Some Thoughts on the Politics of the CARE Act

by Reihan Salam

Patrick Brennan, Yuval Levin, and Avik Roy have offered detailed breakdowns of the new health-system reform proposal from Senators Richard Burr, Tom Coburn, and Orrin Hatch, the Patient CARE Act. Philip Klein observes that the proposal reflects how Obamacare has changed the political debate, as it retains a number of the more popular insurance market regulations established under the law. John Goodman is harshly critical of the proposal, at times unfairly. Rather than pore over every aspect of the proposal, let’s discuss a few central issues.

A number of conservatives, led by James Capretta and Yuval Levin and Ramesh Ponnuru, have coalesced around the notion that while a flat and universal tax benefit for purchasing insurance coverage would be ideal, it would be too disruptive in the short term. So while the current tax exemption for employer-paid premiums should be retained, it should be capped to help finance a refundable tax credit for those who do not belong to larger employer plans. One important aspect of the CARE Act is that while it does cap the tax subsidy for employer-sponsored coverage, it does not offer all workers who aren’t part of larger employer plans a credit. Rather, it phases out the credit at 300 percent of the federal poverty level. Yuval is disappointed by this aspect of the proposal, “as it does not extend the tax benefit to much of the middle class.” Patrick notes that while the phase-out will tend to increase implicit marginal tax rates for households just below the 300 percent threshold, it also “avoids creating a middle-class entitlement.” (Keep in mind that 300 percent of poverty is $35,010 for an individual and $71,550 for a family of four.) If the Obamacare insurance market regulations that have caused “rate shock” in all but a handful of state insurance markets were retained, it is easy to imagine that middle-income households would resent the relatively low phase-out. Yet the hope is that by eliminating most of the federal insurance market regulations established under Obamacare, insurers would be in a position to offer a wider array of low-cost options tailored to the needs of particular individuals and families. Moreover, the phase-out allows for more generous subsidies for low-income households under the CARE Act.

The premium subsidies offer under the CARE Act don’t just vary by income. They also vary according to age. One of the chief conservative objections to Obamacare is that by sharply constraining age rating, the law raises premiums for young people, who tend to earn low incomes while also having low health expenditures, while lowering premiums for older people, who tend to earn somewhat higher incomes and who tend to have higher health expenditures. Avik Roy has been particularly critical of this provision of the law, as has Josh Barro, a defender of the health law, has called for revising its age rating provision as well. The CARE Act loosens the constraints at the federal level, though it allows state insurance regulators to adjust age rating as they see fit. This poses a political risk, as older people tend to be more politically engaged than younger people, and they’d be strongly inclined to resist premium increases. The CARE Act sidesteps this concern by making subsidies for older Americans more generous. It is still true, however, that there will be a nontrivial number of older Americans who earn more than 300 percent of poverty who might attribute high premiums to a looser approach to age rating. Indeed, this is where one can see the political benefits of the flat and universal tax benefit favored by Yuval and Ramesh. The authors of the CARE Act seem convinced that the cost savings associated with a more targeted approach are worth the political risk. And while the CARE Act leaves Medicare untouched, it includes an ambitious reform of Medicaid. Essentially, the CARE Act would establish per capita caps (see Emily Egan’s primer on per capita caps for the American Action Forum) for federal Medicaid expenditures. Unlike block grants, per capita caps are tied to the number of enrollees in the various eligibility categories, and so they are countercyclical by nature — as the size of the eligible population increases, the federal Medicaid contribution will increase as well. Medicaid-eligible individuals would also be free to instead use the health tax credit established under the CARE Act to purchase private insurance coverage, a provision that critics of Medicaid, like Avik Roy, have praised.

Republicans have been criticized for their eagerness to curb the growth of Medicaid expenditures, particularly when contrasted with their reluctance to curb the growth of Medicare expenditures quite to aggressively. The charge commonly levied by left-liberal critics of GOP health policy proposals is that while Republican lawmakers are happy to protect social programs and tax provisions that benefit their (older, whiter, more affluent) constituents, they are quick to gut those that benefit other Americans. The CARE Act undermines this narrative. Though the proposal does aim to rein in the growth of Medicaid expenditures, the fact that it redirects savings both from capping the tax subsidy for employer-sponsored insurance and from establishing Medicaid per capita caps to offer fairly generous premium subsidies to low- and middle-income households suggests that its Republican authors place a high priority of expanding coverage for people of modest means. Indeed, the premium subsidies in the CARE Act actually grow at a faster and arguably more realistic rate than Obamacare’s premium subsidies.

It will thus be interesting to see if the CARE Act gains wide support. Some observers have read significance into the fact that while the last major health-system reform proposal sponsored by Senators Richard Burr and Tom Coburn was also backed by Rep. Paul Ryan, the CARE Act does not have Ryan’s imprimatur, at least not yet. Over the next few weeks, we will see if Ryan releases a proposal of his own — for example, he might seek a more sweeping overhaul of the tax subsidy for employer-sponsored insurance, and that offers a flat and universal tax credit — or if he embraces the CARE Act. It will also be interesting to see if conservatives wary of new premium subsidies correctly discern that the CARE Act represents an enormous improvement relative to the pre-Obamacare status quo.

In “Obamacare’s Prescriptive Problem,” Yuval Levin emphasized that while Obamacare has some of the form of a market-oriented health-system reform, with its reliance on regulated insurance marketplaces, it lacks the substance of a market-oriented health system, as it rigidly constrains insurers in ways that make business-model innovation extremely difficult if not impossible. And though he does not see the CARE Act is flawless, he suggests that it is best understood as Obamacare-in-reverse: while it retains some of Obamacare’s popular insurance market regulations, and while it establishes sliding-scale subsidies, it is actually designed to foster business-model innovation, and indeed to make the the U.S. health system far more innovative than it has been in the past. That seems like good reason for GOP lawmakers, and moderate Democrats looking for worthy alternatives to Obamacare, to rally around it.

The Agenda

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