When Republican Senators Richard Burr, Tom Coburn, and Orrin Hatch released their new Patient CARE Act (PCA) proposal, the most detailed and realistic blueprint for repealing and replacing Obamacare we’ve seen to date, the response from left-of-center observers was for the most part predictable. By repealing various regulations, or giving states more latitude to regulate insurance products, the PCA would allow insurers to take advantage of their consumers and its Medicaid reforms would undermine coverage for the poor. The Medicaid component of the PCA is important and not very well understood, and I hope to address it at greater length soon. But for now, let’s discuss the really political potent charges from some quarters, on the left and the right, that the proposal is little more than Obamacare-lite and that it represents a substantial net tax increase.
The Obamacare-lite charge is easy to dismiss. Like Obamacare, the PCA envisions a system of sliding-scale subsidies designed to help low- and middle-income families secure insurance coverage. It also curbs the tax subsidy for employer-sponsored health insurance, a subsidy that reduced federal tax revenues by $268 billion in 2011 alone, for people with the most expensive health insurance plans, a bit like Obamacare’s so-called “Cadillac tax.” That’s pretty much where the similarities end. The main difference between the two proposals is that while Obamacare offers a highly prescriptive approach to the design of health insurance plans (i.e., plans have to cover certain things in certain ways to qualify for subsidies, even if insurers come up with new benefit designs that better meet the needs of consumers), the PCA gives insurers and medical providers the breathing room they need to innovate. In November, Yuval Levin contrasted two different approaches to health-system reform:
The health-care debate basically divides along the lines of two ways of thinking about how we figure out such things — how we address our ignorance and pursue efficiency. Do we empower expert knowledge at the center of the system to impose efficiency based on principles well known to the administrators or do we empower the dispersed social knowledge of market actors to try out different approaches and find what works — allowing sellers to try different forms of the insurance product, allowing consumers to choose among them, and arriving that way at something like an effective balance between quality and price on the whole?
Conservative health-care proposals generally take that second view. They would use taxpayer money to empower all Americans to be consumers in a competitive market where insurers can offer them genuinely different options and they have the resources to turn their preferences into market power and so to drive health and coverage providers to give them more appealing options at more appealing prices. Conservatives want to use the market to answer the question and address the problem at the core of our health-financing dilemma.
Liberal health-care proposals take the first view — they want to centralize design and purchasing decisions in the hands of the government where experts can make those decisions. They would use taxpayer money not to create consumers who would choose among real options designed by insurers and providers but rather to enact the will of the experts. That approach assumes we actually do have the knowledge of how to solve this problem and we just haven’t applied it, while conservatives tend to think that our lack of that knowledge is the whole point of the exercise.
Despite superficial similarities, Obamacare reflects the liberal approach and the PCA reflects the conservative approach. To be sure, Obamacare is changing as the Obama administration makes use of administrative discretion to delay the enforcement of various provisions. The decision to allow people insured in the individual market to renew plans that had been deemed substandard suggests that at least some members of the Obama administration recognize that the law exerts too tight a grip on insurers and consumers. But prescriptiveness is in Obamacare’s DNA. The same is not true of the PCA, for better or worse.
Moreover, though the PCA, like Obamacare, reflects a desire to protect Americans with pre-existing conditions from facing steep premium increases when their health status changes and to encourage people to become insured when they are young and healthy rather than when they are old and sick, it aims to do so by offering strong protections to those who have been continuously covered. One premise behind the PCA is that you don’t need the coercion of an individual mandate penalty if you make insurance more attractive to consumers by (a) making it cheaper (through subsidies, like Obamacare), (b) giving insurers wide berth to tailor their products to different kinds of consumers, including cost-conscious consumers (unlike Obamacare), and (c) bundling health insurance with health-status insurance, i.e., guaranteeing that if you remain covered, you will not face higher premiums if you develop an expensive-to-treat illness. Obamacare aims to expand coverage through the use of carrots (subsidies) and sticks (the individual and employer mandates, among others), and though it arguably makes insurance less attractive product for many cost-conscious consumers (it requires insurers to bundle services that many consumers don’t need, thus leaving prices higher than many consumers would care to pay even after subsidies). The PCA also makes use of carrots (subsidies, the availability of insurance policies customized to the needs of particular consumers, protection against changes to your health status for all those who buy insurance) and sticks (if you choose to go without coverage, you will have to pay higher premiums when you do choose to buy it, provided you’re not poor), but they’re quite different from Obamacare’s carrots and sticks.
We can approximate the net budget impact of the PCA using CBO’s most recent complete budget estimate of Obamacare. Repealing the Medicare payroll tax hike and the taxes on devices, drugs, and insurers would reduce revenue by $533 billion over the period 2014 to 2022. Extending the tax cut by one additional year would bring the tax cut for these provisions to about $613 billion.
When this tax cut is factored into the H&E assessment, the net tax increase and overall reduction in the federal deficit are reduced substantially. On balance, taxes increase by about $444 billion and deficits decline by $860 billion over the next decade.
But even these estimates overstate the intended tax consequences of the PCA. It is clear from discussions with the offices of the Senators who wrote the PCA proposal that they will adjust the proposed upper limit on tax–preferred employer premium payments as necessary to ensure the overall proposal is tax-neutral. Based on the H&E model, we believe there is substantial room, even after considering the additional tax cuts, to raise the upper limit to levels well above 65 percent of high-cost coverage and achieve the goals of the PCA authors.
That is, if the H&E model is revenue-positive relative to the current law baseline (taking into account Obamacare), the law’s authors will revise it to raise the threshold at which employer-sponsored health insurance plans are taxed until it is revenue-neutral. (And even if the PCA isn’t revised, it impacts a minority of high-cost employer plans, thus greatly limiting its disruptive potential.) There are other directions Senators Burr, Coburn, and Hatch could go to reduce the net tax increase. For example, they could create a flat and universal tax benefit for all Americans who don’t receive coverage through their employers rather than rely on sliding-scale subsidies, as Ramesh Ponnuru and Yuval Levin have proposed. James Capretta has long advocated this approach, which, unlike sliding-scale subsidies that shrink as you earn more income, don’t reduce the incentive to work.
But all in all, the PCA represents not just an improvement over Obamacare, but also over the pre-Obamacare status quo.