Jed Graham’s Excellent Idea for Reforming Health Reform

by Reihan Salam

I believe that PPACA needs to be repealed and replaced. But repeal will be very difficult, particularly if the president is reelected, and building a consensus around a new health reform proposal might prove more difficult still.

The Obama administration has already acknowledged that the CLASS program is broken, and it is widely understood that achieving cost savings in Medicare will prove extremely difficult. The administrative challenges involved in determining eligibility for subsidies on the exchanges are considerable, and the increase in implicit marginal tax rates could dampen economic growth. The excise tax on high-cost health plans is poorly designed and new regulations on insurers and medical providers could stymie business model innovation. There are also serious concerns about how the expansion of Medicaid will exacerbate the problems caused by the misalignment of incentives between states and the federal government. Basically, a lot of us are betting on the prospect of repeal, but if repeal doesn’t happen, well, fixing PPACA will be the central public policy challenge of the next decades, and I use the plural advisedly. 

But Jed Graham has come up with a way to make PPACA — or rather an important part of PPACA — accomplish at least some of the goals of market-friendly health reformers:

 

The basic idea involves repurposing a portion of the outlays under the Patient Protection and Affordable Care Act (better known as ObamaCare) from straightforward premium subsidies into deposits into new national health savings accounts.

Simply put: No qualifying coverage for a year; no account deposit — not just for one year but for several.

Replacing the punitive mandate with the perk of dollars available for spending on medical care — or saving — could provide an even more forceful incentive, without piling on extra costs or undermining affordability. On top of that, it would encourage more careful consumer attention to medical spending. And it would, in effect, provide a reward to promote healthy lifestyles, while allowing individuals to build savings, ideally for future medical needs.

Lastly, it could kick-start reform of the wasteful tax treatment of health care, potentially giving Republicans a reason to come to the table.

Part of the problem under the current law is that there is an incentive to purchase more comprehensive coverage:

 

[S]ingle 40-year-olds earning 300% of the poverty level in 2014 ($35,000) would pay the same $3,300, whether they opt for the bronze or silver plan.

The only difference is that the government would chip in an extra $650 or so for the silver plan, which would cost roughly 18% more.

For a family of four with 40-year-old adults earning 300% of poverty, the government would chip in an extra $1,725 to cover the full extra cost of a silver plan.

The idea here is to deposit that extra subsidy — the difference in cost between a bronze and silver plan – in a national HSA.

Graham goes on to explain why his HSA incentive will prove at least as effective as the mandate in ensuring a healthy risk pool, and he also calls for a reform of the tax treatment of health insurance that would apply to higher earners as well. It’s an interesting idea, and one I can imagine Democrats embracing as the flaws of PPACA become clearer and Republicans embracing if PPACA seems likely to survive.  

The Agenda

NRO’s domestic-policy blog, by Reihan Salam.