Is There a Republican Alternative to Obamacare?

John C. Goodman

4/7/2012 12:01:00 AM - John C. Goodman

Just about every Republican candidate for office in the country is an unabashed opponent of ObamaCare. But if they get rid of the Democrat's health reform law, what would they replace it with?

Some critics claim that the GOP only knows what it's against when it comes to health policy. They have no positive agenda for solving the problems of rising costs, inadequate quality and, for many, lack of access to care.

But the critics are wrong. There is a Republican health plan. And it's even more radical and more progressive than ObamaCare! What is it? It's the health reform John McCain proposed during the last presidential election.

If you don't live in a battle ground state, you probably never heard about the McCain health plan. During the election the national media completely ignored it — even though it was far more innovative than the health ideas Barack Obama was proposing.

If you do live in a battle ground state, you probably did hear about it. But odds are what you heard was a completely distorted version. In fact, the Obama campaign spent more money attacking and mischaracterizing the McCain health plan than has ever been spent for or against a public policy idea in the history of the republic.

Perhaps for that reason, Republicans today are a bit skittish about even discussing the idea. Just as most Democratic candidates don't want to talk about ObamaCare, Republicans don't want to talk about the McCain plan either. And that's too bad.

The McCain vision was based on a bill, sponsored by Sens. Tom Coburn (R-OK) and Richard Burr (R-NC), along with Reps. Paul Ryan (R-WI) and Devin Nunes (R-CA). That bill, in turn, was based on an idea which Mark Pauly and I proposed in a Health Affairs article more than a decade ago.

What makes this Republican approach so radical is that it would replace all government tax and spending subsidies for the purchase of private health insurance with a fixed-sum tax credit — essentially giving every American the same number of dollars to apply to their health insurance, regardless of where they obtain it.

Under the current system, federal state and local tax subsidies for private health insurance approach $300 billion a year. The distribution of these dollars is arbitrary, unfair and wasteful.

How much help a family gets from government depends on such factors as its tax bracket, the type of health plan the employer chooses, and state and local tax rates.

The subsidies are also regressive. According to the Lewin Group, families earning more than $100,000 a year get nearly six times as much tax relief as families earning $25,000. We give the most encouragement to buy health insurance to those people who least need encouragement and who probably would have purchased it anyway.

In addition, people can always lower their taxes by spending more on health insurance, and there is no limit to how bloated a health plan can be.

Oddly enough, we place special burdens on people who must purchase their own insurance. Essentially, they must pay taxes first and buy the insurance with what's left over.

For a worker facing a 15.3% (FICA) payroll tax, a 25% income tax rate and a 5% state income tax, having to buy health insurance with after-tax dollars essentially doubles its cost.

Special burdens also are placed on part-time workers and the self-employed.

Consider that one in five workers is part time. Employers usually do not offer these workers health insurance. And federal law makes it difficult for employers to give them a choice between wages and health insurance.

The self-employed are now able to deduct health insurance costs on their income tax returns. Unlike other workers, they get no relief from the payroll tax, which for many, is a larger tax bite than the income tax.

These problems can be solved with an approach that treats everyone alike, regardless of income or job status. The McCain/Coburn approach (with my updating a bit) works like this:

• The current system of tax and spending subsidies would be replaced by a tax credit of, say, $2,500 per person or $8,000 for a family of four for the purchase of health insurance.

• The subsidy would be refundable; everyone gets it even if he does not owe any income taxes.

• Families could obtain the subsidy in the year in which the insurance is purchased and would not have to wait until April 15 the following year to get their credit.

• Insurance companies and other intermediaries would be able to help families obtain their credit and apply it directly to the health insurance premiums.

As a result, people who must purchase their own insurance (including part-time workers and the self-employed) would get just as much tax relief as people who obtain insurance through an employer.

The tax credit would subsidize the core insurance that everyone should have. It would not subsidize all the bells and whistles, as the current system does.

Since employees and their employers would be paying for additional coverage with after-tax dollars, everyone would have an incentive to compare the value of extra health benefits to the value of other things money can buy.