The Missing Reform

Published April 24, 2011

The New York Times

Republicans have an effective slogan for their health care agenda: “repeal and replace.” The problem is, they can agree only on the first half; agreeing on what to put in place of last year’s health care law is the hard part. Even Representative Paul Ryan’s bold budget proposal avoids the issue.

Republicans can’t keep ducking through the 2012 elections. Fortunately, there’s a solution hidden in plain sight: a tax credit for health insurance.

Unlike wages, employer-provided health benefits are untaxed, giving employees an incentive to get the most expensive coverage available through their jobs. This drives up health care costs, but nobody in politics wants to fix the problem by simply taxing benefits.

In his 2008 presidential campaign, Senator John McCain proposed to untangle this knot through an insurance tax credit. Whether they get insurance from their employer or buy it themselves, workers would receive the same credit, creating an incentive to shop around for the cheapest coverage.

The proposal has a lot of virtues. Many without employer coverage would be able to get insurance on their own. With coverage less dependent on employment, people wouldn’t worry about losing coverage if they lost or changed their jobs. They wouldn’t have to worry, either, about their company cutting their benefits. And, as more Americans bought their own insurance, consumer pressure would bring down costs for everyone. Ultimately, companies could get out of the business of managing their employees’ health insurance altogether.

But the plan came under heavy fire in the 2008 campaign, and Mr. McCain did little to defend it. The chief problem was the same one that frustrates ambitious health reformers on the left: Most people like their insurance and do not want Washington to change it.

It’s true that Mr. McCain’s plan would be disruptive: many young and healthy employees would find cheap policies on the individual market, leaving their colleagues to pay higher premiums—or see their employers end their coverage altogether. That political vulnerability is the main reason House Republicans did not include Mr. McCain’s proposal during the 2009 health care debate. Instead they advanced a grab-bag of smaller proposals, like letting people buy insurance across state lines and capping medical malpractice awards.

These ideas have their merits, but they aren’t enough. The Congressional Budget Office found that the House Republican alternative would increase the ranks of the insured by only three million over 10 years. No wonder even moderate Democrats did not find it attractive.

So far, then, Republicans have proposed a big-bang insurance tax credit and no tax credit at all. The middle course is to make a gradual move toward an individual market. It would make the tax break a flat credit, as Mr. McCain proposed, to end the incentive to overspend. But it would let people use that credit to buy their own insurance only if they do not have access to a company plan. Those whose employers offer insurance coverage could use the credit only to offset the cost of that coverage.

This alternative sacrifices some advantages of the McCain plan. It would not do as much to shift control over insurance to workers. They would have to stay in their jobs to keep their existing plans. But it would cut costs and help people the tax code now pushes out of insurance markets. And it would do so, critically, without threatening the insurance arrangements of the satisfied majority. Over time, this reform could help the individual market grow and become more attractive to more Americans. Voters might then become receptive to relaxed restrictions on using the tax credit to exit the employer market.

This incremental transition would be in keeping with Mr. Ryan’s other reforms. Rather than replacing traditional Medicare immediately, his budget plan lets current beneficiaries and those who are about to retire keep the plans they have been expecting. Rather than imposing a new model for Medicaid policies, his plan readjusts the balance between the states and the federal government in running the program.

A true alternative should build on this approach—gradually bringing market forces to bear on the problems of the uninsured and of exploding health-care costs—instead of repeating Republican mistakes of the recent past.

Ramesh Ponnuru is a senior editor at National Review. Yuval Levin is the editor of National Affairs and a fellow at the Ethics and Public Policy Center.

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