This column by ACRU General Counsel Peter Ferrara was published August 24, 2014 on Forbes.com.
One of the biggest drags on economic growth under President Obama has been Obamacare, enacted on a strictly partisan basis in 2010. That drag has come primarily from the sweeping overregulation of Obamacare.
The biggest culprit has been the employer mandate, which requires all employers of 50 or more full time workers to buy them health insurance with the terms and benefits as specified by the federal government. That is effectively a tax on employment of well over $10,000 a year per worker for family coverage.
Even for employers that already provide health insurance, the employer mandate will likely be a big tax increase on employment. That is because the mandated health insurance will most likely cost more than what the employer is already providing. That results first because the government responds to political pressure to require generous benefits most people will think the employer is paying for, to be include in the mandated health insurance. That drives up the cost of the mandatory health insurance.
Secondly, the mandated health insurance is subjected to costly overregulation involving guaranteed issue and community rating. Guaranteed issue requires insurers to sell their health insurance to everyone that applies, regardless of how sick and costly they are when they first apply, such as those who already have cancer or heart disease. That is like requiring fire insurance companies to sell their fire insurance to buyers who call up after their house has already caught on fire.
Community rating requires health insurers to sell that insurance at the same standard rates as for everyone else, regardless of how sick and costly the buyers are when they first apply for the insurance. That is like requiring fire insurers to sell fire insurance at the same standard rates as for anyone else, to buyers after their houses have already caught on fire.
Of course, the standard rates for such fire insurance are going to be very high. The same will be true for health insurance subject to such regulation. There are better, far less costly ways of assuring that health insurance is available to everyone, including those with costly preconditions.
This employer mandate employment tax is reducing job and wage growth. Moreover, to further avoid that costly tax on employment, millions of workers across the country have been reduced to part time work of 29 hours a week or less, because the definition of a full time worker in the Obamacare legislation is 30 hours a week or more. That is driving down the net wages and incomes of middle class and working people, and increasing inequality as a result. Small companies around the 50 worker threshold are also restraining growth and employment for the same reasons. All of this has been killing economic growth, stunting the recovery, and greatly extending the misery of the recession well beyond previous recessions.
The individual mandate is increasing costs of health insurance in the individual health insurance market as well, for the same reasons. President Obama was quick to claim credit for Obamacare for supposedly restraining the growth of health costs. But that health cost slowdown he cited actually started back in 2003, when Health Savings Accounts (HSAs) were adopted by the then GOP Congress, as I will explain below. Barack Obama was an Illinois State Senator back then, and Obamacare was just a gleam in his eye.
So both the employer mandate and the individual mandate are effective tax increases, which are a drag on economic growth. Obamacare is financed by another half trillion in tax increases, which are also anti-growth.
How to Repeal and Replace Obamacare
But Obamacare can be replaced by free market, Patient Power, health care reforms based on sharply expanding patient power, control and choice over their own health care, which would assure health care for all (unlike Obamacare), with no employer mandate, no individual mandate, and sharply reduced taxes, federal spending and regulation. That would reverse the above anti-growth effects of Obamacare, and contribute to booming economic growth and recovery. Such Patient Power reforms have long been advocated by John Goodman, long time President of the National Center for Policy Analysis in Dallas.
The centerpiece of such Patient Power reforms would be to extend the same tax preference for employer provided health insurance to everyone, in the form of a refundable, universal, health insurance tax credit for all of roughly $2,500 per year ($8,000 for family coverage) for the purchase of private health insurance. The credit would not be meant to pay for the entire cost of such insurance, but only to help pay for it, just as the tax preference for employer provided insurance does not pay the entire cost of such insurance, but only helps pay for it.
There would be no government mandate of any sort to use the credit to buy any particular insurance with any particular terms or benefits. Each worker would be free to use the credit to buy the health insurance of the worker’s own choice, such as Health Savings Accounts (HSAs), discussed further below.
Workers would even be free to choose to use the credit to buy into coverage through Medicaid if they desired. The credit amount is equal to the CBO estimated average cost of adding one additional person to Medicaid coverage. This one feature assures coverage for all those with any pre-existing condition, because they could always choose Medicaid coverage, which includes anyone regardless of any pre-existing condition. But few would be expected to choose Medicaid, because of the fundamental problems of Medicaid as discussed below. Indeed, people would also be free to choose to use the credit to leave Medicaid for the purchase of any private health insurance of their choice, including HSAs.
The $2,500 credit would effectively operate as a reverse penalty in terms of lost opportunity cost for failing to use it. The taxpayer would effectively then leave $2,500 on the table in terms of his personal finances.
But socially, the amount of any unused credits would be sent to local safety net hospitals and clinics serving the poor in the local area. For example, if 1000 people in Dallas did not use the credit to buy any health insurance, $2,500,000 would be sent to safety net hospitals and clinics in Dallas specializing in serving the poor.
The second component of the Patient Power reforms would be to transfer control over Medicaid to the states, with the federal financing of the program provided through fixed, finite, block grants to each state, as under the enormously successful 1996 welfare reforms of the old, New Deal, Aid to Families with Dependent Children (AFDC) program. Currently, the federal financing for Medicaid is provided under a matching federal financing formula, paying more to each state the more the state spends on Medicaid. That is like the federal government paying the states to spend more on Medicaid.
Under the fixed, finite, block grant formula, the state knows that if its redesigned, state, Medicaid program costs more, it is going to pay 100% of the difference. But if the program costs less, it would keep 100% of the savings. These are ideal incentives for each state to weigh the costs against the benefits for Medicaid spending, and only pursue the spending that was worthwhile.
Preferably, each state would use its power under the Medicaid block grants to provide assistance to the poor through health insurance vouchers that could be used by the poor to supplement the uni
versal health insurance tax credit to help the beneficiary to purchase the private health insurance of his or her choice, including HSAs. The voters of each state would then be free to determine how much assistance at what income levels would be necessary to assure that the state’s poor could buy essential health insurance, which would be very different for Mississippi and Louisiana than for New York and California, given their widely varying health cost structures, and income distributions.
Such Medicaid reform would be enormously beneficial for the poor. Medicaid currently pays so little to the doctors and hospitals to provide essential health care to the poor that they often face grave difficulties in finding timely, essential health care under the program. But with private health insurance purchased with the help of the universal health insurance tax credit, supplemented for the poor with Medicaid health insurance vouchers, the poor would enjoy the same health care as the middle class, because they would have the same health insurance as the middle class, which is forced by competitive market pressures to pay enough to the doctors and hospitals to ensure that those covered by the insurance can get timely, essential health care. This would mean an enormous gain for the poor as compared to the current Medicaid program.
As another safety net component of the Obamacare replacement plan, states would also be free to use a limited part of the Medicaid block grant funds to set up Uninsurable Risk Pools for those uninsured who had contracted costly preexisting conditions such as cancer or heart disease while uninsured. Any uninsured who could not obtain health insurance in the market for this reason would be able to obtain full coverage from the Uninsurable Risk Pool for an affordable fee based on the applicant’s ability to pay, which is necessary for the pool to serve as a safety net program. State taxpayers and part of the Medicaid block grant funds would subsidize the pool to cover all costs not covered by the fees charged to those covered by the pool.
Over 30 states have set up similar Uninsurable Risk Pools, and they have proven by experience to be a low cost means of covering those who could not obtain coverage in the market because of costly pre-existing conditions. That is because only a very small percentage of the population ever becomes truly uninsurable in the private market.
These reforms would assure universal health care for all. Everyone would have the universal health insurance tax credit, the poor would receive additional assistance to purchase private coverage, and everyone would continue to be backed up by Medicaid and the Uninsurable Risk Pools as safety nets. By contrast, Obamacare fails to achieve universal coverage, as CBO projects that even after 10 years, Obamacare would still leave 30 million Americans uninsured, and without any assured access to health care.
Health Savings Accounts
The health cost control functions of Obamacare would also be achieved far more effectively through HSAs and market competition. With an HSA, instead of all the money going to an insurance company, the insured pays only enough to purchase coverage with a high deductible, around the range of $5,000 to $6,000 a year or more. The health insurance then pays for all health care costs above that annual deductible.
The substantial cost savings from purchasing such high deductible insurance is then saved in the HSA to pay for health costs below the deductible. Whatever is not spent from the HSA can be withdrawn after a year and spent on anything, or saved tax free for health care in future years, and for retirement. Consequently, whatever the worker spends on health care from his HSA is effectively his own money.
That will leave him with full market incentives to control costs. He will question what health care is necessary, seek second opinions, and explore less costly alternatives. Moreover, since the patients now have full market incentives to control costs, doctors and hospitals will compete to control costs, the more patients in the marketplace have HSAs.
These HSA incentives have proven very effective in controlling costs in the real world. The Republican Congress passed modern HSAs in 2003. Since then, HSA coverage has been exploding, doubling year after year. Today, 30 million Americans have HSAs. And the slowdown in the growth of health costs first buds after HSAs were passed, and builds along with that growth in HSA coverage.
These HSAs are the classic Patient Power reform, because the patient has maximum power, choice and control over the HSA funds. The Patient Power alternative to Obamacare would expand the HSA option throughout the entire health care system. Workers even with employer provided coverage could use the universal health insurance tax credit to purchase preferred health insurance of their choice, which would include HSAs. This gives workers a market check on the power of employers over their health insurance, as the incentive of employers is to choose the coverage that works best for them rather than their employees. The universal credit could also be used to opt out of Medicaid for HSAs.
Also under the Medicaid block grants, the poor could use the health insurance vouchers to purchase HSAs if they prefer. Retirees should also be assured of the freedom to choose HSAs under Medicare Part C. Through these reforms, virtually everyone would enjoy the freedom to choose HSAs if they prefer. That, and the market competition between the alternative choices among the different insurers in all these markets would restrain the growth in health costs far more effectively than Obamacare, which only works to increase health costs.
Booming Economic Growth Through Health Care Reform
Repealing and replacing Obamacare with the above Patient Power reforms would further contribute to booming economic growth, in addition to previous reforms I have advocated in recent weeks in this column. Repealing Obamacare would automatically involve a tax cut of 16% in the capital gains tax, and in the taxation of corporate dividends. That would promote the capital investment that creates jobs and increases wages. It would also cut the top rate of the Medicare payroll tax by roughly one fourth, which would also create jobs and increase wages.
It would also end the effective taxation involved in the employer mandate and the individual mandate, again increasing jobs and wages. The millions of Americans now reduced to part time work would be liberated to find full time jobs again, restoring millions of middle class incomes. The restrained growth of health costs would also liberate businesses to invest more in job creation, and directly increase wages. That would result both from repealing the cost increasing effects of Obamacare, as well as from the cost restraining features of the replacement reforms.