Why the Patient CARE Act Proposal Isn’t Ready to Replace Obamacare
Friday, March 21, 2014
Capitol Hill Republicans’ latest plan to replace the Affordable Care Act falls short of what is needed to reverse the downward drift of our over-regulated, over-subsidized, and over-politicized health care system.
In recent months, Capitol Hill Republicans have renewed efforts to offer a health care reform plan to replace and not just repeal the Affordable Care Act (ACA). Previous reform proposals within Republican circles have lacked the comprehensive scope, attention to implementation obstacles, and strategic vision to present an effective and attractive replacement alternative to the floundering ACA regime. Stepping up to try to fill this vacuum is the Patient Choice, Affordability, Responsibility, and Empowerment (CARE) Act, proposed in late January by senators Richard Burr (R-NC), Tom Coburn (R-OK), and Orrin Hatch (R-UT).
The Patient CARE Act’s stated objectives are to lower health care costs, put patients in charge of their health decisions, provide relief from Obamacare’s mandates, and ensure affordable health care for patients and taxpayers. The proposal also is a political document intended to fill in enough blanks to maximize support for replacing as much of the ACA as possible.
Unfortunately, the initial Burr-Coburn-Hatch plan primarily reveals the limits of most conservative health policy thinking and the bounds of conventional politics. It thus falls short of what is needed to reverse the downward drift of our over-regulated, over-subsidized, and over- politicized health care system.
Less than full repeal
A more balanced proposal should suggest how possible reforms would encourage, rather than hamper, newer efforts to reorganize health care services to become more efficient, effective, affordable, and available.
The proposal’s promise to “repeal Obamacare” turns out to be limited by concessions to both political reality and the constraints of standard budgetary scoring by the Congressional Budget Office (CBO). Burr, Coburn, and Hatch quickly reinstate several popular provisions that have already been fully implemented and would be hard to dislodge. They endorse Obamacare’s prohibition on lifetime limits for insurance coverage and its mandate that insurers extend family coverage to any “dependent” adult children up to age 26 within the primary insured’s family.
The three senators apparently decided they must come close to, or exceed, the expanded insurance coverage promises made by Obamacare defenders, while using the sometimes-artificial health care spending and coverage models of the CBO. Those commitments to near-universal coverage and budget neutrality force a series of policy concessions needed to pay for their version of insurance subsidies and to ensure enrollment in less-expensive coverage options.
The Patient CARE Act repeals the various tax hikes imposed by Obamacare. It caps growth in federal spending on Medicaid. It also substitutes less-generous tax subsidies for insurance coverage and encourages purchases of less-comprehensive insurance plans. However, those policy changes alone do not quite add up to meet the proposal’s overall budgetary targets and coverage goals.
To finance more insurance coverage for uninsured Americans and others with fewer tax subsidies, the proposal essentially would pay less for the care of current and future Medicare beneficiaries and would increase taxes on some individuals and families who already have more-comprehensive employer-based insurance.
The Patient CARE Act sidesteps any efforts to reverse the budgetary effects of the ACA’s series of Medicare reimbursement cuts. Obamacare used those “savings” to help fund a significant share of its subsidies for expanded insurance coverage through new health exchanges and Medicaid.
The proposal also replaces Obamacare’s “Cadillac” tax on high-cost, employer-sponsored insurance (ESI) plans with a reconfigured tax of its own. The Patient CARE Act’s cap on the maximum tax subsidies for individuals or families enrolled in ESI plans serves mostly to offset some of the added costs of extending new, post-ACA tax subsidies to other purchasers of insurance in the individual market.
Burr, Coburn, and Hatch also require auto-enrollment in low-cost default insurance for lower-income Americans who fail to choose a subsidized health plan (with an opt-out escape hatch that most behavioral economists expect very few to use). This allows the Patient CARE Act sponsors to claim that they can meet or exceed the expanded coverage figures promised by Obamacare, even if the scope of the benefits under such default coverage will in most cases be quite limited.
Any Republican-sponsored alternative to Obamacare must deal with the problem of ensuring access to insurance coverage for individuals with preexisting health conditions. The Burr-Coburn-Hatch proposal would extend to the individual insurance market the 1996 Health Insurance Portability and Accountability Act (HIPAA) protections against coverage restrictions or premium hikes based on changes in an individual’s health status or the source of his ESI coverage. Those provisions ensured that anyone who maintained continuous insurance coverage within the employer group insurance market would not be singled out for new underwriting based on health status when switching to a new employer’s health plan.
Applying similar rules to all individuals who move among any kind of insurance plans also provides a strong incentive for responsible citizenship. Individuals will acquire and maintain insurance coverage or risk the future consequences of possible premium hikes or coverage restrictions based on changes in health status. This approach should work more effectively than Obamacare’s individual coverage mandate, which has managed to become both highly unpopular and relatively weak.
The Burr-Coburn-Hatch provisions for preexisting conditions meet the minimum political requirements for the Obamacare replacement debate.
The Patient CARE Act adds another layer of protection for individuals with preexisting conditions who cannot or do not maintain such continuous coverage. It would increase federal taxpayer support to subsidize state-run high-risk pools to help cover other Americans who lack access to insurance because of their health status. However, the proposal’s sketchy description of those high-risk pools fails to provide any parameters for the extent of federal funding they will receive, the level at which enrollees’ out-of-pocket premiums will be capped above standard rates, and what sort of coverage state administrators will offer.
In any case, the Burr-Coburn-Hatch provisions for preexisting conditions meet the minimum political requirements for the Obamacare replacement debate. They promise to address the problem without an individual mandate, sweeping guaranteed issue requirements, or one-sided federal commands to state officials.
Reshuffling the stacked deck of tax-subsidy cards for health insurance
Another major challenge for Republican alternatives to Obamacare involves finding different ways to subsidize expanded insurance coverage choices through the federal tax code while addressing other concerns with the current tax treatment of health care spending. Conflicts and tradeoffs are unavoidable between such competing goals as tax equity, support for lower-income individuals, economic efficiency, broader pooling of health risks, and fiscal balance.
The Patient CARE Act retargets tax subsidies to reduce the out-of-pocket premium costs faced by potential insurance purchasers in the individual market. The proposal assumes it will accomplish this rearrangement of current-law tax subsidies in a (mostly) budget- and tax-neutral manner, assist low-income Americans more generously, narrow the tax subsidy gaps between purchasers in different segments of the insurance market, and avoid significant disruptions in the current employer group insurance market. This precarious balancing act is hard to explain, let alone manage sustainably.
Conflicts and tradeoffs are unavoidable between such competing goals as tax equity, support for lower-income individuals, economic efficiency, broader pooling of health risks, and fiscal balance.
The Patient CARE Act would extend its own version of tax credits to certain individuals with incomes not exceeding 300 percent of the federal poverty level (FPL). The amounts provided to beneficiaries would be fixed but age-adjusted in three basic tiers. All individuals who do not work for a large employer (more than 100 employees) but fall within these annual income limits would be eligible for the tax credits. Those tax subsidies could be used only for health insurance provided in the individual, as opposed to the employer group, market.
A new cap would be imposed on the maximum cost of the employer-group premiums that can be tax-subsidized for individuals under the current-law tax exclusion. The Burr-Coburn-Hatch proposal’s most recent iteration describes that premium cap at no more than 65 percent of a “high-cost” employer plan (a more precise definition apparently will be supplied later).
Simply reducing the incentives of an open-ended tax exclusion to encourage group insurance that is more comprehensive and costly than necessary could be accomplished by other types of changes in the tax code. They do not have to increase the net tax burden on Americans currently benefiting from them. However, the Patient CARE Act needs those increased taxes (or lower tax expenditures) on workers in more-expensive employer-group plans to balance out the budgetary costs of providing new tax subsidies to the generally lower-income Americans buying insurance in the individual market.
The Patient CARE Act resists trying to level the tax-subsidy playing field more directly for purchasers of any kind of health insurance. Instead, the proposal attempts to construct a subsidy firewall between employees working for relatively larger firms and other current or potential individual-market insurance customers. The new individual-market tax credits are designed to be more generous than the tax exclusion in most cases for lower-income individuals, but they are not available to similar lower-income workers employed by larger firms.
The Burr-Coburn-Hatch proposal moves toward three different dollar amounts of tax credits based on relative age (and those amounts are further adjusted for family status). Those modest gradations remain far from matched to the likely range of premium cost variation ahead in the less-regulated individual-insurance market envisioned under the Patient CARE Act.
The proposal fails to establish a more-principled, long-term goal of reaching greater tax equity for all health insurance purchasers, while allowing for a necessary transition period and allocating subsidies more proportionate to variation in likely insurance costs. A cap on the maximum amount of premiums on which tax subsidies are based should be justified as a way to reduce distorted incentives in health spending decisions, rather than as a revenue-producing mechanism to redistribute or expand the current levels of such tax subsidies.
Outsourcing Medicaid reform to the states
The Patient CARE Act mostly tracks the path of recent Republican proposals for Medicaid reform. It adopts a “cap and trade” package of greater budgetary predictability in return for more operational flexibility for state officials. The first-year baseline for establishing each state’s federal grant allotment would be based on the previous year’s federal Medicaid program costs for several different types of beneficiaries in a given state. The Patient CARE Act derives most of its Medicaid-related budgetary savings by setting subsequent annual updates in the aggregate amount of this capped allotment at a rate below the currently projected annual rate of increase in federal Medicaid spending. The proposal also suggests a wide variety of ways in which states could be given greater operational flexibility in administering their respective Medicaid programs.
The Patient CARE Act dodges several thorny issues about the relative funding levels ahead for Medicaid allotments, federal tax credits, and state-level supplements.
Burr, Coburn, and Hatch put more of a private-insurance face on this largely budget-driven reform of Medicaid by allowing beneficiaries to choose to use the new tax credits to purchase private coverage instead of enrolling in Medicaid. However, the Patient CARE Act dodges several thorny issues about the relative funding levels ahead for Medicaid allotments, federal tax credits, and state-level supplements.
Missing pieces and limited vision
This first draft of the Patient CARE Act is predictably longer on principles, aspirations, and directional turn signals that on operational legislative details. It suffers from three weaknesses common to many earlier Hill Republican proposals.
Second, the Patient CARE Act says little about policy changes that would encourage and enhance health care delivery system improvements. A more balanced proposal should suggest how possible reforms would encourage, rather than hamper, newer efforts to reorganize health care services to become more efficient, effective, affordable, and available. The three senators’ plan also offers only sketchy gestures and aspirational rhetoric when it comes to increasing the transparency and availability of information for health care decision making.
Third, the Burr-Coburn-Hatch approach to health reform remains largely trapped within the familiar confines of tweaking the financing of health care services through insurance coverage. It fails to speak to the potentially broader array of other public policy reforms that would help to improve the “health” of most Americans while reducing the demands placed on an overloaded and expensive health care delivery system. Policy reforms that improve the overall ratio between independently productive citizens and those who must depend on them offer the best insurance policy of all.
The Burr-Coburn-Hatch proposal may suffice for political purposes as mostly an inventory of past health policy reform components offered by its primary sponsors and other Hill Republicans. However, its tentative moves into newer areas tend to lack necessary details, structural consistency, and a sustainable destination. Its vision remains tactical rather than strategic.
To replace Obamacare with health policy reform that works, rather than just keeps the greater dangers of the ACA at a distance, Capitol Hill Republican health care reformers should be advised: “You’re going to need a bigger boat.”
This article is adapted from an AEI Outlook.
FURTHER READING: Miller also writes “Obamacare's Next Bout: More Legal Challenges.” Lee Harris analyzes “Why Obamacare Has Proved a Hard Sell."
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