Republicans’ Obamacare replacement doesn’t accomplish one of its key goals, which is to end distortions that prop up the employer-based health insurance system over the individual market.
If conservatives want market reform of healthcare provision, they need to amend this bill radically to include policy changes aimed at fixing this distortion.
House Speaker Paul Ryan was right that federal policy favors employer-based insurance and that this is undesirable. Why? because, as Health and Human Services Secretary Tom Price said on Tuesday, tax treatment needs to be equal. Both men were right about the theory, but wrong in suggesting their bill addresses this problem well.
Health insurance is a rare untaxed benefit because of anachronistic Depression-era law. When your employer pays your wages or a salary you owe tax on it. If he provides you with a limousine service to work, as Tom Daschle learned, you owe tax on the value. If he gives you an apartment to live in, you’d owe tax on that, too. This is all a logical extension of the income tax; if your employer pays you with something valuable in exchange for your labor, it’s taxed.
But this does not apply for health insurance. The portion of your health insurance premium which your employer pays is an untaxed benefit. Further, the portion of your employer-sponsored health insurance which you pay is tax-deductible.
But if you get your health insurance on the private market, you don’t get this benefit; your premiums are not deductible. This unfairness, for example to the self-employed, isn’t the only reason people choose employer-based insurance. But it helps tip the scale.
Among the many reasons why this is a problem is that employer-based health insurance doesn’t follow you from job to job. This decreases job mobility, pinning people down. Decreased worker mobility means lower wages and lower job satisfaction. It also means fewer people strike out on their own and set up their own businesses.
More portability wouldn’t only liberate workers, it would also rearrange incentives for insurers. If an insurer thought it might keep a 25-year-old patient for another 40 years, it would want to work with the patient to be healthier, with free checkups, a deeper discount on cholesterol medicine, fitness programs etc.
This tax distortion has pushed down wages because employers pay people in greater health benefits instead of cash.
A more robust individual market would mean more competition in the insurance industry. Customers shopping in the individual market can compare prices and benefits and choose a plan that fits them. In the employer marketplace, the customer does basically no shopping. Instead, the HR department picks for everyone.
Real reform of healthcare will require market forces. The employer-based system dampens market forces.
Last week’s version of the GOP’s Affordable Care Act included a provision to reduce distortions by capping the amount of premium a person can deduct. That would mean people getting extensive coverage (low deductibles, low co-pays) would lose some of their tax break. This would push people towards lower-premium plans and towards the individual market. Both of those changes would make patients more like customers, seeking the best value. This would spur competition in quality and price.
But large employers love the exclusion, and they successfully lobbied the GOP to drop that cap. Republicans need to stick the cap back in and make sure it is not indexed for inflation, so it steadily removes the tax benefit of employer-based insurance.
To offset that tax hike, Republicans should expand Health Savings Accounts even more than the current bill does. The legislation raises the annual contribution limit (a nice perk for high earners or aggressive savers), but there’s more to do.
HSAs should no longer be linked to a high-deductible health plan. HSA money should be freed up to spend on premiums, on annual fees for membership-based health practices, or to contribute to mutual-aid health plans, which eschew insurance. Unshackling HSAs would spur competition, diversity, and innovation in the provision of healthcare.
Far better than the tax credits the GOP bill extends to those on the individual market would be means-tested subsidies straight into the HSAs of poorer families.
These are just a few reforms to remove distortions that stultify innovation and competition. There are plenty others, such as Sen. Rand Paul’s idea of Association Health Plans. But stripping away preferences for employer-based health will be a tough political sell and it will upset big business.
Republicans need to understand, though, that most people regard healthcare, and health itself, as more important for themselves and their families than almost anything else. Individual people should have the right to choose what’s best for them and their dependents. They should not have their fiscal arms twisted to choose what they don’t really want.
