The Economics of Replacing Obamacare: The Good, The Bad, and The Ugly


ACRU Staff


June 2, 2014

This column by ACRU General Counsel Peter Ferrara was published on June 1, 2014 on

Republicans have not unified behind a single bill to replace Obamacare because conservatives have been debating among themselves exactly what the components of that bill should be. The ongoing collapse of Obamacare, economically and politically, is heightening the stakes in that debate, delaying matters.

But the replacement plan now emerging will broaden health coverage at least as much as Obamacare, which teased universal coverage but never delivered. Moreover, the replacement plan would actually reduce health costs (through tried and true market incentives, proven to work in the real world), again which Obamacare promised, but instead produced exactly the opposite. Indeed, the plan would do this while cutting government spending, taxes and regulation as compared to Obamacare. Just think of the historic political significance of the Democrat Left finally enacting socialized medicine, after fighting for it for over a century, and the country rising up in political rebellion to reject it, and replace it with free market medicine instead.

Jim Capretta, a Senior Fellow with the Ethics and Public Policy Center, recently wrote about this emerging plan in the book, Room to Grow, published by the YG Network, a conservative organization that grew out of the work of the Republican House majority.

Capretta starts with a fundamental point that more conservatives need to grasp: “[I]f a plan to replace Obamacare is found by CBO to do little or nothing to reduce the number of uninsured Americans, it is unlikely to get the political momentum necessary to fully displace Obamacare.” He adds quite correctly,

“Conservatives must see the present opportunity provided by Obamacare, clearly. We have an opportunity to move our health-care system to the right not only of Obamacare but also of the pre-Obamacare status quo. The middle class is ready to hear from conservatives about their practical and realistic proposals to improve their lives. If conservatives seize the political moment, they could displace the largest expansion of governmental power in a generation with a program that would unleash, for the first time, the real potential of consumer choice in health care. It would be the most significant conservative policy victory in many years.”

Capretta also grasps the core of the issue when he writes,

“The Obama Administration claims that Obamacare is a marketplace, but the reality is that it is a top-down, bureaucratic solution, with all of the critical decisions made in Washington. HHS strictly defines the insurance product and then compels insurers to sell it while the IRS compels consumers to buy it. That is not a market. The conservative alternative must employ a decentralized approach, with consumers driving the system by the decisions they make about insurance coverage and the use of medical services. It must therefore feature far less prescriptive insurance regulation.”

Capretta also correctly identifies the core problem with health policy even before Obamacare: “[E]conomists of all political stripes have long agreed that the open ended tax subsidization of employer-paid health insurance is one of the main distortions of the existing system. It encourages excessively costly employer plans and discriminates against households that do not have access to employer coverage and thus must rely on the individual market for insurance.”

But Capretta too easily accepts conventional wisdom among Republican health policy staffers when he writes, “But conservatives must resist the temptation to simply undo current tax policy in an Obamacare replacement plan. Approximately 160 million people in the United States are enrolled in employer-sponsored insurance. Any widespread disruption of that coverage, as a complete rewrite of the federal tax treatment would surely involve, would be strongly resisted by the families benefitting from that coverage and would likely doom the entire reform effort.”

Yes, it is wise that in repealing and replacing Obamacare we don’t do what Obamacare has just done in causing millions, perhaps tens of millions ultimately, to lose their current health insurance, which they were promised they could keep. But Capretta and too many others too easily forget a central difference between the two approaches. Obamacare is based on coercive mandates prescribing from the top down exactly what health insurance everyone must buy, so that naturally involves banning many existing health policies people currently have and like. The conservative Obamacare replacement is based on unrestricted individual consumer choice in a competitive marketplace. So anyone who likes the current plan they have can just choose that one under the Obamacare replacement reforms. And the plans people like in widespread numbers are precisely the ones that are going to continue to be offered in the competitive marketplace.

Replacing Obamacare: The Good

Capretta’s central strategy for the Obamacare replacement plan is to extend the tax preference for employer provided health insurance to everyone, in the form of a tax credit, with a fixed, finite, maximum, for purchasing health insurance. That has been advocated for many years now by John Goodman, President of the National Center for Policy Analysis.

Capretta references an earlier paper, A Winning Alternative for Obamacare, produced by The 2017 Project, an organization dedicated to developing policies for the post-Obama world. That paper proposes a tax credit of $1,200 a year for those under 35 years old, $2,100 for those between 35 and 50, and $3,000 for those over 50, plus $900 per child. Goodman proposes a credit of $2,500 a year for everyone, and $8,000 per family. These credits would all be refundable, meaning that if the taxpayer has less in income tax liability than the amount of the credit, the government would pay the taxpayer the difference in cash.

The 2017 Project paper states, “Ending the unfairness in the tax code by offering a refundable tax credit for the purchase of insurance through the individual market is the core element of a well-conceived alternative. Indeed, this first leg is the most important of the three legs that any winning alternative to Obamacare must feature–and, with it in place, Obamacare would be poised to fall.”

These credits are only intended to help with the purchase of health insurance, just as the employer tax preference helps employers pay for the insurance, not finance the whole purchase. What tax credits of these amounts consequently do is provide an incentive up to the limit for everyone to buy health insurance, but not to buy more expensive insurance without limit, like a health insurance deduction, or the current, non-taxation exclusion for employer provided health insurance, which provide more in subsidies the more the consumer spends. That leads to overconsumption of health care, and more rapid health care inflation.

Capretta explains the improved incentives by saying, “A tax credit of this kind would help generate intense price competition in the marketplace. Consumers receiving the credit would have every incentive to find good value in health insurance because any premium charged by an insurance plan above the credit would be paid by the consumer, not the government.”

Besides that incentive for economic efficiency, Goodman’s plan has the advantage of providing the same, equal, tax benefit for health insurance to everyone, not just to those who get employer provided health insurance, or those favored by the widely varying, largely arbitrary differences in tax benefits provided under Obamacare.

The Obamacare mandate for employer provided health insurance has also raised the cost of emp
loyment, reducing jobs and contributing to the weakness of the economic recovery. Because the mandate applies to full time workers of 30 hours a week or more, millions of workers have seen their hours cut back to 29 hours per week. Because the mandate applies to firms of 50 or more workers, hiring has slowed as firms approach the 50 worker threshold. Replacing the mandate with the tax credits for health insurance eliminates these negative economic effects, while probably expanding health insurance coverage at least as much as Obamacare.

The emerging replacement plan would also provide for continuous coverage protection against the development of pre-existing conditions. Those who lose employer health plans because of a job change could not be charged more or denied coverage for pre-existing conditions they may have developed if they purchase health coverage with the credit in the individual market within two months, just as the law provides when a worker gets a new employer plan upon a job change.

The plan also provides for federal funding assistance for states to set up High Risk pools for those who have contracted costly illnesses while uninsured. They would be assured of coverage by the High Risk pool, and charged premiums based on ability to pay, with taxpayers covering financing shortfalls in the pool. Such High Risk pools have proved workable at modest cost in 30 states.

Finally, the plan provides that anyone in Medicaid could use their tax credit to help purchase private insurance instead. States would be given broad flexibility over Medicaid to provide supplemental benefits for the poor to choose private health insurance instead. If Goodman’s proposal to allow anyone to choose to use their credit to buy into Medicaid as well were adopted, everyone would be further assured of coverage regardless of pre-existing conditions, and the Obamacare replacement plan would assure universal health care for all. Goodman’s credit is equal to the CBO estimated cost of adding an additional person to Medicaid.

Replacing Obamacare: The Bad

But Capretta and others would not offer their health insurance tax credits to everyone. They limit their credits only to those without employer coverage, who consequently must buy health insurance on their own in the individual market. They also allow those employed by small businesses to use the credits to buy health insurance they prefer over their employer’s plan.

The reason for this limitation is that Capretta and others fear larger employers will drop their health insurance plans if workers have a credit to buy health insurance on their own, resulting in millions losing their current insurance just like under Obamacare. But Goodman’s proposal for the same equal tax credits for everyone would not take away the tax preference for employer health plans. It just changes the form of the tax preference from the current tax exclusion to the tax credits. But it extends that same preference to everyone, with the much better incentives described above.

Capretta’s limitation, however, limits the efficiency incentives of the tax credit for less expensive insurance only to those who purchase insurance in the individual market. Capretta tries to make up for that by proposing to limit the tax preference by taxing the employee for employer paid premiums above a certain limit. That creates new political vulnerabilities of its own, discussed further below.

In addition, allowing workers with employer insurance to choose their own insurance they prefer with the credit empowers workers with an important check and balance on their employer choosing insurance that may be better for the employer but not for the workers. Such as insurance with more limited provider networks, or stricter gatekeepers denying preferred health care. Moreover, with the credit going to everyone, everyone would have the freedom to choose Health Savings Accounts, even if their employer did not offer them, extending the proven, cost reducing effects of those accounts. Capretta’s limitation sacrifices these benefits of the credit.

Replacing Obamacare: The Ugly

Capretta’s tax on employer provided health insurance in practice turns out to apply to the top 35% of employer health plans, as reflected in the bill proposed by Senators Coburn (R-OK), Burr (R-NC) and Hatch (R-UT). That is a tax assessed against the covered workers, which means roughly 35% of workers not necessarily wealthier than middle income could be expected to bear that tax.

Moreover, about 97% of voters have health insurance. So the plan is to raise taxes on about 35% of those who vote, to help finance insurance for those who don’t vote. Unions will be more worried about this new tax on their workers than about losing employer provided health insurance for their workers.

This is supposed to be better political strategy than just offering the same, equal tax credit to everyone?



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