In the December issue of The Economist’s View, a collection of short-form essays by leading economists published by the Berkeley Electronic Press, Mark Pauly of Wharton has an excellent piece that clarifies many of the challenges facing the health reform architecture created by PPACA. He walks through a number of issues.

(1) On the impact of PPACA on Medicare and the overall tax burden, Pauly writes:

It is well known that the Medicare program has substantial financial difficulties as the population ages and costly but beneficial new technology continues to be applied to care for seniors. The real problem is of course not the fictitious balance in the Medicare Part A trust fund, but rather the increased future tax rates borne largely by the working population as growing Medicare spending needs to be financed. The changes in Medicare—reducing Medicare Advantage payment and some other reimbursement reductions to hospitals and doctors (the latter already in great jeopardy)—had been considered possible modifications to Medicare that might have mitigated the worrisome and probably unsustainable tax burden for transfers to the elderly through Medicare and Social Security. Now that these provisions have instead been used to finance transfers to the uninsured, the high burden of future Medicare financing will remain without modification. Who bears this cost depends on what happens next. If the high tax burden induces reductions in social insurance programs for the elderly, they will pay yet further for coverage of the rest of the population. If, despite the dramatically higher tax rates these programs, they are sustained in something like their current form, middle class taxpayers and workers in the future will in effect bear the cost of covering the uninsured. They do this not because they were asked to pay higher explicit taxes for health reform, but rather because they will have to pay higher taxes for Medicare to replace the savings that were transferred to funding health reform.

Pauly then posits that the prospect of sharp increases to average and marginal tax rates will put pressure on advocates of the new insurance subsidies. Because the voting public wasn’t given a clear picture of the implications of PPACA for the tax burden going forward, new questions will likely be raised about the structure of the subsidies:

But if instead they come to realize for the first time how much this generous program is costing them, they may ask for better evidence on the benefits from it, and, if the evidence is lacking, cut back on the program in order to hold their overall federal taxes down.

Pauly’s basic take is that while there is fairly clear evidence that the minority of uninsured people who are poor and near-poor derive significant benefits from received insurance coverage, the evidence is weaker for extending coverage to the non-poor uninsured. If we’re all going to collectively pay for extending coverage to the non-poor uninsured, we need to have a better sense of what’s at stake.

(2) Pauly sees a potential free-lunch in imposing taxes on fringe benefits, including health benefits:

Note that the tax would cause increased cost sharing and strengthen managed care among the middle class and above who are already insured; results of the RAND health insurance experiment strongly suggest that there will be little adverse impact on health but considerable reduction in spending. Moving up the current high cost insurance tax to more recent implementation and redefining it as a tax on higher wageworkers who take more generous policies would help both transparency and implementation.
This is a tax with a negative excess burden, one that both raises revenue and corrects already existing distortions, so in that sense it is ideal public policy from the point of view of economic welfare.

In light of the political resistance to this approach, Pauly notes that the government could, “offset at least part of the capping of the exclusion by lower marginal tax rates.”

(3) Pauly ends with a brief discussion of the inequitable nature of the subsidies:

Subsidies are much greater for lower income workers in small firms or firms which do not offer insurance coverage (often the same) which is both inequitable to lower income workers in large firms and likely to cause distortions in firm size as large firms spin off low wage activities to smaller firms that can qualify for subsidies (Herring and Pauly 2010). Government’s ability to keep different sets of low wage workers apart in order to offer much larger subsidies to some than to others is likely to erode over time. But subsidizing everyone raises the cost of subsidies.

All in all, Pauly offers a very useful guide to thinking about how we might reform reform. Many argue that we should take about nothing but repeal between now and the presidential election. My concern is that there needs to be a Plan B if PPACA does survive between now and, say, 2014. Because the legislation is unsustainable, it will have to be fixed if it is not repealed. And even if PPACA’s Republican and Democratic critics manage to successfully repeal the legislation, we’re in urgent need of an alternative that addresses the underlying problem of access to affordable insurance coverage, like the approach outlined by Thomas Miller and James Capretta.