The GOP’s Obamacare Replacement: Better Than Good

Last week, the GOP kept a promise to the American people by delivering a replacement plan for Obamacare.

The plan — part of the party’s “A Better Way” campaign — was unveiled by House Speaker Paul Ryan, R-Wisc. “What we are laying out today is a first-time-in-six-years consensus by the Republicans in the House on what we replace Obamacare with,” he said.

The plan is a good one. House Republicans have laid out several core reform proposals their party can rally around. As I note in my new book The Way Out of Obamacare, a plan like this one would be a vast improvement over the unmitigated disaster that is Obamacare.

Two provisions in particular merit mention — the series of refundable tax credits designed to help offset the cost of health insurance and the cap on the tax exemption for employer-provided coverage.

These reforms would undo one of the government’s biggest policy mistakes. During World War II, Congress enacted wage and price controls to try to control inflation. But to appease unions, the feds exempted the value of employees’ health benefits from those controls and from income tax.

That exemption has done enormous damage.

First, it costs the U.S. government $266 billion annually. That money doesn’t benefit the neediest. According to the Congressional Budget Office, 60% goes to the wealthiest 40% of families.

Second, the exemption encourages people to seek overly generous health plans. After all, a dollar of untaxed health benefits is worth more than a dollar of taxed wages. As Ryan’s plan explains, that gives “employers and employees an incentive to select more extensive coverage than they otherwise would” if they had to buy insurance on their own, with post-tax dollars.

People then use those generous plans to consume more healthcare services than they would if they were paying for them directly. Employer health premiums have jumped by as much as 15% as result, according to the CBO.

Those buying coverage on their own cannot get the tax break that employers enjoy — they must use after-tax dollars.

The House plan would help rectify this unequal tax treatment by offering refundable tax credits that increase with age to those who purchase coverage on the individual market.

While Ryan’s plan states the credits would be age-based, it doesn’t provide specific dollar amounts. But he may just be preserving his negotiating leverage with Congress. If lawmakers are smart, they’ll set the value of those credits at $1,200 for those aged 18 to 35, $2,100 for those 35 to 50, and $3,000 for anyone over 50. Families would get another $900 for each child.

Credits at those levels would cover most of the cost of a basic pre-Obamacare plan in most parts of the country,according to Dr. Jeffrey Anderson of the Hudson Institute. Anderson’s analysis is based on a report from the U.S. Government Accountability Office.

But credits alone aren’t enough. To create parity between insurance obtained through an employer versus on one’s own, the House plan would cap the employer exemption — although it hasn’t agreed on a set amount.

Lawmakers should set the cap at $8,000 for single workers and $20,000 for family plans — and adjust these levels at the inflation rate plus one percent.

Obamacare tried to address the employer-sponsored tax distortion but failed miserably.

Instead of a straightforward refundable credit, the law created a monstrously complex, unpredictable income-based subsidy paid to insurance companies. Despite its enormous price tag — more than $1 trillion over the next decade — this system has left millions of middle class families out in the cold.

Consider the differences between Obamacare and the GOP’s potential reforms. If Republicans opt for tax credits like those Anderson and I advocate, a 40-year old couple with two children making $65,000 a year could get $6,000 in tax credits to offset insurance costs.

Under Obamacare, they get zip.

And unlike Obamacare, if this family could find a plan that cost less than the tax credit, under the GOP plan, they’d be able to keep the difference. These leftover funds could then be placed into a Health Savings Account, which allow consumers to deposit money tax-free for routine out-of-pocket health expenses.

Obamacare’s approach to the employer tax exemption, meanwhile, was to impose a hugely disruptive and costly 40% excise tax on high-cost insurance. The White House claimed this so-called “Cadillac tax” would only apply to gold-plated policies offered to well-heeled executives.

But within five years of its enactment, almost one-third of employers would have been hit by it. Even Democrats have recoiled at this monster — and agreed at the end of last year with Republicans to delay it until 2020.

The House’s proposal for dealing with pre-existing conditions is also better than Obamacare’s. The law’s “guaranteed issue” regulation — which prevents insurers from denying any person coverage — encourages people to wait until they get sick to buy insurance.

The House vision, by contrast, would protect Americans who maintain continuous coverage from unreasonable rate hikes. People would not be allowed to game the system by entering and exiting the insured pool as they pleased, if they wanted to retain access to affordable coverage.

For those who truly can’t afford insurance because of costly, chronic ailments, the House would reestablish state-run high risk pools — which Obamacare closed — and fund them with $25 billion.

The House replacement plan includes several other good ideas. It would expand Health Savings Accounts, allow consumers to buy insurance policies issued in other states, and restore fiscal sanity to Medicare and Medicaid.

In February, Ryan charged the Health Care Reform Task Force with developing an Obamacare alternative. The resulting plan provides a politically viable, market-based replacement for Obamacare that will make the nation’s healthcare system better than it is today — and better than it was before the president’s law took effect.