President-elect Trump's pick of Rep. Tom Price to be his Secretary of Health and Human Services has drawn more attention to his proposal to replace Obamacare. One aspect of the bill — to award individuals tax credits to purchase insurance that are adjusted by age rather than income — has come under some criticism. Without trying to advocate this approach personally, it's worth clarifying why a number of Republican proposals over the past several years have chosen this path.
Under Price's most recent proposal, tax credits would be made available ranging from $1,200 for those between 18 to 35 to $3,000 for those over 50 — with an additional $900 credit per child up to age 18. Vox's Sarah Kliff, in her critique of Price's Obamacare replacement idea, observed, "This means that that Bill Gates would qualify for the largest tax credit simply because he is 61 years old. ... Conversely, a 23-year-old with little income and health problems gets minimal help under Price's plan — despite the fact that they need support much more than Gates does." Technically, assuming Gates gets insurance from his employer, he would not be getting any credits. Putting that aside, here's why many Republicans are moving toward age-based credits.
One reason for choosing to allocate subsidies by age is practical — it's far easier to administer. In fact, one of the biggest ongoing struggles for the implementation of Obamacare has been coming up with ways to verify applicants' income for the purposes of determining subsidies. Trying to figure out a way to deal with income verification was one of the early problems encountered by the back end of computer systems that were designed for Obamacare. Also, people can intentionally understate their income to get more subsidies, people could accidently misstate it, or their income can vary over the course of the year. This created a mini-scandal for Obamacare during tax season, when H&R Block reported that two-thirds of beneficiaries had to repay subsidies out of their anticipated tax refunds (an average of $729), because their income ended up being higher than what they stated when they applied for insurance. Awarding credits by age eliminates all of these problems. Somebody's birth date does not vary, and it is easily verifiable in government databases.
Another reason is that adjusting by age could potentially cover more people by more efficiently allocating government spending. In a more market oriented system, insurance is going to be a lot cheaper for younger people. Imagine giving a 30 year-old with a low income the highest tax credit available under the Price plan — $3,000 per year. If, in a market-based system, that 30 year-old could easily find insurance for $100 per month, or $1,200 per year, it means the government is leaving $1,800 in subsidy money on the table that in the age-based system would go toward helping somebody older with more expensive insurance.
It's also worth making an additional point about the actual value of the tax credits. Given all the publicity about premium increases, the idea of a $1,200 annual credit seems paltry. But in a universe in which Obamacare regulations were stripped away, insurance would be much cheaper. And we don't have to speak theoretically about this.
Back in 2013, before the implementation of the law, the Government Accountability Office released a report on insurance premiums in 50 states, plus the District of Colombia. As you can see from the below chart based on the report, just a few years ago, a 30-year old male non-smoker was able to purchase insurance for under $1,200 annually in all but six relatively highly regulated states. In Texas in 2013, plans were available for as low as $363 before Obamacare. A search of Healthcare.gov this morning found the cheapest plan in the state available to a male non-smoker is over $2,500.
It's true that prices would have risen since 2013 to some extent, regardless of Obamacare. But if you want a more apples-to-apples comparison, check out Massachusetts in the chart. It happened to be the state that implemented Romneycare, which was the model for Obamacare. And at $2,564, its premiums were the highest in the nation — nearly three times neighboring New Hampshire. The next three highest-cost states (New York, New Jersey, and Maine) all had Obamacare-like regulations on the books, including the requirement that insurers cover those with pre-existing conditions. At the time, looking at the chart, I predicted massive nationwide "rate shock" under Obamacare once these type of regulations became federal.
The point is, in discussing the value of tax credits, it doesn't make sense to look at insurance prices as they exist now, because they would quickly drop if Republicans follow through on promises to implement market-based reforms. (Which I by no means take for granted).
Liberals would argue, of course, that the insurance that exists in a market-based system would be less comprehensive, benefitting the younger and healthier, but making things worse for those with more significant health needs. This is a different argument that I shall address in subsequent posts.