•Also, until recently the subsidy for employer-purchased insurance applied only to third-party insurance and not to self-insurance (say, through a Health Savings Account). This encouraged everyone to (wastefully) rely on insurance companies and employees to pay every medical bill. This, in turn, destroyed price competition and quality competition and effectively suppressed normal market forces throughout the health care system. Although we now allow tax-advantaged self-insurance, the conditions are highly restrictive.
What does the Affordable Care Act do about all this? It leaves every single one of those perverse incentives in place and adds new ones! What does the Republican approach do? It eliminates every one of them by offering a fixed-sum, refundable tax credit for the purchase of private health insurance. Every individual and every family would get the same amount of help from government, regardless of where the insurance is purchased -? at the office, in an exchange or in the marketplace.
People would no longer be encouraged to buy employer-specific, non-portable coverage. Because the subsidy is a fixed sum, it would apply only to the core insurance we want everybody to have. Any additional insurance would be purchased with after-tax dollars. People would be discouraged from buying an additional dollar of insurance unless it was more valuable than a dollar spent on other goods and services.
The Republican approach also gives people greater flexibility in combining health care savings with third-party insurance.
Here is another problem: the current system of subsidies is arbitrary and unfair. It penalizes people who must purchase insurance on their own, and it gives the greatest tax relief to those who least need it. A family earning $100,000, for example, gets six times the tax subsidy as a family earning $25,000.
What does the Affordable Care Act do about that? It leaves the current inequities in place and layers on a whole set of new ones. A family of four at, say, 138% of the poverty level will be able to enter Medicaid and obtain coverage worth about $8,000 a year for free. Families that earn one dollar more will be able to go into a health insurance exchange and obtain, say, a $16,000 insurance plan in return for a premium of about $900 out of their own pockets. Yet, employees of the Hilton Hotel, earning similar incomes, get no new help from government, and the tax relief they get from the current income tax system is less than $2,500.
By contrast, the Republican approach does not force families into Medicaid, and it gives everyone who buys private insurance the same help under the tax law.
The Republican approach is a defined contribution approach. People are given a sum of money to buy health insurance. They may add funds of their own to this amount. Suppliers of insurance will then be allowed to compete in the private marketplace to see what they can offer for premiums people can afford.
By contrast, ObamaCare takes a defined-benefit approach. The government intends to tell all of us what insurance we must have, whether it is affordable or not. Further, the ObamaCare approach double penalizes people who choose not to insure: failure to claim the credit means they will pay higher taxes and there is a penalty imposed on top of that.
Here are a few more ways in which Republican and Democratic approaches differ:
Tax Fairness. Under the Republican approach, every individual and every family will get the same help from government:
•Regardless of whether they work less than 30 hours a week or more;
•Whether their workplace has fewer than 50 employees or more; and
•Whether they are in a union or not.
Fair Treatment of Employers, Employees and Retirees. Unlike ObamaCare, the Republican approach:
•Would not encourage employers to avoid hiring new workers;
•Would not encourage employers to drop health coverage for current employees or for their retirees;
•Would not penalize employees and their employers if they work full time rather than part time;
•Would not favor small over large business or vice versa;
•Would not favor non-union over union firms or vice versa; and
•Would not encourage outsourcing or labor saving technologies or in other ways discourage economic recovery.
No Mandate. No one would be forced to buy health insurance. People who turn down the tax credit and elect to be uninsured would have a higher tax bill, however. For families that pay income taxes, failure to insure would result in $2,500 in higher taxes for individuals and $8,000 for a family of four. They could either use these funds to buy health insurance or give them to Uncle Sam.
Universal Coverage. ObamaCare is expected to leave 30 million people uninsured and the actual number is probably much greater than that. By contrast, under the Republican approach it's hard to imagine anyone remaining uninsured. The reason: every adult can have at least $2,500 of health insurance for free. Every family of four can have $8,000 of insurance for free. Insurance at this premium may consist of very narrow networks and perhaps pay provider fees only a bit better than Medicaid. Still, it's free. I'm sure some will turn down the offer anyway, however. I wish Republicans would deal with that eventuality by sending unclaimed tax credits to safety net institutions in the communities where the uninsured live. This would guarantee a form of universal coverage for everyone.
Minimum Bureaucracy. The Republican bill is only 56 pages long. One suspects that the regulations needed to implement it would fall well short of the 20,000 pages needed to implement ObamaCare. Because the tax credits are the same for everyone, there would be no need for an exchange to verify income or establish that an applicant had not been offered affordable coverage by an employer or link electronically to five or six different government agencies. Uwe Reinhardt has written about the highly complex assignments the ObamaCare exchanges must carry out. So have I. By contrast, EHealth (a private online exchange that has allowed more than 3 million people to obtain health insurance) could handle the entire process under the Republican plan without spending millions of dollars on new technology ? as the Obama administration is doing.
How can we pay for the Republican plan, especially given our frequent criticism of ObamaCare's unsustainable cuts in Medicare and our dislike of ObamaCare's taxes on capital? I believe it can be done with money already in the system (that is, with no new taxes) even after restoring some Medicare spending and reversing the taxes on investment income.
If I could summarize these huge differences in one sentence, it would be this: The Republican approach is focused on getting rid of perverse incentives and treating everyone equitably, while the Democratic approach leaves the current system's perverse incentives and inequities in place and adds new ones.