• The Republican Study Committee has a “replace” plan.

    The following is jointly authored by Aaron and Austin

    For years now, we have heard that those opposed to Obamacare had a plan to “repeal and replace” it. They’ve certainly been working on the “repeal” part. In fact, some House Republicans are willing to shut down the government, if not risk U.S. default on its debt obligations, if Obamacare is not repealed. So, we know what they’re against, but what are they for. We’ve not heard a word about “replace”.

    That’s not terribly surprising. Reforming the health care system to cover more people and to reduce the rate of growth of health spending is hard. The Affordable care Act (ACA), love it or hate it, was designed to do these things. It reforms the individual insurance market through exchanges and provides subsidies to those with low to moderate incomes to help them purchase insurance. It also includes some reforms aimed at lowering the rate of growth of health care spending, though it is not yet clear to what extent it will do so. The law was designed to balance its costs (coverage expansion) with reduced health care spending (Medicare payment cuts) and new revenue (taxes).

    The law’s opponents have claimed it costs too much, will result in rationing, and limit freedom. Today, a group of House conservatives presented their version of a replacement plan, endorsed by the Republican Study Committee. In short, it throws poor Americans under the bus.

    The centerpiece of the plan is a universal, standard tax deduction of health insurance premiums, up to $7,500 for an individual and $20,000 for a family. This would level a playing field that is uneven today.

    Today, only insurance purchased through work is tax deductible. People who don’t get insurance through their jobs don’t get a deduction.

    There are two problems with the House plan though. The first is that it will obviously cost a lot of money. How much is not clear, but it won’t be insignificant. How will that be paid for? The second is that a tax deduction is much more valuable to someone who makes a lot of money than someone who makes little. But people with large incomes aren’t the ones who need help affording coverage. It’s those at the lower end of the socioeconomic spectrum who need the most assistance. Because of their low marginal tax rates, a tax deduction is of very little help.

    Sick Americans would receive very little help under the plan too. One of the ways the ACA helps the sick is by eliminating the ability of insurers to refuse to cover them (guaranteed issue) or to charge them more for being ill (community rating). The House plan weakens the guaranteed issue protection by extending it only to those who have continuous coverage. If you dropped (or were forced out) of prior coverage, you may not be able to get back in the market.

    For sick Americans, it replaces the ACA’s protections with a high risk pool in which premiums are capped at 200% of what healthy people pay in the rest of the market. To help offset the cost, the proposal sets aside $25 billion over 10 years. Still, sick people will pay very high premiums. If they become poor due to loss of work from their illness, they still have to pay those high premiums, or go uninsured.

    The plan includes a number of provisions that would encourage and expand the use of health savings accounts (HSAs). These are personal accounts that can be used to buy health care services or pay cost-sharing tax free. Again, the favorable tax treatment is of very little value to low income Americans. Moreover, low income Americans don’t have a lot of money to put aside for their future health care use. HSAs might be a helpful step. But they alone won’t help everyone.

    The rest of the proposal is a grab bag of old ideas that cannot work well as sketched out, won’t do very much, or are wasteful giveaways. For example, allowing insurers to sell policies across state lines would invite a “race to the bottom.” In time, all insurance would originate from states with the least regulation. The policies will be cheaper. But they’ll also be skimpier. They’ll be great if you’re young, healthy, or wealthy enough to afford to fill in the coverage gaps. They’ll be terrible if you are older, have a chronic condition, or, again, if you’re low income.

    The plan would reform medical malpractice by capping damages. However, studies show, malpractice suits doesn’t contribute as much to higher health spending as people think.

    Finally, the plan includes giveaways to the wellness industry, increasing the amount by which plans can increase premiums for those who don’t meet health standards. This is unlikely to do more than make sick people pay more for coverage. It would also permit gym memberships and nutritional supplements to be purchased tax free, up to a cap. These are giveaways to the fitness and supplements industry, as well as to people at the higher end of the socioeconomic spectrum who are more likely to go to gyms and use supplements anyway.

    There are some other provisions, including removing government support for comparative effectiveness research, but these are the high notes.

    The Affordable Care Act is intended to help people who don’t have insurance, especially those who are less than healthy, get it. The House proposal is intended to make insurance cheaper and easier to get if you are healthy.

    We understand that putting together a health plan is challenging. Nothing good comes without limitations and costs. That’s true of the House plan as well as the ACA. But if you’re committed to coming up with a way to expanding coverage while preserving the private insurance market, at least the ACA follows an established model. It happens to be how Massachusetts did it. It’s how Switzerland did it. And it’s how the conservative Heritage Foundation suggested doing it in 1989.

    The House is claiming it has a new way. But to us it only looks like a way back to the same problems that plague the system today.

    @aaronecarroll and @afrakt

    • It’d be much more efficient to allow the non-poor to purchase health insurance of their choosing in a liberalized market, and secure access for the very poor and the very sick with targeted subsidies funded through appropriations from the general fund.

      It simply doesn’t make economic sense to distort the entire insurance market for the vast majority of the population who are neither poor nor gravely/chronically ill into a mechanism engineered to indirectly subsidize the costs of those who are. What you get in practice under such a regime is *vastly* more wasteful spending by, and subsidization of, the health-care consumption of the non-poor and the non-sick than you do savings by or subsidization of the care for the poor and the sick.

      Seems like the deficiencies that you cite in the plan could be addressed by incorporating income and health indexed transfers (into HSA’s and against high premiums), in order to preserve access for the the sick and the poor. If you disagree, I’d be interested in hearing why.

    • The Republicans are in a dilemma of their own making. Once ACA’s broad provisions become effective next year, ACA will likely become very popular. Yet, every Republican (save one Republican Senator who voted present) voted against ACA. How will Republicans explain to voters their singular opposition to a very popular law. They can’t, and must resort to any measure, any tactic, to avoid ACA becoming effective. The alternative is to work with Democrats to fix the flaws in the law, and then take credit for saving Americans from the Democrats’ bad law. I’d bet Obama and the Democratic leadership would even give Republicans credit for saving the day. Up until today’s proposal, Republicans had chosen Armageddon as their strategy. Now their alternative is deception and subterfuge. Granted, it’s a better strategy than Armageddon. But it’s a little late (less than two weeks before the exchanges ramp up) to offer a complex alternative that would take a year or more for Congress to consider. Of course, that’s the intent: run out the clock before ACA becomes effective and hope for a Republican sweep the next election.

      • I actually think that the Republicans will pay only a small price (if any) for opposing the ACA, even its effects are broadly popular. Medicare has proved to be extremely popular, but what political price did Ronald Reagan ever pay for shilling for the AMA when it opposed the bill that became Medicare? How many elderly Tea Partiers protesting against the ACA because of its Medicare cuts even know that their great political hero was so opposed to Medicare?

    • Can’t wait for a CBO score on this on the deficit effect and coverage expansion.

      It seems like a whole bunch of tax cutting and a little bit of spending without a dollar in revenue to cover it.

      Of the 50 million uninsured, a small fraction will get coverage, and certainly nothing close to the 5 million kids staying on parents policies and millions more in the loss of Medicaid expansion in the ACA.

    • “The second is that a tax deduction is much more valuable to someone who makes a lot of money than someone who makes little.”

      The solution to this is – as part of tax reform – to convert “squishy” personal exemptions and itemized deductions into non-refundable tax credits. The adjective squishy recognizes that these are often personal decisions unrelated to earning “income” subject to income tax. From a policy perspective, it’s hard to justify a high income earner getting a larger personal exemption than a low income earner when it’s granted based on whether the person is alive! In essence, if government is going to grant a tax subsidy, the benefit should be equiv alent regardless of income level.

      BTW, it also raises a large amount of tax revenue if the tax credit rate is set at the lowest income tax rate bracket. I just happen to have a link to a tax form in an exotic foreign country. The tax credit rate is set at 15% (line 31 on the tax form) for all taxpayers (charitable contributions are also subject to the 15% tax credit rate increased for lower amounts of donations. There is ZERO home mortgage interest and property tax deduction.)

      • @Don Miller: what hellish, post-apocalyptic nightmare state is that form from? Surely it would be the end of liberty to stoop so low.

        In terms of the plan, I am unclear why eliminating government support for comparative effectiveness research would save money? Unless the results of this research are completely unreliable, it would seen to be important to understand if expensive new procedures result in better outcomes.

        Nor do I really understand why bargaining can’t be part of the package. The individual consumer likely lacks information and perspective to make informed decisions at the point of a crisis. If we want to add to this burden than wouldn’t non-partisan CE research be more important? It would be one thing if they went for major medical (sudden heart attack) as a separate category than routine medical costs (daily statin pills). I would still be skeptical that the routine care wouldn’t end up reducing costs but there would be at least an argument. But how can you bargain effectively for unexpected emergency care?

    • One clarification/correction: Health coverage received through an employer is an EXCLUSION from gross income, not a deduction. I haven’t read the Republican plan (yet) so I don’t know if the plan treats the cost of individual coverage as an exclusion but if it indeed treats the cost as a deduction, only those tax payers who itemize will benefit from it. It might make more people itemize but those who don’t do not benefit from it.

    • I cannot understand why conservatives support turning health insurance into interstate commerce, which would then be subject to federal regulation. You would think they would prefer to leave it in the hands of state insurance regulators.

    • From the above summary:
      “The House plan weakens the guaranteed issue protection by extending it only to those who have continuous coverage. If you dropped (or were forced out) of prior coverage, you may not be able to get back in the market.”

      From the executive summary:

      “The bill also guarantees that individuals with pre-existing conditions can move between the large group, small group, and individual health insurance markets, so long as they maintain continuous coverage. Under current law, individuals purchasing insurance in the individual market are protected from pre-existing condition exclusions only if they have not had a substantial break in coverage, their previous coverage was through an employer, and they fully exhaust COBRA coverage. This provision would allow individuals to receive those same protections regardless of the source of their prior coverage and without requiring them to
      exhaust COBRA coverage, which is often very expensive for both employees and employers.”

      I like the proposed change relative to the existing law, but the authors should really contrast this scenario with the alternative under the ACA rather than the soon-to-be void statutes.

    • From the executive summary:

      “Those with a qualifying health plan will receive an SDHI of $7,500 (individuals) or $20,000 (families) which will apply to income and payroll taxes, and will increase at CPI-U. The SDHI eliminates the current incentive to choose increasingly expensive plans by providing the full value of the deduction regardless of how expensive the plan is. For example, a family with a $15,000 plan would receive an additional $5,000 tax deduction.”

      Anyone have a guess as to how this would pan out in practice for those who pay insurance premiums and payroll taxes but who either pay no federal income taxes or are subject to a negative Federal income tax via the EIC?

    • Prior to the ACA, all states had a high risk pool which anyone nearly any sick, uninsured person could qualify for. There has been medicaid for the poor since the sixties. The ACA eliminates the high risk pools, alters Medicaid and creates this massive kludge of a program. If there is a portion of the population that is too rich for medicaid but too poor for private insurance and the high risk pools then vouchers are one option that could have been used.

    • If the Republican proposal calls for only $2.5 billion per year to support high risk pools, then this is not a serious proposal.

      The short-lived high risk pool from 2010 to 2012 had less than 200,000 participants, and it burned through $5 billion in just two years.

      The Republican numbers cited in this post are kind of a bad joke.

      Bob Hertz,The Health Care Crusade

    • I suspect Republicans don’t appreciate how many people will end up in high risk pools. My family is pretty healthy, but we’ve had to argue away several pre-existing condition exclusions when applying for individual insurance. We accepted one, fairly minor, exclusion.

      So, it’s not the chronically ill are the only people facing exclusions, I wouldn’t be surprised if a quarter of the population ends up with them.

    • Actually less than 20 states had high risk pools before 2010, if you define a pool as taking in all applicants without waiting lists and charging a premium that at least some persons could afford.

      The other states had either no pool, or a pathetically small pool with virtually no subsidies.

      That is because state legislators were very stingy about using general funds to help the uninsured. Even in a liberal state like MN, the pool was at first funded by a tax on providers not general revenue.

      The numbers are daunting. Say that in the Republican plan, a high risk pool is allowed to charge 200% of normal premiums. If the normal premium for individual coverage is $5000 a year, the high risk pool would be allowed to charge $10,000 a year.

      Even then the pool would need tax money. The average particioant in the MN pool used to cost $12,000 a year. In the short lived federal pool, the average participant cost almost $30,000 a year due to pent up demand for expensive procedures.

      The Republican theory is not all bad. They notice that if you force regular health plans to give up all underwriting, the premiums will go up for everyone. Their alternate theory is that you let the insurance plans exclude the sick, which keeps premiums moderate, but then you help the sick persons get coverage in the high risk pool.

      In effect, you let the young person keep his underwritten health insurance for $100 a month, but you tax that person to fund the high risk pools.

      Well OK, but you have to actually raise taxes! A full blown national high risk pool would need at least $80 billiion in subsidies each year.

      Bob Hertz, The Health Care Crusade

    • I’m baffled by the “race to the bottom” argument. Is this what we observe in auto, life, homeowners insurance? Why would we expect things to be different in health insurance?

      I, for one, would greatly favor a market in which INDIVIDUALS rather than POLITICIANS get to decide on the laundry list of benefits to be included in my health insurance policy. Just as foreign competition brought very welcome relief to consumers (lower prices, better cars), a New Yorker being able to buy a health plan stripped of the egregiously long list of mandated benefits that have been grafted on over decades n a process of political cronyism run amok will benefit from rather sizable premium savings.

      Up to one quarter of the uninsured has been shown in several studies to be attributable to the higher costs of mandated health benefits. To the degree that being able to buy policies across state lines alleviates that burden, that single provision alone has the potential to cover about half the number of uninsured as Obamacare will.

      For the record, Switzerland provides universal access to private health insurance: there is no Medicaid or Medicare program. EVERYONE buys private health coverage with a single rational set of income-related subsidies. Imagine the hue and cry from progressives were anyone to try and take the American health system in a similar direction. In reality, Obamacare is a very far cry from the Swiss system and suffers quite badly in the comparison. For example, the Swiss wouldn’t be stupid enough to create the huge labor market distortions that will result as Obamacare unsuccessfully tries to preserve a firewall between employer-based coverage and the Exchanges.

      • “For the record, Switzerland provides universal access to private health insurance: there is no Medicaid or Medicare program. EVERYONE buys private health coverage with a single rational set of income-related subsidies. Imagine the hue and cry from progressives were anyone to try and take the American health system in a similar direction. In reality, Obamacare is a very far cry from the Swiss system and suffers quite badly in the comparison. For example, the Swiss wouldn’t be stupid enough to create the huge labor market distortions that will result as Obamacare unsuccessfully tries to preserve a firewall between employer-based coverage and the Exchanges.”

        No, Switzerland requires everyone to buy health insurance.

        It does this through a combination of subsidies based on income and regulations that require insurance is affordable to everyone and strict regulations regarding what insurance is required to cover.

        Imagine the endless keening wail from conservatives if such a system was put in place here.

        Oh, wait, it was in many ways under Obamacare, and the wail can still be heard years after.

    • From what I’ve read, Georgia’s legislation to allow cross-state sales of health insurance failed: no out-of-state plans participated. How easy is it for an insurer to set up a narrow network in another state that is more affordable than local options? It would take a long time for it to build the volume it would need to have leverage with providers. How easy would it be for in-state plans to protect their turf?

      I agree with the comment that there is a huge irony in the Republican position to cede state regulation of health insurance to the federal government. Principles of Federalism are great until they run counter your preferred policies. One might think that a suit against the initiative on the grounds of interstate commerce might win. Could you think of any large insurers who would file that suit?

    • Switzerland is a high wage country. The number of persons who need signficant subsidies is probably much, much smaller in percentage terms than America.

      Switzerland also has national fee schedules, which hold down the price of insurance. Switzerland has functioning risk adjustment programs, wherein the insurance companies with healthier populations subsidize all other insurers. Switzerland also devotes some general revenues to hospital costs, so that insurance does not need to pay the entire loaded cost of a hospital stay.

    • @Austin:

      You may find the paper below interesting, if you haven’t already read it.

      “Optimal Healthcare Spending with Redistributive Financing
      May 6, 2013
      Mark Shepard
      Department of Economics, Harvard University
      Katherine Baicker
      Harvard School of Public Health, and NBER
      Jonathan Skinner”