I have made very clear in recent posts that one negative feature of the tax bill, increasing national debt by $1 trillion over ten years, greatly outweighs its good features. For this reason I ask Nebraska Senator Deb Fischer to put the welfare of our country ahead of the demands of her Republican colleagues and vote against the bill.
Nevertheless, the tax bill does have beneficial features and I would like to acknowledge them here. Major ones are:
Lowering the corporate tax rate from 35% to 21% and moving to a territorial system, making us far more internationally competitive and encouraging our multinational corporations to bring their foreign profits back home.
Establishing immediate expensing of capital investment, thereby speeding up business investment and increasing economic growth.
Reducing itemized deductions for state and local taxes and mortgage interest, but not eliminating them as should be done for much greater revenue savings.
Increasing the standard deduction to $12,000/$24,000 (for singles/couples) which will reduce the number of individual taxpayers who itemize deductions from 30% to just 6%. This single feature alone achieves major simplification.
Measuring inflation adjustments for income thresholds by the Chained Consumer Price Index (CCPI) rather than the current CPI. CCPI takes consumer behavior into account when computing inflation and will lead to an increase in tax revenue over time.
Eliminating the individual mandate for the ACA which will lead to fewer healthy people signing up for health insurance. This begins a process of healthcare cost reform which must continue much further to significantly reduce the cost of American healthcare. Much more later.
Conclusion. The good features in the tax bill do not nearly outweigh the awfulness of adding $1 trillion to our debt over the next ten years. The Republican Party should be ashamed of itself for such poor fiscal and economic stewardship. What is it thinking?
Now that the Republicans have failed to replace the Affordable Care Act with a poor substitute, it is likely that a bipartisan plan will emerge. Both sides want changes in the existing structure of the ACA. The Democrats want to hold down the rapidly growing costs for individuals who purchase insurance through the exchanges. The Republicans want to hold down the overall cost of American healthcare which now exceeds 18% of GDP.
There should be plenty of room for compromise:
Medicaid. The Centers for Medicare and Medicaid Services project that under the House bill, which caps federal spending growth for Medicaid and saves hundreds of billions of dollars, total Medicaid enrollment will stay roughly constant above 70 million for the next decade, compared to 55 million before the ACA was enacted.
A Bipartisan Problem Solvers Caucus would fund cost-sharing payments to insurers, proposes curtailing the mandate on employers to provide health insurance to their workers, advances states’ ability to band together into regional compacts for selling insurance across state lines, and expands the opportunity for states to experiment with different ways of providing coverage.
Medicare. Just letting Medicare negotiate for drug prices and reducing the variation in the costs for post-acute care would provide huge savings, without even addressing inefficiencies in Medicare’s basic design.
Conclusion. The above plan holds down the cost of insurance purchased by individuals on the exchanges as well as taking significant steps to control the costs of both Medicare and Medicaid. It doesn’t address the huge inefficiency of employer provided care but nevertheless represents a big step forward towards implementing cost control in healthcare.
The Affordable Care Act, established in 2010, greatly expanded access to healthcare in the U.S. However, in spite of its name, it has done nothing to control the rapidly increasing cost of healthcare which is the core of our debt problem.
The new Senate plan, struggling to gain enough support to pass, puts Medicaid on a budget but doesn’t even attempt to address wider aspects of the healthcare cost problem.
A wider approach is the best way to proceed and perhaps now it is the only way to succeed in getting something done. Mr. Peter Suderman, who writes for Reason magazine, proposes several principles for a new approach:
Work for broader coverage but not necessarily universal coverage. This allows focusing on other important features such as:
Unification, not fragmentation, is what should be emphasized. Medicare and Medicaid are paid for directly by the government. Employer provided coverage, subsidized through the tax code and costing $250 billion per year, is the biggest problem in the U.S. healthcare system. It incentivizes employers to provide ever more generous insurance while insulating individuals from the true cost of care. It discourages job switching and entrepreneurship. Medicare ends up paying out far more than individuals have paid in.
Health insurance coverage is not the same as healthcare. For non-catastrophic, non-emergency expenses, affordability should be emphasized, rather than subsidies. Health savings accounts are a good way to accomplish this.
Focus on government assistance for the poorest and sickest. This means upgrading Medicaid, and coverage for pre-existing conditions, at the same time as putting Medicaid, Medicare and employer provided care all on a fixed, but reasonable, budget.
Conclusion. The cost of American healthcare is a huge problem. Hopefully the Senate will begin to address this fundamental problem as it struggles to pass a healthcare reform bill.
Recently I have been discussing the high cost of American healthcare and the urgent need to lower this cost. The current GOP plan, the American Health Care Act, partially addresses this problem by reforming the funding mechanism for Medicaid.
But much more needs to be done. All Americans will have to be involved in the solution and not just the poor. There are two main facets to the problem, neither of which is addressed by the AHCA:
The tax exemption for employer provided health insurance should be replaced by a universal (and refundable) tax credit limited to the cost of catastrophic health insurance (with a high deductible).
Medicare needs to be redesigned so that well-off retirees pay for more of their health care. Details to follow soon.
The U.S. spends 18% of GDP on healthcare, public and private, about $3 trillion per year, and almost twice as much per capita as any other developed country. Furthermore this already enormous relative cost will continue to get worse without major changes in policy.
The main reason for the huge cost is that free market forces are not operating properly. More specifically, it is because most of us, as individual healthcare consumers, do not have enough “skin in the game.”
This conundrum is caused by our third party health insurance system whereby most of us receive health insurance through our employers. This gives us as individuals little incentive to pay attention to the cost of our own care and to try to keep these costs as low as possible.
A good way to fix this problem is to limit the exemption for employer provided insurance to the cost of catastrophic care with a high deductible. Routine medical expenses would be handled through individual (tax preferred) health savings accounts. The self-employed can be included by granting them a (refundable) tax credit also equivalent to the cost of catastrophic care.
Conclusion. Americans are fortunate to have access to high quality health care. But we are paying unsustainably high prices for it. If we cannot figure out a rational and sensible solution to this problem, our healthcare system will soon collapse from its own deadweight and we will end up with a tightly controlled, government run, single payer system.
The Democratic Affordable Care Act expands access to health insurance for millions of Americans. This is its great virtue. However it does nothing to rein in overall costs which is a huge deficiency.
The Republican American Health Care Act, passed by the House and being considered by the Senate, has both strengths and weaknesses, as I have previously discussed. Primarily, it puts Medicaid on a budget by block-granting it to the states with sufficient flexibility for the states to operate it much more efficiently. This needs to be done and is a big money saver.
The major problem with the AHCA is that all cost savings come from just one program, namely Medicaid, and this is a program for people with low incomes. Simple fairness, as well as the need for much bigger savings, dictates that financially well-off people should also have to share in solving the healthcare cost problem. This can and should be done in two different ways:
The tax exemption for employer provided health insurance should be replaced with a universal (and refundable) tax credit sufficient to pay for catastrophic health insurance (with a high deductible). Also tax preferred Health Savings Accounts for all can be subsidized based on income. The purpose here is to force all of us to pay attention to, and take responsibility for, the cost of our own healthcare.
Redesign of Medicare. Medicare is already being subsidized by the federal government at a net cost (after FICA taxes and premiums paid) of over $400 billion per year, and this overall cost will continue to increase as the number of retirees increases and the net subsidy per retiree also increases (see chart). Details of possible redesign will be discussed later.
Conclusion. The ACA needs to be improved in many ways to get the cost of healthcare under control. The AHCA bill currently being considered by Congress needs major changes so that all Americans, rich and poor and in between, are part of the solution of our healthcare cost problem.
As I have discussed in previous posts, here and here, the American Health Care Act, the GOP replacement for the Affordable Care Act, is a step in the right direction.
One of the best features of the GOP bill is its provisions to revamp the Medicaid program. The problems of Medicaid are well described by the healthcare expert, Avik Roy, here and here:
Medicaid was established in 1965 and now provides healthcare benefits for individuals and families with incomes up to 133% of the federal poverty level.
The states pay 40% of the costs on average while only controlling 5% of how the program is operated.
The federal Medicaid law mandates a laundry list of benefits which the states must provide. States cannot charge premiums and copays and deductibles are minimal.
Medicaid is the largest or second largest line item in nearly every state budget. The only tool states have in controlling costs is to pay doctors and hospitals less than private insurers pay for the same care. This means that fewer and fewer doctors are accepting Medicaid patients.
Thus Medicaid enrollees have poor access to healthcare. In fact, their health outcomes are typically no better than for those with no insurance at all.
An able-bodied adult on Medicaid receives about $6000 a year in government health-insurance benefits. Yet CBO estimates that five million Americans won’t sign up for Medicaid if the ACA individual mandate is repealed as proposed by the AHCA.
AHCA block grants will give states more flexibility to manage Medicaid’s costs in ways which increase access to doctors and other providers. It would also decrease federal outlays for Medicaid by $880 billion in its first decade.
AHCA’s goal is to ultimately merge Medicaid for able-bodied low-income adults into the system of tax credits which the AHCA proposes for those above the poverty line.
Conclusion. The AHCA will make Medicaid into a much more efficient, flexible and effective program for serving low-income individuals and families. This represents a first step in the entitlement reform which the U.S. so badly needs.
The American HealthCare Act, introduced in the House of Representatives on Monday, begins the process of looking for a replacement and improvement to the Affordable Care Act. It moves in the right direction but also has some major shortcomings.
The Bill’s strengths are:
The Bill discards the ACAs web of mandates and regulations in favor of incentives to buy health insurance in a deregulated market.
The Bill replaces the ACA exchanges with refundable tax credits for individuals not covered by employer provided health insurance.
The Bill turns Medicaid into a block grant program for states with much flexibility for the individual states to run their own programs. This reverses the current system whereby the federal government matches each state’s spending on Medicaid and is thereby expensive for both state and federal government
The Bill also has major weaknesses:
There is no upper limit on the tax exemption for employer-paid premiums. This tax exemption amounts to a total drain of nearly $300 billion a year on U.S. tax revenues and is the biggest single reason why healthcare is so expensive in the U.S.
The inadequacy of financial support for the lowest income individuals and families. A $2000 annual tax credit for a minimum wage worker is simply not enough for her/him to be able to afford health insurance.
This huge discrepancy between the lavish tax treatment of employer-paid care and stingy tax credits for individuals is a matter of fundamental inequity as well as unsound tax policy. It would be much fairer to give all Americans the same equal tax credit roughly equivalent to the cost of catastrophic healthcare insurance.
Conclusion. The ACA increases access to healthcare insurance but does nothing to control costs. It is imperative for the Republican replacement plan to fix this glaring deficiency.
I have been making the case for some time now that the rapidly increasing costs of U.S. health care, especially for the entitlement programs of Medicare and Medicaid, is the fundamental cause of our exploding national debt, and therefore these costs must be curtailed. The only way to fix this problem is for Americans to have more “skin in the game” regarding these costs. My last post, “The Inherent Instability of Obamacare,” discusses the separate but related problem that the Affordable Care Act is actuarially unsound because it misprices the basic risks involved in health insurance. This is why costs on the exchanges are going up so fast which, in turn, leads to fewer enrollees.
A good way to address this double whammy of problems is to use a plan developed (mostly) by the American Enterprise Institute in December, 2015. The main features are:
ACA Mandates, for both individuals and employers, would be abolished.
Retain tax preferences for employer-paid premiums, with an upper limit comparable to the cost of catastrophic health insurance.
Provide refundable tax credits to households without access to employer coverage, gradually replacing subsidies provided by ACA exchanges.
Persons with pre-existing conditions would have continuous coverage protection.
Medicare would migrate to a defined contribution, refundable tax credit model as above, with eligibility gradually rising to age 67.
Medicaid would be financed with block grants to the states and would supplement the refundable tax credit model.
Health Savings Accounts, to accompany high deductible plans, would be encouraged with a one-time federal tax credit matching enrollee contributions.
Health Care for Veterans would be integrated into mainstream care.
Summary. Abolishing the mandates means that coverage levels and price would be actuarially determined in the market place. Equal tax credits for insurance and help in setting up health savings accounts ensure fairness and widespread accessibility. The overall free market model will guarantee both low cost and the greatest possible degree of flexibility, innovation and quality of care.
The recent announcement by Aetna Insurance Company that it will exit the health insurance market in most of the states where it now operates raises a fundamental question about the stability of the Affordable Care Act. As shown by the following map from yesterday’s New York Times, it appears that at least five states with 17% of the American population will have only one health insurer to choose from next year. As the Wall Street Journal’s Greg Ip points out in a recent article, “the problem isn’t technical or temporary, it is intrinsic to how the law was written” Specifically:
Insurance is supposed to price risk but the ACA changed this. Insurers can no longer charge or exclude coverage for pre-existing conditions, charge men and women different rates, or charge older customers more than three times as much as the young.
For example, a 64-year-old consumes six times as much health care as the average 21-year-old. Adhering to the 3-to-1 maximum ratio, the insurer would have to greatly overcharge the 21-year-old than his actual cost and/or greatly undercharge the 64-year-old.
The rational response for unsound pricing is for young and healthy customers to stay away and sick, older customers to flock to the exchanges. ACA mechanisms to prevent this type of behavior aren’t working very well.
One example of this is that the ACA exchanges, which provide income-based subsidies for those without employer provided health insurance, are mainly attracting those people just slightly above the poverty line who get the biggest subsidies (see chart).
I have pointed out many times that the cost of health care, especially for the entitlement programs of Medicare and Medicaid, is the fundamental driver of our exploding national debt and therefore must be curtailed. But now, in addition to the cost problem, we are discovering that the ACA also has a fundamental access problem as well. Big changes are clearly needed in the ACA. More details later!
My last post, “The Challenges of American Health Care,” describes the huge demographic and cost pressures facing American healthcare and lays out a comprehensive reform plan by the Hoover Institution’s Scott Atlas to address them. Today I will give more details about these pressures on both private care as well as care subsidized by the Affordable Care Act. For example:
The cost of providing health care to an average American family surpassed $25,000 for the first time in 2016, $1,155 higher than last year, and triple the cost in 2001.
A significant cost driver is the rapid growth in what health plans and insured people are paying for prescription drugs, now comprising $4,270 annually, or 17% of the total.
80% of healthcare costs come from just 20% of the population.
The insurance company United Healthcare announced that it is withdrawing from most ACA exchanges because it lost $475 million on plans sold in 2015 and expects to lose another $650 million in 2016.
Overall $2.5 billion was lost by insurance companies on the exchanges in 2014. The government’s “risk corridors” program is insufficiently funded to reimburse these losses to the insurance companies involved.
The fundamental problem is politicization of the marketplace. Insurers were pressured to set premiums low initially to ensure that the rollout was not a flop. Now premiums are increasing rapidly to cover the initial losses. Households with income over 250% of poverty already find the plans offered on the ACA exchanges unattractive.
Conclusion: The overall rapid increases in the cost of healthcare, public and private, is unsustainable for individuals, families, employers and government. Something has to give. We need a total reform of healthcare spending in the U.S. Many good suggestions have been made for how to do this. Now is the time to act!