Sunday, March 05, 2017

Bad and Worse Obamacare Repeal and Replacement Proposals

by Michael Dorf

Republicans in Congress are apparently divided over how to replace the Affordable Care Act, but they appear united on two crucial points about its repeal. First, they want to reduce subsidies for the purchase of health care so that they can cut taxes for the businesses and individuals whose taxes were increased in order to finance those subsidies. (A useful summary of the tax elements of the ACA can be found here.) Second, Republicans want to repeal the individual mandate for people who do not obtain health insurance through their employer or one of the government programs (chiefly Medicare, Medicaid, or the VA) to purchase health insurance via the ACA-created exchanges or the largely unregulated market that will likely replace the exchanges. Both alone and in combination, these core commitments of the "repeal" part of "repeal and replace" will make health insurance substantially less affordable and less comprehensive.

To balance the tax cuts with spending cuts, Congress will make less money available for subsidies, which will mean that fewer people will be able to purchase health insurance at all and the people who are able to purchase health insurance will receive inferior coverage, with high deductibles, low caps, and so forth. For his part, President "Nobody knew health care could be so complicated" Trump, who has not exactly been focused like a laser beam on the details of repeal-and-replace, has suggested that subsidies would not be lowered by the tax cuts because his low-tax and deregulatory policies will have such an enormous stimulative impact on the economy that tax revenue will remain constant or even increase despite the lower rates. Almost nobody on Capitol Hill takes that claim seriously, however, and if you do, I have a Laffer-curve-shaped bridge I would be happy to sell you.

The other GOP article of faith seems calculated to destroy the individual health insurance market. Recall that the individual mandate is the lynchpin of that system under the ACA, because without it, insufficient numbers of young and healthy people will sign up for health insurance. Why not? Because the most popular element of Obamacare (which many Republicans themselves claim to want to retain) forbids insurers from screening out likely high-cost enrollees based on pre-existing medical conditions. Retaining that prohibition without the individual mandate enables the young and healthy to go uninsured unless and until they need health care--at which point they can simply sign up. And that in turn starves the insurers of adequate funds to cover costs. Hence, the individual market following repeal would likely look much like it did before the ACA: very expensive and inadequate coverage, in some places supplemented by grossly under-funded "high risk pools."

Thus, the "repeal" half of repeal-and-replace would more or less return the U.S. health insurance individual marketplace to the status quo before the ACA. Combined with likely GOP cuts to and/or block-granting of funds for the ACA's Medicaid expansion, that would mean millions of Americans would lose the health insurance they gained under the ACA.

But wait! We haven't talked about the "replace" half. Would the replacement do better? The short answer is "how much are you paying me for that Laffer-curve-shaped bridge?" The longer answer is that a debate is shaping up within the GOP over how regressive to make the distribution of the grossly inadequate replacement plan. Still, as with the key parts of "repeal," there seems to be pretty broad agreement about the basics of "replace."

States, which already administer Medicaid, would be given still greater flexibility by Congress converting various funding streams with strings attached into block grants. In principle, that would not be disastrous, but because, as noted above, one key aim of the GOP plan is to reduce taxes, substantially fewer dollars would end up going to the states under the block grants, and in many states, Republican elected officials might divert block-granted funds that do end up making it into the state treasury from the poor and working poor who receive Medicaid now to programs that benefit more powerful constituencies.

Meanwhile, people who are currently eligible to purchase health insurance on the ACA exchanges would be given a cash subsidy instead. In some variants of the "replace" plans that have been discussed, these extra funds would be used to purchase health care directly, through medical savings accounts. In other variants, the funds would be used to purchase health insurance from a further deregulated market. As with Medicaid, in principle this sounds plausible, but two practical considerations doom the plans. First, given the tax cuts, the subsidies will surely be too small for most of the relevant people to purchase adequate health care or health insurance. Second, although consumer choice in competitive markets is an excellent way of delivering goods and services in most contexts, health care and health insurance are different due to the highly asymmetric information between sellers (whether health care providers or insurance companies) and buyers. Thus, no matter how the subsidies in the ACA replacement legislation are distributed, they will result in less widespread and inferior health care.

Despite GOP agreement on the broad outlines of the terrible replacement plan for the ACA, Republicans remain divided on a key issue: How to disguise the meager subsidies they do plan to provide as something other than subsidies. Given Republican orthodoxy about the evils of government spending, all of the plans under discussion rely on the pretense that there is a difference between giving someone a certain amount of money and cutting his or her taxes by the exact same amount of money. There is no economic difference with respect to any particular individual, of course, but the the three leading approaches have different distributional consequences.

The least awful plan--apparently supported by a majority of Republicans in Congress--would give eligible people "refundable tax credits." What is that? If the term is unfamiliar, it can be usefully illustrated by contrasting it with a non-refundable tax credit. Suppose that after filling out her tax return, a taxpayer owes the government $5,000. A non-refundable tax credit of $2,000 would simply mean that she pays $3,000 instead. This is obviously no different in economic terms from her paying the $5,000 and receiving the $2,000 back as a check. There can be good reasons for using a tax credit rather than a subsidy to provide the money: It eliminates an unnecessary transaction and can smooth out the availability of the money. There can also be a not-so-good reason: A tax credit can be described to the gullible public as a "tax cut" (😀) rather than as "spending" (😡).

Unlike a non-refundable tax credit, which goes to anyone who would otherwise have tax liability in excess of the amount of the credit, a refundable tax credit goes to people who do not have enough (or any) tax liability against which it is offset. For example, a refundable tax credit of $2,000 to a person who would otherwise have tax liability of $1,000 means that instead of paying $1,000 to the government, the taxpayer receives a check for $1,000. A refundable tax credit of $2,000 to someone who already has no tax liability results in a check to that person in the amount of $2,000.

If one thought that subsidies to taxpayers were a good way to address some social problem, refundable tax credits could be a sensible way of delivering the subsidies. Because people with lower income generally have greater need, one might want to decrease the size of the credit based on income, but at least from what has thus far been discussed, it appears that the refundable tax credits under consideration by Republicans in Congress are age-based rather than income-based. Just as a flat tax is not progressive, a non-means-tested refundable tax credit is also not progressive. But at least it isn't regressive.

That's more than can be said for the other two options under consideration. Apparently some of the hard-core conservatives in Congress oppose refundable tax credits because they are an "entitlement program." That's true, but if so, then the preferred options of these conservatives are also entitlement programs--just regressive ones.

It has been reported that some of the far-right conservatives in Congress who oppose refundable tax credits might accept non-refundable tax credits. An illustration reveals why this would be inadequate as well as regressive. In states that participated in the Medicaid expansion of the ACA, a single adult can earn up to 138% of the poverty line and be eligible for Medicaid. In 2017, the poverty line for such a person is annual income of $12,060. 138% of that is $16, 643. Let's suppose that Jim earns $17,000 annually and is thus not eligible for expanded Medicaid. Under the current tax law, Jim would owe ten percent income tax on the first $9,275 of taxable income. Assuming Jim doesn't itemize his deductions, with $17,000 in gross income, his taxable income would be $6,650. (That's the $17,000 minus a personal exemption of $4,050 and a standard deduction of 6,300.) So Jim has federal income tax liability of $665. If Jim can only receive a non-refundable tax credit but not a refundable tax credit, that means that the maximum subsidy for which Jim would be eligible to purchase health care or health insurance is $665. That's less than a third of the price of the cheapest, lowest-coverage, plan available. And that's for someone at the top of Medicaid expansion. For people in states without Medicaid expansion (or if the "repeal" portion of repeal-and-replace rolls back Medicaid expansion), the maximum available subsidy from an ordinary tax credit will be close to or at $0.

Some economic libertarians in Congress would prefer an even more regressive approach. Thus, members of the Freedom Caucus--the brave patriots and macroeconomic geniuses who brought us the debt ceiling crises of the Obama years--back a plan that would replace Obamacare with a $5,000 deduction for the purchase of health insurance. Very low earners would derive no value whatsoever from that provision because they don't need more deductions against their non-existent taxable income. Meanwhile, the more one makes, the more valuable the deduction is, because the progressivity of the income tax code's tax brackets translates into regressively for tax deductions.

So there you have it. The "replace" part of repeal-and-replace will be grossly inadequate and distributionally backwards. The only real questions are how grossly inadequate and how distributionally backwards. And to be clear, this is mainstream Republican cruelty. It is what the GOP would have done even with a normal Republican president.

Too depressing? Watch John Oliver's comedic take on repeal-and-replace from last week's Last Week Tonight below (or here):


David Ricardo said...

Thanks to Mr. Dorf for this excellent discussion of the issues. But as a Ph. D. in Economics with a substantial amount of work in health care economics I have to be candid here and say I have absolutely no idea of how the ‘advance refundable tax credits’ which appear to be what Paul Ryan and his leadership wish to push through the House will work. I can only assume it would be something like this.

Assume the new and improved (sarcasm) program starts Jan 1, 2018. For operational purposes it should be 2019 but conservatives may not allow that and even if they did the health care market could totally collapse in 2018.

1. At some time during 2017 an individual would file for the refundable credit to the IRS to be paid in 2018.

2. The credit would be divided into 12 equal payments, and on Jan. 1, 2018 and each succeeding month the monthly tax refund would be sent to the insurance provider designated by the taxpayer.

3. The tax payer would then make monthly premium payments to the insurer (assuming of course he or she could afford to do so).

Now that sounds workable, though not affordable for millions given the current parameters, but what about these situations.

1. A taxpayer loses coverage because they can no longer pay the premium. How does the Treasury find out the coverage has terminated and how do they get back any credits paid that should not have been?

2. A person wishes to start coverage in mid year. How does this get set up?

3. An employee is terminated and goes on COBRA. Do they get the subsidy and how does that work since the person is technically still in the employer’s group plan?

4. Will group plans no longer be required for some employers and will those employers end coverage sending millions into the private individual market?

5. What about the current Medicaid expansion enrollees who will be dumped into the private individual market? The will not be able to afford private plans, and will lose dental and vision services coverage that Medicaid provides but which private plans do not.

6. Will the health care providers who agreed to lower reimbursements in return for the individual mandate be allowed to go back to the old rates and how much will that cost? And if not how much will health care providers have to raise prices for the insured to recover from a huge increase in bad debt expense from treating the un-insured. What happens in 2019 when premium increases explode?

Okay, these are just a few of the unanswered questions. But we all know the end result, as Mr. Dorf has explained. Higher insurance premiums, less coverage, higher health care provider charges, chaos, less employer plans, huge tax relief for high income taxpayers. Exactly who voted for that?

Bob Hockett said...

Thanks, Mike. I certainly hope that the Dems will be as clear as you are in exposing what is afoot.

Also wish that the Dems - or even Trump - would insist on this - - as a precondition for any repeal, but of course they will not. [Frown-face icon.]

Shag from Brookline said...

I appreciate what are clearly good intentions on Bob's part with his:

"Also wish that the Dems - or even Trump - would insist on this - [link to an interesting article by Bob] - as a precondition for any repeal, but of course they will not."

The Dems most likely wish for this but they are in the minority in Congress. Might Trump wish for this because of what he promised during the campaign and after his election? Trump has been know to change positions. Bob's "they" does not refer to Republicans in Congress they control. So far, Republicans have not fully consolidated on their position. But between Trump and Republican controlled Congress, the repeal of Obamacare may be replaced with, as one wag put it recently, "Trumpscare."

David raises question of how complicated a replacement discussed by Mike in his post may be.

Joe said...

"Exactly who voted for that?"

Well, bottom line, you get who you get, even if the reason you voted for them was that you had a general distaste for Hillary Clinton and dislike various aspects of the PPACA. You trust the details with the likes of Paul Ryan, reasonable shot the result won't be that good. Who knew this was so hard though?

The HP article is interesting though not sure the proposal would get as much support as it suggests. One idea here would be to change the law so that along with other things, the Medicaid expansion would be universal again. I gather, going by the creative reasoning in the PPACA Cases (thanks Roberts, Breyer & Kagan!), this could be done if a whole new law is passed. But, maybe not.

ETA: More use of emoticons in posts .... positive development.

Shag from Brookline said...

If greater use of emotions result in medical issues, will coverage be provided therefor? Some who got insurance via Obamacare may react emotionally to Mike's post (and similar posts). Might there develop a "repeal and replace" medical diagnosis for some currently insured via Obamacare? Might some of them be part of Trump's base?

David Ricardo said...

The House bill has been released and because it is an amendment to PP-ACA rather than a new bill (so much for full repeal Republicans promised) it is almost impossible to tell exactly what it does until much more examination. But, and this is very important, it does spend a lot of time clarifying how lottery winnings affect eligibility for Medicaid, a real serious issue. However it does answer the question of how the House leadership will get budget hawks to go along with the cost. Here is what the propaganda from the House says on costs.

"How are you paying for this plan? How much is it going to cost taxpayers?

We are still discussing details, but we are committed to repealing Obamacare and replacing it with fiscally responsible policies that restore the free market and protect taxpayers."

Interpretation: We don't know how much it will cost, how it will be paid for, and we won't tell anyone until after it has passed."

Oh, and there will be no subsidies, which conservatives hate. Instead the advance refundable tax credits will be paid directly to insurnace companies to reduce premiums paid by the individual (but not till 2020, good luck folks on Exchange policies for 2018 and 2019). You can see how that is different from a subsidy which is a payment made directly to the insurance companies to reduce premiums paid by the individuals.

Are conservativs dumb enough to fall for this? You Betcha

Shag from Brookline said...

Is Trump's base dumb enough to fall for this? Will the Revengelicals fall in line because of sexual obsessions?

I'm intrigued by David's noting that this is not a new House bill but an amendment to PP-ACA. If it were to pass in Congress and signed by the President, would it be referred to as Obamacare or something else? In the unlikely case that the amended PP-ACA proved to be better than the former version, Republicans would object to it being referred to as Obamacare. But in the more likely case that the amended PP-ACA proved to be worse than the former version, then Republicans would want it to be referred to as Obamacare.