Hitting the Political Sweet Spot on an Obamacare Alternative

Published June 5, 2014

The Weekly Standard Blog

Over at Forbes, Peter Ferrara has written an interesting assessment of the state of the debate among conservatives on how to advance an alternative to Obamacare that will lead to its repeal.  His analysis gets many things right.  Most especially, he is right that it will not be possible to move away from Obamacare without a viable plan to replace it — and not just any replacement plan will do the trick.  A politically viable alternative must substantially increase insurance coverage versus the pre-Obamacare status quo while also providing real solutions for persons with expensive pre-existing health conditions — doing so, of course, without the heavy-handed mandates and regulations of Obamacare.  Plans that fall short of these objectives will be successfully attacked as inadequate.  Most Americans rightly believe that a return to the pre-Obamacare status quo would not be satisfactory because health care in the United States desperately needs real reform.  What they don’t want is the massive government takeover of American medicine that Obamacare represents.

Ferrara is also right, as he has been for a long time, that moving to a real marketplace in U.S. health care will require some change in the tax treatment of health insurance.  Today’s tax law provides generous subsidization of employer-sponsored insurance plans, but nothing equivalent for persons who must buy insurance on their own.  This unbalanced treatment is the source of many problems.  First, it has fostered an over-reliance on employer plans, to the point that the market for individual coverage is far less robust than it could, and should, be.  Second, reliance on job-based insurance disrupts the continuity of insurance coverage, as workers must switch insurance when they switch jobs.  Third, until the enactment of Obamacare, the tax preference for employer plans had been without an upper limit and therefore encouraged overly expensive employer plans and provided a disincentive to pursue cost-effective care.

An effective reform would rationalize this tax treatment to ensure all Americans are treated fairly and can get insurance that protects them financially, while not discouraging cost-conscious consumption.  For all of its expense and coercion, Obamacare does not address the first two of these concerns — at least for the middle class.  The Obamacare “Cadillac” tax (which isn’t slated to go into effect until January 2018, a year after President Obama leaves office) addresses the third concern, but it does so with an irrationally designed penalty on expensive employer insurance plans that would hit anyone on such plans with a 40 percent excise tax, whether that person be the company’s janitor or its CEO.

Most conservatives agree on the problems and the need for a politically viable solution.  But there continues to be debate over exactly how to proceed.

Where Ferrara misses the mark is in arguing that his favored approach — full replacement of today’s tax preference for employer-paid premiums with a universal, refundable tax credit that all U.S. households would receive — would be more politically viable than the alternative we favor.  Our approach, reflected in the 2017 Project’s health reform plan, would provide a fixed, refundable tax credit to households without access to stable employer coverage but would generally leave in place the tax preference for job-based insurance.  The only change for employer plans would be to replace the Obamacare Cadillac tax with a more rational cap on the tax break for such plans.

Why do we approach the problem this way?  Because there is very little to be gained by disrupting the insurance arrangements of the 160 million or so Americans who are enrolled in job-based coverage and basically like what they have.  It is far better to provide a tax credit for those outside this system that is comparable to the tax break for employer plans, and then replace the Cadillac tax under Obamacare with a rational and not overly constraining upper limit on the tax break that employer plans can enjoy.

Ferrara asserts that it would not be any more politically treacherous to fully replace the job-based tax preference with a universal tax credit for everyone.  But there are plenty of reasons to think he is wrong about this.  For starters, Senator John McCain proposed the full conversion to tax credits in the 2008 presidential contest and was attacked relentlessly by the Obama-Biden campaign for unraveling employer-based insurance.  The attacks were effective and contributed significantly to Democratic momentum in September and October of that year.

The attacks were hard to deflect in 2008, and would be again in 2014 or 2016, because the full switch to universal tax credits would lessen employer control over their workplace insurance plans.  Many employers fear that, with a Ferrara-like universal credit, their younger, healthier workers will choose to buy low-cost plans on the individual market and leave employers with just the older and less healthy employees in their plans.  Under this scenario, premiums for employer plans would rise rapidly.  Anticipating this, many, if not most, large employers would oppose such an alternative, thereby diminishing the prospects for repeal.

Ferrara notes correctly that there is also political risk in putting an upper limit on the tax break for employer coverage, and he points in particular to the limitation proposed in the plan offered by Senators Richard Burr, Tom Coburn, and Orrin Hatch.  Their plan would allow tax-free employer-paid premiums up to only 65 percent of an expensive employer-sponsored plan.

There are several things to note about the senators’ plan, and about the political viability of these kinds of reform plans in general.  First, the Burr-Coburn-Hatch “tax cap” was inadvertently set at too low of a level.  As explained in a separate post, the senators intended to set the cap at a level that would ensure their plan was budget-neutral.  It was only after they introduced their plan that it was discovered that the plan would produce large excess revenues.  There is room under the plan, therefore, to raise the cap substantially so that it affects only the most expensive employer-sponsored plans.

Second, the reform plan authored by the 2017 Project makes it clear that it is possible to construct an approach with a high tax cap and generous tax credits for those outside the employer system that is also fiscally sound.  The upper-limit thresholds in the 2017 Project plan are about $8,000 for individuals and $20,000 for families.  Only the most expensive plans would exceed these thresholds, and even in those plans, workers would still get generous subsidization of their health insurance, just not for the premiums above the tax preference limits.

It will also be much harder for supporters of Obamacare to attack this approach because of the Obamacare Cadillac tax.  Indeed, the more that the “tax cap” can be shown to be a better and more rational version of Obama’s Cadillac tax, the more difficult it will be for Democrats to attack it.

Obamacare’s unpopularity has created a historic political opportunity for the law’s opponents.  The public is thirsting for credible alternatives.  But that does not mean that advancing a replacement plan is entirely without political risk.  Conservatives must be careful about how they proceed, and that starts with avoiding the mistakes of 2008.  There’s no reason to create needless anxiety among those with employer coverage, because a viable plan can provide fairness, broad coverage, and lower costs without doing so.  The sooner conservatives come to this realization, the better.

James C. Capretta is a senior fellow at the Ethics and Public Policy Center and a visiting fellow at the American Enterprise Institute. 

Jeffrey H. Anderson is the executive director of the 2017 Project.

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