The Burr-Hatch-Upton Obamacare Replacement

by Avik Roy

For those who are interested, I have a detailed write-up of the new Burr-Hatch-Upton Obamacare replacement plan over at Forbes. I agree with Yuval below that the plan handles the “tradeoffs [of health reform] in a particularly plausible and promising way.” However, I disagree with him that a uniform tax credit — in which low- and high-earners get an equal subsidy from the government — is a better system than the one that Burr, Hatch, and Upton propose. Indeed, the opposite is true. This is possibly the most important intra-conservative debate about health-care policy today, especially in the context of 2016:

The central debate that is emerging in Republican circles is between those who support a means-tested approach to subsidizing health insurance, and those who support a uniform subsidy that is the same regardless of one’s income. This may seem like a technical and obscure debate, but it is critical to the future of Republican health reform.

Plans like Burr-Hatch-Upton and my own take into account the fact that we already massively subsidize health coverage for upper-income folks, through the employer tax exclusion and Medicare. They try to balance that out by offering comparable help to the uninsured, and limiting the tax break for high earners. It’s that approach that allows both plans to exceed Obamacare’s projections for the number of Americans with health insurance: Coburn-Burr-Hatch by 3 million in 2020, Transcending Obamacare by 9 million in 2020. 

An alternative approach—embraced by groups like the 2017 Project—prefers a uniform tax credit that would be the same for the poor and the rich. The argument advanced by the 2017’ers is that a uniform tax credit avoids the problem of discouraging people from making more money, because their subsidy is the same regardless of income. The means-tested approach, they say, discourages work by gradually reducing the subsidy as income goes up. Furthermore, many conservatives are inherently hostile to the principle of income redistribution, and therefore have an intuitive aversion to means-tested subsidies. 

To me, the uniform tax credit approach is highly problematic. As the table above shows, the 2017 Project proposal would slash health subsidies for people near the poverty line by more than $2,300 a year: real money for people in that income bracket. By contrast, the 2017’ers would offer a new $2,100 subsidy to people with six-figure incomes who don’t need the help. A plan that takes money away from the poor, and gives it to high earners, is not viable in a general Presidential election, and has no shot of getting through a Congress with fewer than 60 Republican senators.

More importantly, the uniform tax credit approach would leave millions of people without health insurance. In order to make the fiscal math work, the uniform tax credit has to be smaller so it can be distributed to a much broader population. This means that fewer low-income people would be able to afford health coverage. As a result, Stephen Parente has modeled the 2017 Project plan as covering 6 million fewer people than Obamacare.

I would add another point. Creating a new, universal, multi-trillion-dollar entitlement — which is what a uniform tax subsidy would be — has large unintended consequences from a standpoint of political economy. Because every voter would benefit from the entitlement, politicians in Washington would face powerful incentives to increase the size and value of the subsidy over time. Reforming such an entitlement would be far harder than reforming Medicare: which, as we know, is no walk in the park. Caveat subsidium.

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