Might Cogan, Hubbard, and Kessler Offer a Guide to the Emerging Romney Health Policy?

Recently, Ezra Klein wrote a post arguing that Mitt Romney has been somewhat evasive about his plans to replace Obamacare:

Romney would turn Medicaid over to the states and — though this appears in a separate policy paper — cap its growth at inflation plus 1 percent, which would mean deep cuts to the program. He would allow private insurance to be sold across state lines, meaning that if health-care insurers find the rules in California too onerous, they can locate in South Dakota instead. This is basically how credit cards work today. He would cap non-economic damages in medical malpractice lawsuits and encourage “Consumer Reports-type” ratings of health plans. The broad idea, his campaign says, is to make the market for health insurance look more like the market for things that aren’t health insurance.

But the key to his plan comes in these nine words: “End tax discrimination against the individual purchase of insurance.” The problem is, there aren’t any words after that. The health-care system today is basically built atop the tax deduction for employer-based health care. That’s why most Americans under 65 who have health care have it through their employer. But how you end that deduction matters quite a lot.

Later in the piece, Ezra identifies a pattern:

[T]heir approach to health reform is similar to their approach to tax reform and spending cuts. They’ve laid out a basic set of principles. But they haven’t laid out the specifics that would tell us how their policies would effect most Americans. In tax reform, they haven’t said which deductions and loopholes they would close to pay for their tax cuts. On the spending side, they’ve said they want to cut federal spending by $500 billion in 2016, but they haven’t said where the cuts will come from.

I’ve explicitly made the case for “strategic ambiguity.” Part of the argument is that detailed presidential campaign proposals ignore crucially important structural properties of our system of governance: 

Before a presidential election, it makes sense to get a sense of what a candidate’s broad objectives are regarding tax policy, but providing an extremely detailed proposal propagates the illusion that presidents can unilaterally implement their plans once in office. Moreover, extremely detailed proposals can tie the hands of a president who must negotiate a policy compromise that reconciles various clashing interests. To reconcile clashing interests in a coherent and plausible way in your own proposal is “to negotiate with yourself.” I might acknowledge that raising revenues is part of an acceptable compromise with “the other team,” but does it make sense for me to unilaterally announce my revenue target? Does that then become an opening bid rather than a final offer? And if it’s a final offer, where does the negotiation go from there?

But this doesn’t change the fact that at least some voters want to have a clearer sense of where a Romney White House might go on health policy, and so the Romney campaign will at some point have to do more than offer a TBD on the questions Ezra raises, despite the fact that any detailed proposal won’t survive contact with the legislative process. Barack Obama, for example, pledged to pursue significant deficit reduction during his 2008 presidential campaign and he explicitly made the case against using an individual mandate as part of a coverage expansion effort. 

In light of a recent Bloomberg View column by Ramesh Ponnuru, which we’ve discussed in this space, one possibility is that the Romney campaign will draw heavily on the ideas of one of the former Massachusetts governor’s key economic policy advisors, Glenn Hubbard.

In 2005, Hubbard co-authored a short book, Healthy, Wealthy, and Wise, with the economists John Cogan and Daniel Kessler. In 2011, after the passage of Obamacare, a second edition was published

Ezra’s post brings up Sen. John McCain’s 2008 health reform proposal as one possible direction for the Romney campaign:

McCain proposed to end the deduction for employer health insurance and replace it with a $2,500 tax credit for individuals and a $5,000 tax credit for families. He got flayed for it. The Obama campaign attacked it as a tax increase. Independent experts noted that the plan would, in effect, make health care much more expensive for employers, which would make them likely to drop health-care coverage for their employees.

These attacks were problematic in that they seriously tied the president’s hands when he pursued coverage expansion, as replacing the tax exclusion for employer-provided health insurance with a refundable tax credit has long been considered one of the more equitable and cost-effective strategies for pursuing coverage expansion. 

Cogan, Hubbard, and Kessler offer a somewhat different approach. On the tax preference, they propose:

(1) Full deductibility of health expenses:

Deductibility mitigates the bias against individual insurance because both employer-sponsored and individual insurance can be acquired with pre–income tax dollars. However, because the tax change allows the deduction of the cost of individual insurance from the income-tax base but not from the payroll-tax base, the proposed policy retains a significant tax incentive for the purchase of employer-sponsored insurance. Expenditures on insurance purchased through an employer would, as under current law, still be excludable from both the income-tax and payroll-tax bases.

Because the tax change allows the deductibility of out-of-pocket health care expenses only with the purchase of insurance, the proposed policy also creates a significant tax incentive for the currently uninsured to purchase insurance.

(2) Modified health savings accounts:

We propose three significant changes to HSAs. First, under current law, an employer-sponsored family health-insurance plan must have a deductible of at least $1,200 to qualify its purchaser for the HSA ($2,400 for a family). We would eliminate the minimum deductible requirement. Second, for persons under age fifty-five, the annual amount a person can deposit in an HSA is currently limited to a maximum of $3,050 ($6,150 for a family). Since our plan will make all current health care expenses tax deductible, the role of HSAs will be to enable tax-free saving for future health care needs. To maintain parity with current law, we would allow individuals to save tax-free the difference between the current HSA maximum deposit and the current minimum required deductible, which is about $1,800 for an individual and $3,700 for a family. Third, under current law, funds from an HSA cannot be used to purchase insurance. Under our proposal, funds from an HSA can be used for any qualified health care expense.

(3) Tax credits for low-income households:

To offer low-income households financial assistance to purchase health care, we propose a tax credit, applicable against income or payroll taxes, that would subsidize 25 percent of health expenses up to a maximum of $1,000 for an individual ($2,000 for a family). Health care expenses would include both payments for insurance and out-of-pocket expenses. Thus, the credit would be available to buy insurance through an employer, on one’s own, or to pay for out-of-pocket expenses (conditional on having insurance).

The goal of these reforms is to reduce the bias against catastrophic insurance and thus to encourage its adoption. There are many other aspects of the Cogan, Hubbard, and Kessler reform agenda, some of which the Romney campaign seems to have indicated that it will not pursue, e.g., they call for the creation of a nationwide insurance market in which federally certified insurance products would compete against state-regulated plans for the business of individuals and small groups, giving them options similar to those enjoyed by large employers under ERISA. The authors also call for public subsidies to protect those suffering from chronic illnesses, which could prove very expensive. They also place heavy emphasis on combating anticompetitive behavior, among other things.

I should stress that this is speculation. It is easy to imagine the Romney campaign going in a very different direction. But we do know that Glenn Hubbard is a respected voice in Republican policy circles, and that many of the ideas he championed in Seeds of Destruction, a short policy manifesto he co-authored with Peter Navarro, anticipated Romney campaign themes. 

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

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