GOP’s “repeal and replace”—curbing tax exclusions for employer-based coverage

As I previously noted, conservative health policy analysts James Capretta and Robert Moffit have now provided one of the best available roadmaps to Republican proposals to replace ObamaCare.  I noted six critical passages that deserve attention. I considered the first principle–moving from defined benefit to defined contribution–in my last post. I’m now going to go slightly out of order and consider principle #3 first:

3.       In the context of employer plans, this approach would mean moving away from the unlimited tax break that is conferred on employer-paid premiums, and instead providing directly to workers a fixed tax credit that would offset the cost of enrollment in the private insurance plans of their choice.

It’s hard to give a clean thumbs-up or thumbs-down here. Principle #3 commands considerable support from experts on both sides of the aisle. Democratic and Republican policy experts from Martin Feldstein to Douglas Holz-Eakin to Jon Gruber agree that tax subsidies to employer-provided coverage bring significant ill effects. The Congressional Budget Office reports:

The exclusion of employers’ contributions for health care, health insurance premiums, and long-term care insurance premiums is the single largest tax expenditure in the individual income tax code; including effects on payroll taxes, that tax expenditure is projected to equal 1.8 percent of GDP over the 2013–2022 period.

It is hard to justify such large tax expenditures on the grounds of either efficiency or equity. From an efficiency perspective, these policies encourage many people to over-insure, and thus to make inefficient use of medical services. From an equity perspective, these tax expenditures are poorly targeted.  The Pollack household, for example, receives more than $5,000 in the form of reduced income taxes as a result of these policies. Our school’s less-affluent support staff members receive notably smaller tax benefits than I do, even if they purchase identical insurance policies.

This is a politically sensitive issue. Provision must also be made for certain high-risk occupations and for other special circumstances. Public and private unions have made wage concessions in return for generous insurance policies. Curbing or capping these tax expenditures would ding affluent and upper-middle-class people, whose desire to eliminate loopholes and to reduce moral hazard in the provision of health coverage may falter once people realize their personal taxes would go up.

I thought that the Affordable Care Act’s Cadillac tax provided a reasonable compromise in curbing tax subsidies to high-cost insurance plans. President Obama and Democratic leaders get too little credit for this valuable but unpopular cost-control measure, which was enacted over the heated objections of traditional Democratic constituencies.

I do have another major qualm about Capretta and Moffit’s plan, which so explicitly seeks to erode our traditional system of employer-based coverage. It’s now fashionable to label employer-based coverage an unfortunate accident of history, a practice that only exists because of quirks in the Internal Revenue Code. There’s certainly a lot wrong with traditional employer-based coverage. The most obvious problem is that families lose access to affordable insurance at the precise moment in which they are most economically vulnerable: when someone loses a job.

Alongside these difficulties, though, it’s important to note the benefits of employer-based coverage. As Paul Starr relates in his terrific Remedy and Reaction, employer-based coverage started in earnest during the 1930s, through early Blue Cross plans. Large firms offered economies of scale in administration. They provided stable and favorable risk pools which made possible de facto community rating and guaranteed-issue health coverage for much of the American workforce and their families. Large firms also provided an important function as reliable purchasing agents for their workers.

Millions of people today benefit from such arrangements. Yet as Aaron Carroll notes here, America’s system of employer-based coverage is now unraveling. A nice new paper in Health Services Research by Hao Yu and Andrew Dick documents the strong link between declining coverage and escalating health care costs, particularly in the second and third quartiles of the income distribution. These authors also document rising out-of-pocket costs that arise for similar reasons.

Efforts that further unravel employer-based coverage—such as candidate McCain’s 2008 plan—will prove harmful if these concerns were left unaddressed. To their credit, Capretta and Moffit would start with workers at small firms. I remain concerned about the long-term trend, especially because proposed policies would be coupled with efforts to move workers into “low-premium, high-value” plans. Such an approach would be especially problematic for older or sicker workers who are now well-served by many employers.

Providing workers with a fixed tax credit to buy outside coverage will only improve the system if workers enjoy secure access to properly regulated coverage, within a framework that ensured everyone reliable access to affordable coverage with due protections for individuals with high expected treatment costs.

In other words, this path requires something like the new exchanges established under the Affordable Care Act. For reasons I will discuss later, I’m not confident that Capretta and Moffit would create the robust exchanges that their policies require.

Austin Frakt, among others, has argued that conservatives should embrace ACA, which is as much a step toward their preferred market-based reforms as they are likely to get. On the substance, ACA actually is the bipartisan compromise many political moderates had hoped for in comprehensive health reform.

Republicans may conceivably gather the votes (in Congress and on the Supreme Court) to strip ACA’s expanded insurance coverage and financial supports that help low-income people. I doubt they can do the same in enacting serious cost-containment efforts disliked by concentrated interest groups and by older, more affluent constituents at the core of the current Republican coalition.

Especially in this policy arena, a more moderate approach would escew “repeal and replace” with “retain and revise.” Unfortunately, that’s not the world we live in.

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