Building a New Era of Governance – Part 2

6) Continue with efforts to reform the healthcare system.  Love it or hate it, the Patient Protection and Affordable Care Act (PPACA, e.g. Obamacare) is here to stay (sorry Project 2017); at the very least, the law will not in its entirety be repealed.  The myriad subsidies, tax credits, and benefit requirements are far too popular; to repeal them would be political suicide.  What Congress needs to do now is to focus on modulating and improving upon what already exists.  Obamacare goes a ways towards addressing the pre-existing deficiencies in the system (although in an arguably inefficient and potentially self-defeating, if not destructive, manner).  These deficiencies are not hard to identify.  American healthcare is outrageously expensive (see below), and too few people have access to the system (anomalies which are very much related, via the effects of adverse selection).  Those who do have access (especially those on employer-sponsored plans) then face rigidities such as a lack of portability and increased dependency upon a single employment setting.  Obamacare generally does a pretty good job at addressing the lack of access to care; already, it has significantly boosted insurance rates via expansions of Medicaid and the provision of individual and business tax credits/subsidies.  The renewed ability of individuals to purchase insurance has also addressed the portability issue.  However, its record on holding down long-run costs appears to be more mixed.  It has provisions that simultaneously place downward and upward pressure on costs.  For the former, the individual mandate should help by increasing the pool of healthy individuals contributing to the system (countering adverse selection), offsetting the costs of newly-enrolled less-healthy individuals.  Additionally, the law contains numerous “experiments” designed to hold down costs, such as the creation of “bundled payment plans” as opposed to the traditional fee-for-service payment model (which rewards doctors on quantity, not quality, of services rendered).  At the same time, the law contains many expensive provisions, such as the prohibition of lifetime caps on benefits and new restrictions on varying premiums based on certain risk factors.  Thus far, costs have leveled off in recent years; then again, we did go through a massive recession that put a dent in demand for health services, and spending growth has been rising as of late, albeit very modestly.  Regardless of Obamacare’s impact on cost growth in particular, an ageing populace and the continued existence of marketplace distortions calls for continued efforts to make health spending more efficient and cost-effective.  I think that Republicans in Congress can pursue policy options that are both effective and politically sustainable.  They include the following:

In both relative and absolute terms, the United States spends far more resources than other countries on healthcare (source: vox.com)

 

The growth in healthcare expenditures has slowed in recent years, though its permanence has yet to be determined

The growth in healthcare expenditures has slowed in recent years, though its permanence has yet to be determined

PPACA has had a dramatic impact on the nation's uninsurance rate

PPACA has had a dramatic impact on the nation’s uninsurance rate

a) Repeal the Cadillac Tax, replace with a gradual phase-out of the tax exclusion on employer-sponsored insurance premiums.  While FDR’s World War 2 wage and price controls arguably created the present-day Employer Sponsored Health Insurance (ESHI) system, this policy has no doubt been greatly aided by the Federal government’s decision to exclude employer sponsored insurance from taxation (and kudos to Ike for making it open-ended in 1954!).  By excluding fringe benefits from taxation, the federal government has virtually subsidized the provision of employer-sponsored insurance.  From both an employer and employee perspective, $1 in healthcare is much more cost-effective than an additional dollar in wages.  This has led to costlier plans, and an increasing proportion of overall compensation being dedicated to benefits (as opposed to wages).  Adding insult to injury, the same tax benefits do not apply to individual plans, which are typically purchased using after-tax income (although Obamacare has implicitly equalized this a bit via the provision of subsidies and tax credits for individual plans).  To try and further “equalize” treatment, the authors of PPACA included the phase-in of a 40% tax on “Cadillac” insurance plans, specifically the cost of plans that exceed pre-determined thresholds (about $10,200 for individual coverage and $27,500 for family).  I see this tax as very arbitrary – 40% on randomly selected amounts, that has no guarantee of “equalizing” tax treatment between ESHI plans and individual plans.  The thing is, we already have taxes in place (federal income & payroll taxes) that could apply to these premiums; it’s just that the government has exempted them completely.  In addition to its failure to equalize treatment and how unnecessary it is, it also does not raise anywhere near as much revenue as a hypothetical full repeal of the ESHI tax exemption would.  The Cadillac tax is estimated to raise about $80 billion between 2018 and 2023 – a six-year period.  Meanwhile, the ESHI exemption in totality costs the federal government a whopping $250 billion every single year.

The tax exclusion of employer-sponsored health insurance is by far the most costly federal tax expenditure

The tax exclusion of employer contributions to ESHI is by far the most costly federal tax expenditure

I see this as a prime opportunity for Republicans to claim credit for killing a tax (the Cadillac tax) while simultaneously making the tax treatment of healthcare more sane and raising the government badly needed revenue.  What they could do is enact legislation that repeals the Cadillac tax in its entirety, but simultaneously places caps on the tax exclusion equal to the thresholds imposed by the Cadillac tax.  In this way, benefit amounts exceeding $10,200 for individual coverage and $27,500 for family coverage will be subject to normal taxable income.  Unlike other proposals, though, I would move for these threshold amounts not to be indexed to price changes whatsoever – be it a measure of inflation, a flat rate, etc.  In this way, more and more plans will gradually be subject to the tax (much like bracket creep of the 1970s) so that the discretionary impact of the exclusion can be tempered over time.  Better yet, have the thresholds lowered on an annual basis so that eventually all “fringe” benefits will be taxed, and there will be no implicit subsidization of ESHI.  Of course, an elimination of the biggest single tax break in the federal tax code would produce enormous backlash in and of itself; indeed, it would be rather hefty tax hike.  That’s why I think the Republicans should also consider using some of the revenue generated to lower marginal tax rates (one of their favorite pastimes); any potential revenue left over could be used to lower the deficit and perhaps expand insurance subsidies for the poor and middle-class elsewhere (which would be especially appealing to Democrats).  Combined with a repeal of the (more visible and unpopular?) Cadillac tax, I think this could be a politically palpable solution.  It will help eliminate artificial demand for healthcare and give the many types of insurance options equal – as opposed to preferential – treatment.

b)  Force (or nudge) states to dismantle barriers for the purchase of insurance across state-lines.  This is an area where federalism & devolution has failed – and the federal government ought to step in.  Other than for the appeasement of insurance companies, there is no reason states should restrict consumers from purchasing policies from out-of-state companies.  This has had the effect of creating localized insurance monopolies that have artificially driven up costs.  Sure, it will take time for interstate insurance provider networks to materialize; but it’s better to start now than to continue with the status quo.  Republicans really shouldn’t encounter as much resistance from Democrats with this measure; after all, Obamacare intentionally created state-level exchanges where consumers can “shop” for different policies, with the intent that (perhaps one day) a single national exchange or market could be created.  However, Republicans may run into arguments that this will cause a decline in benefit standards as consumers seek the most cost-effective policies; however, shouldn’t Obamacare’s minimum benefit provisions (that differentiate plans into bronze, gold, silver, etc.) create a floor on a substantial portion of policies?  And if not, Congress could always mandate a bare minimum of standards to create a floor under state floors (though this would probably lead to a conservative backlash; the party establishment must proceed with caution).

c) Medical malpractice reform.  Yup, it’s a relatively small part of the overall cost picture, but even Democrats have to admit that $45 billion a year in defensive medicine is a bit much (even if a portion of it is “worthwhile”.  Although it might work better at a state-level, federal policies such as enacting caps on total payouts, raising the thresholds to file suit and concepts such as “loser pays” could all do their bit to reigning in excessive medical malpractice costs.

d) Promote cost transparency.  Obamacare has already done a wonderful thing by mandating that employers report insurance costs on employee’s W-2 forms.  This has helped in the process of getting employee’s “skin in the game”, so that they are congnizent of costs that otherwise feel disconnected  from them (what a revolutionary concept).  Congress ought to expand the variety of benefits that require W-2 reporting, and could try to find additional means for cost information to reach consumers directly.  Of course, it must be mindful of the unintended consequences of such mandates, as reporting consumes time & resources in and of itself.  Again, since transparency provisions already passed Obamacare in its original form by an overwhelmingly Democratic Congress in 2010, I don’t see why further transparency provisions can’t be a bipartisan effort.

e) Temporarily increase Disproportionate Share Hospital (DSH) payments to hospitals.  Right now, hospitals across the nation are straining to provide uncompensated emergency care for millions of uninsured Americans, care that the federal government partially pays for via DSH payments.  Unfortunately, these payments are usually not enough, forcing costs onto general insurance premiums.  As Obamacare expands and insures more people, this problem should theoretically ease somewhat, and the strains on DSH should ease.  Nonetheless, this insurance expansion in incomplete (especially since not all states are on board with expanding Medicaid), and may not be enough to substantially reduce the strains on the already overburdened DSH payment system.  So why would conservative Republicans have an incentive to increase federal spending?  Quite simply, higher DSH payments could indirectly ease insurance premiums for millions of people (allowing for less private-level “redistribution” from the insured to the uninsured”, and costs could be lowered for the federal government too in a way that offsets the increased spending on DSH.  Expanded DSH would also be appealing to Democrats, as it would serve to benefit one of their core constituencies (the uninsured poor).  It is one of those times when less requires more.

f) Loosen federal restrictions on Health Savings Accounts (HSAs).  I see HSAs as a part of the solution to get people to have skin in the game when it comes to healthcare spending.  When combined with high-deductible health plans, HSAs establish a connection between medical spending and personal savings that can help to curb the consumption of excess medical care.  The Federal government should lift existing statutory contribution limits and abolish all taxes that apply to HSA withdrawals, including for so-called “non-qualified” withdrawals.  The latter option, in addition to being more fair, would help to eliminate distortionary tax-minimizing behavior that could actually inflate health spending.  HSAs go along with the conservative notion of individual responsibility (which might explain their strong support by Republicans), and certainly Democrats shouldn’t be opposed to an increase in savings accounts (especially considering Obama’s proposed myRA retirement accounts).

g) Eliminate the Employer Mandate.  One of Obamacare’s most controversial provisions is that employers with 50 or more “Full Time Employees” (FTEs) provide them with health insurance or pay a penalty.  An FTE is defined as someone who works 30 hours or more.  This has lead to huge disagreements over the provision’s impact on the labor market, with critics claiming that this provision is weakening the 40-hour workweek by incentivizing employers to cut back on workers’ hours to avoid the mandate and associated penalties.  Proponents have countered that most workers already work more than 40 hours a week, and thus are at little risk having their hours drastically cut to below 30/week.  In response to a recent bill to move the threshold from 30 hours to 40 hours, these proponents have also said that this bill makes cuts in workers’ hours much more likely, as so many work 40 hours (or a little more) per week.  Both sides have points; but really, it almost doesn’t matter.  The employer mandate, like much of Obamacare, creates arbitrary thresholds that threaten to severely distort the economy and strangle business decisions.  The 50 FTE threshold has already led to an increase in “49er” businesses, who artificially limit their employee count to less than 50 to avoid the mandate and payment of penalties.  Additionally, I feel the employer mandate exacerbates an existing major problem with American healthcare: the very fact that so much of it is provided by employers!  This 4th-party payment system is incredibly non-transparent and non-portable, disregarding the economies of scale it provides via pooling, and explains a major part of the cost dilemma.  As such, I think the mandate deserves repeal.  Since Republicans will obviously fail at repealing the law, they might as well go after a single provision of it to incrementally enact positive change.  Although repeal of the mandate is also likely to fail, it is still worth a shot, especially considering how the new 114th Congress has already decided that targeting the mandate will be one of its first legislative acts.  Perhaps this will also give some Democrats who are weary of the net impact of Obamacare to finally demonstrate their political independence from a surprisingly unpopular law.

The Unfinished Business of Healthcare Reform

I plan on finally resuming regular postings on here by next week.  Before I begin, however, the following is a post I made in January 2013 on MSU Roosevelt Institute’s blog.  It argues that healthcare reform in the United States is far from finished, and proposes that new federal measures be enacted to help address chronic deficiencies within the system.  While it is certainly not comprehensive, and does not necessarily reflect my current views on what needs to be done in regards to healthcare, it still provides a good framework for an in-depth discussion on the subject.

 Of the many issues facing the United States today, few are as controversial as the issue of healthcare.  For years, debates have raged across the country as to how to properly address perceived deficiencies within America’s healthcare system, with opinions severely polarized as to how healthcare should be delivered, payed for, and what role (if any) the federal government should play. The recent passage of the Patient Protection and Affordable Care Act (PPACA) on March 23, 2010 seems to have only intensified the debate further.  This should not be viewed as a negative consequence, however; quite the contrary.  For healthcare reform is – and should be – an ongoing, gradual process; no single action can solve all the problems immediately.  Indeed, given the importance of an adequate healthcare system to the well-being of societies everywhere, it would be desirable for the debates to become a regular part the national status quo.  Truly, the importance of a good healthcare system cannot be understated: not only does it help to increase the overall health and wellbeing of a nation’s citizenry, but it also helps to ensure that they remain active and productive members of the economy as well.  It is this higher productivity that is vital for sustained economic growth and higher living standards for everyone.  Unfortunately, as any American will readily admit, the US system does have some serious flaws that threaten this vision unless bold modifications are undertaken.  Specifically, these flaws include exceptionally high healthcare costs (and high cost growth rates), a glut of uninsured individuals, a lack of insurance portability, and perceived threats to quality.  Despite the passage of PPACA (whose vices & virtues this post will not be discussing), many of the roots of these overarching weaknesses remain unaddressed.  What are they, then?  Although the causes are many, three of them especially stand out.  First, because the federal government has exempted employer-sponsored healthcare benefits from an employee’s taxable income, many employees are encouraged to select more health insurance/costlier coverage as opposed to higher wages, and effectively feel insulated from the cost (thinking they are spending someone else’s money).  Because this tax exemption does not apply when people attempt to buy individual insurance, the federal government is also effectively incentivizing people to stick with employer-sponsored insurance as opposed to the (more portable & transparent) individual insurance plans.  A second major cause of the US’ healthcare problems is the inability to buy insurance across state lines.  This effectively creates localized monopolies that drive up the price of insurance.  Lastly, the negative consequences of American eating & exercise habits are a major burden on the system.  Given the entrenched nature of these causes, it is naturally quite difficult to find solutions that are deemed acceptable to everyone across the political spectrum.  However, because they address elements of concern for both sides of the aisle, the following proposed solutions, when considered, do have the potential to gain widespread support:

  • Remove the federal tax exemption for employer-sponsored insurance; cut income taxes to offset cost.  Repealing the distortionary tax exemption will decrease artificial demand for healthcare (thus lowering cost pressure, something both sides would like) and will encourage the individual purchase of portable plans. It has the added benefit of hitting high earners the hardest, which should make it more appealing to liberals.  A cut in income taxes to offset the cost would appeal to conservatives, and such tax cuts have the added benefit of being adaptable to maximize progressivity.
  • Encourage states to loosen barriers that prevent the out-of-state purchase of health insurance by offering them increased Medicaid funding in return.  Loosening barriers to allow cross-state purchases of health insurance would encourage competition between insurance companies, lowering costs.  These lower costs have the added benefit of offsetting the need for increased Medicaid funding.
  • Mandate and appropriate funding for the annual creation and delivery of specialized pamphlets that notify citizens of the importance of healthy lifestyles, allow them to easily estimate the impact their habits and choices have on both their own wellbeing and society’s, and offers guidance on the do’s and don’ts to becoming healthier.  The cost of funding should be offset by tax increases or spending cuts elsewhere in the budget.

When combined, such reforms not only have the potential to gain substantial bipartisan support, but will make great progress in permanently strengthening America’s healthcare system for many, many years to come.

– Tyler Leighton

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