Though the Ryan budget calls for repealing the coverage-expanding provisions of the Affordable Care Act, it doesn’t offer much in the way of an alternative. To his credit, Ryan has backed ambitious coverage expansion proposals, like the Patients’ Choice Act, in the past. But as federal and state officials struggle to implement the ACA, the need for a replacement agenda is pressing. And even if the federal government gets dozens of state-based exchanges up and running, other challenges loom. Recently, the CBO projected that the number of subsidized exchange enrollees will start to decline after 2018, as rising costs will lead large numbers of young, healthy individuals to choose to pay a penalty rather than pay high and rising insurance premiums.

The growing interest in using Medicaid expansion funds to finance private coverage represents an opportunity for right-of-center reformers. Because the ACA increases spending so dramatically — Charles Blahous has the details on how much the ACA is likely to cost over the next decade — and because it is so maddeningly complex, many voters will soon be clamoring for a cheaper, more coherent approach. In “Constructing an Alternative to Obamacare,” James Capretta outlines a multi-pronged coverage expansion strategy that, among other things, reforming the tax treatment of medical insurance and a Medicaid reform designed to restrain spending growth while giving state governments greater flexibility.

Capretta’s tax reform keeps the tax subsidy for job-based coverage in place, yet it places an upper limit on its value. He also extends a refundable tax credit for those with no attachment to the workplace or who work for small firms that don’t offer insurance coverage. This tax credit would be roughly $5000 for families and $2500 for individuals. 

This new refundable tax credit interacts with Capretta’s Medicaid reform proposal in a potentially promising way. Rather than provide states with federal-matching payments, Capretta would institute a system of fixed, per capita payments for coverage, an idea that was recently endorsed by Sen. Orrin Hatch (R-UT). Most per capita cap proposals set separate per capita payments for different kinds of Medicare beneficiary: the aged, disabled, adults under 65, and children. Per capita caps of this kind have met with resistance from many on the left — see the critiques from the Center on Budget and Policy Priorities and from the advocacy group Families USA, which focus on the concern that the caps will prove too binding

Yet because per capita caps offer spending tied to the number of enrollees, they naturally increase payments to states during economic downturns or other periods during which the Medicaid-eligible population increases. Moreover, states that manage to keep Medicaid spending below the cap will be free to use their surplus as part of their general fund — an attractive proposition given the demand for state-level education and infrastructure spending. States that prove particularly successful at managing the cost of their health safety nets will be able to shift resources to improve productivity and quality of life.

Capretta envisions fixed, per capita payments that are tied to historical spending in the states and that grow with an agreed-upon index, e.g., medical inflation. The refundable tax credits mentioned above would be subtracted from the total amount. To get a sense of how Medicaid payments vary across states, State Health Facts provides a chart of Medicaid payments per enrollee for fiscal year 2009. The chief actuary of the Centers for Medicare and Medicaid Services provided the following assessment of payments per enrollee in fiscal year 2011:

Per enrollee spending for health services was estimated to be $6,982 in 2011. Estimated per capita spending for children ($2,851) and adults ($4,362) was much lower than that for aged ($15,931) and disabled ($17,958) beneficiaries, reflecting the differing health status of, and use of services by, the members of these groups. Per enrollee spending was estimated to have increased by 2.6 percent between 2010 and 2011.

The CBO’s assessment of federal Medicaid expenditures per new enrollee under the ACA is presumably lower than the CMS number because the number of new enrollees among the aged and disabled would be relatively small.

If we assume that state governments will have $6000 for non-disabled, under-65 low-income adults (from a combination of the per capita paymentand the refundable tax credit) to work with, how will states close the gap if they want to limit the churn of enrollment, dis-enrollment, and re-enrollment that interrupts continuous coverage by enrolling Medicaid beneficiaries in private coverage? One possibility is that some states will relax costly insurance mandates for the Medicaid population. 

Capretta also recommends that states provide all adults with default insurance options, with premiums that match either the refundable tax credit or a Medicaid-enhanced amount for the Medicaid-eligible. As Capretta explains, this default insurance options would be very barebones — they’d necessarily have higher-than-normal deductibles and mainly offer protection against catastrophic medical expenditures. Yet this default option has the potential to expand coverage dramatically.

One of the virtues of the Capretta plan is that it eases some of the “horizontal equity” problems created by the Affordable Care Act’s four-tranche structure (Medicare, Medicaid, employer-sponsored insurance, and exchange insurance), which tends to provide more generous subsidies to individuals on the exchanges than to individuals enrolled in job-sponsored plans or Medicaid. In addition, it reduces the incentive for state governments to overspend, and it gives them far more discretion to expand coverage through a wide variety of strategies. And by capping the value of the employer-exclusion and creating a channel of low-cost default options, it might greatly facilitate a shift towards progressive cost-consciousness, i.e., the notion that while low-income families should be shielded from excessive cost sharing, middle- and upper-income families should move closer to Swiss levels of out-of-pocket health spending. 

Reihan Salam — Reihan Salam is executive editor of National Review and a National Review Institute policy fellow.

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