Medicaid systems, people with sudden drops in income report their monthly income to local offices. Often, increases in income are legally or illegally ignored for awhile. Meanwhile, many who are eligible for such programs do not apply.
In the tax system, the earned income tax credit is usually paid out after the end of the year based on last year’s income. Attempts to pay it during the year have floundered largely because few know before December 31 what their total annual income will be. Yet, significant errors creep in, despite an elaborate system of reporting wages on W-2 forms and interest and dividends on 1099 forms. For instance, the net income of many self-employed—consider household workers paid in cash—is underreported by 30 percent or more.
For some reason, health reformers think they can do better than the welfare and tax systems and set up what is essentially a whole new transfer and tax system based on past annual rather than current income and then adjusted for changes during the current year. Is this a real possibility or just a dream?
There are alternatives, but they require tough choices if widespread abuse is to be avoided. The most logical fix, in my view, is to provide a fairly level monthly credit for most participants. Then let higher-income people pay back some or all of their credit through the tax system and lower-income people turn to Medicaid or a reformed state-run health care subsidy system for more help. This way, health insurance companies would know for most people the exact amount of monthly credit, which would be based on the age and number of those insured. And variations in benefits and taxes administered by the Medicaid and tax systems could be based on current income, not on income from two years ago.
There may be other ideas out there worth trying too. New health subsidies almost inevitably will add complexity, but let’s at least make sure that they can administered and that hard-bought lessons in our welfare and tax systems don’t go a-begging.
Many families with moderate earnings pay 20 percent or more of their income for health insurance. By Congressional Budget Office estimates, a family making $54,000 a year can expect a moderate-cost insurance policy to cost about $14,700 in 2016. True, employers often contribute a big chunk of the total. But most economists believe that the family really pays by accepting lower cash wages.
Of course, families in this income bracket pay far more than $14,700 for health care. They get hit by uninsured expenses or covered expenses they have to share-perhaps an average of $5,100 with the $14,700 policy just noted. They also pay fairly large amounts of tax to cover others, such as retirees. In fact, Americans spend about 24 percent of monetary income (wages and interest and the like) on health care. Using a more familiar metric, the total comes to 16 percent of the gross domestic product (GDP), though GDP includes many items that aren’t typically reported as income (such as the rent you save by owning a home).
Congressional health reformers believe that most households shouldn’t pay that much. They propose something closer to tithing. That way, no more than a tenth or an eighth of household income would go to purchase health insurance. This has a nice political ring to it, but here’s the reality: the 24 percent burden is rising and can’t drop without lower cost growth. Congress can only change who pays or temporarily borrow more from China and other creditors.
The problem gets serious when these arithmetical contradictions get woven into legislation. And we’re already on a slippery slope there.
Take the Senate Finance Committee efforts at health reform that have garnered so much attention. Under one version, households with $54,000 of income would get a subsidy of almost $10,000 toward the $14,700 health insurance policy that Congress has decided that they can’t afford. The first catch 22 is that since these subsidies are so expensive, Congress plans to exclude from getting the subsidy those households that get health insurance in lieu of higher cash wages from their employer.
This is unfair. It violates the fundamental principle of equal justice. People in similar circumstances should be treated similarly under the law.
It also contorts and distorts the labor market. If this new subsidy were the only incentive or disincentive around, employers would drop health insurance so they could boost cash wages and allow employees to bag the subsidies. But it’s not. To prevent this massive migration to the new government-subsidized insurance, Congress also plans to penalize employers who don’t provide health insurance and to maintain a fairly inefficient incentive for employer-provided insurance.
The next problem? An employer mandate to pay for employee coverage can work for some employers like a minimum wage increase. Congress doesn’t really like that either, so it limits the mandate—for instance, by capping the “tax” on employers who don’t provide insurance—in one case, to a maximum of $400 per employee. The trouble is a small penalty might not stop many employers from dropping health coverage.
Meanwhile, small employers object even to that much tax. So Congress plans to exempt employers with less than 50 employees and provide yet another layer of subsidy to some of them.
Here’s yet another complication. Congress is holding fast to today’s regressive tax subsidy for employer-provided health insurance, which can be worth $2,000 to $6,000 per family. This benefit, an exclusion from tax of compensation received as health insurance, would be valuable enough to some employers—especially those with highly paid employees who aren’t eligible for the new individual subsidies—to keep them from dropping insurance coverage. It is also probably one reason why the Congressional Budget Office estimated that a Senate Finance Committee version of health reform would cause a drop of only about 3 million in employer-provided coverage over the next 10 years. John Shields and Randy Haught of the Lewin Group, in a study for the Peter G. Peterson Foundation, estimated that when fully implemented, this same Senate Finance bill would cause one set of employers to drop insurance coverage for 19 million people but another set to add coverage for 12 million.
Considering the new and old subsidies together gets complicated. Still, many low- and middle-income earners paying through an employer by accepting lower cash wages would lose out big time. They would get thousands of dollars less in subsidy than families making an equivalent amount of total compensation in cash and then getting insurance from the type of insurance exchange that the reform bills would establish.
Here is the bottom line on how employers and employees together can maximize what they get from government. Many employers who don’t provide insurance today will probably just choose to pay the tax ($400-per-employee under one scenario in the Senate Finance bill) for not carrying health insurance. Some small employers might be enticed back into the market by yet another subsidy they would get. Large employers will react by outsourcing more low- to middle-wage jobs and switch more workers from full-time to part-time employment. Such incentives toward a two-tiered labor market, partly segregated by income, aren’t new, but they will expand under this type of reform.
A big question for the long run is how small employers who become tomorrow’s big employers will behave. In many ways, small and new employers led the movement away from classic pension plans (rather than 401(k) plans) by not offering them in the first place. As these small firms became bigger ones (think information technology and discount retailers), they never retreated to the traditional pension world. Might they do the same with health insurance and never offer an employer plan?
Of course, nothing here is easy to predict—not least because further reform is inevitable given Congress’s unwillingness to seriously tackle the unsustainable growth
Still, there are solutions to this problem within a problem within a problem.
The most important step is to accept the standard of equal justice. Move toward a system where everyone with the same income is eligible for the same size subsidy. This means integrating new and old subsidies, rather than forcing millions of workers and employers into shifting jobs and sources of insurance coverage to game a multilayered and distorted system of subsidies.
Done the right way, I believe that Congress could get more equal justice, higher levels of basic insurance coverage for Americans, and lower costs all in the same package.