“In the real world, [Obamacare] is working” declares Ezra Klein. Even Avik Roy says he makes some good points that conservatives should pay attention to. I think Ezra’s assessment is premature. But let’s skip to the bottom line. As loyal readers know, I’ve said a lot of bad things about Obamacare. Is there anything good that can be said?
By that I don’t mean, does anyone benefit? I mean, is there anything about it that is good public policy? There are five good things I think we can point to.
First, the health reform law extends generous tax relief to millions of people who purchase health insurance on their own. Yes I know, it does so in a very nutty way. The subsidies are arbitrary and unfair and they could cause a complete restructuring of industries that employ below-average wage workers. I’ve written about that (see e.g., Living with Obamacare) and it’s a very serious problem. The positive side of this is that we have broken a bad precedent. Pre-Obamacare, the primary way the government subsidized private health insurance was by excluding health insurance paid by an employer from the employee’s taxable income. For middle income families, the value of this tax break could equal almost half the cost of the insurance. But there was no comparable relief for people who had to purchase health insurance on their own.
For example, if you bought your own insurance last year you could only deduct expenses in excess of 10% of your income. To put that in perspective, Obamacare considers insurance “unaffordable” if it exceeds 9.5% of your income. So if you purchased “affordable” insurance last year, you got no deduction whatsoever.
[The exception to this rule was for the self-employed, who got a full deduction. That gives me an excuse for an interesting side bar on the wacky world of Washington politics. For the last two decades there have been quite a number of Republican proposals to give tax relief to individually purchased insurance. Yet most Democrats resolutely resisted all such proposals, except for the self-employed. The reason why that is ironic is that the self-employed are overwhelmingly Republican voters. The rest of the uninsured tend to lean Democrat and probably substantially so. That means Democrats in Congress were willing to give tax subsidies to the other party’s voters, but not their own voters. Go figure.]
Prior to Obamacare, most health policy analysts favored a system in which people at work and people buying insurance on their own were treated the same way. What we got with health reform was anything but that. For low-wage workers the subsidies in the exchange are greater than they are at work – much greater. For higher-income workers the reverse is true. Maybe with the next round of reform we can get tax fairness and treat everyone the same way. At least we can hope.
Second, Obamacare reverses the highly regressive way we have been subsidizing health insurance – at least in the individual market. The ability to exclude employer premium payments from the employee’s taxable income is obviously valuable. But in general, the higher your tax bracket the more tax relief you get. Among people who get their health insurance at work, those making $150,000 a year will get 15 times the tax relief as someone making $10,000 to $20,000 a year. For employer-provided coverage, we are giving the most tax relief to those who least need it.
Contrast this with the child tax credit. The tax law gives parents $1,000 of tax relief per child – regardless of income and regardless of the tax bracket. In 2008, Barack Obama’s presidential campaign opponent, John McCain, advocated making the tax subsidies for health insurance like the subsidies for children – same amount of tax relief for everyone. Since the Obama campaign spent an estimated $100 million demagoguing the McCain proposal, his political advisors argued against the McCain approach after the election was over – even though Zeke Emanuel and other White House insiders actually favored it.
What we finally got goes too far in the other direction. It’s too generous to the near-poor and too stingy to the middle class. Anyone earning more than 400% of the federal poverty level ($46,680) gets no tax relief at all in the health insurance exchange. But for someone at 138% of the federal poverty level ($15,856), the government pays almost all of the premium. A better way is to give everyone a tax credit equal to the cost of Medicaid-like insurance (about $2,500 for an individual and $8,000 for a family of four) and let them spend out-of-pocket for better coverage if they choose.
Third, the way in which Obamacare subsidizes private insurance is the right way to subsidize it. Like the McCain proposal, the new Obama tax subsidy is a fixed sum subsidy that does not vary with the type of plan people choose. Within the exchange, the size of your tax credit is basically determined by your income and where you live. And you get the same tax relief, regardless of the cost of your insurance. That is, you get the same credit whether you choose a Bronze plan or a Silver or a Gold or a Platinum.
This contrasts markedly with what happens at work. Through the tax exclusion system, the more health insurance you buy, the lower your taxes. This encourages everyone to over-insure and that is a major reason why health care costs have been rising faster than our incomes for the past 40 years. The disappointment is that Obamacare does not extend this method of subsidization to all health insurance.
Fourth, Obamacare creates an online market for health insurance in which people can choose among standardized plans. Granted, it is a market with perverse incentives that is causing a race to the bottom. And, the bizarre metallic bands mean that no matter how much you like your insurance, you are likely to lose it as prices and technology change through time. Still, it’s an online market. Where it denationalized and deregulated, it could become a free market for health insurance.
Fifth, on the eve of the passage of the Affordable Care Act, virtually every Democrat who appeared on television to support it gave one and only one reason: to protect people with pre-existing conditions from insurance companies who they claimed were mistreating them. They greatly exaggerated the problem. The law set up a federal risk pool that allowed people who had been denied coverage for a health reason to enroll and pay a premium similar to what a healthy person would pay. After 3½ years, only 107,000 people had enrolled, although the pool was closed prematurely and some applicants were denied entry. Ironically, when Republicans in Congress proposed to take money away from the Obamacare advertising slush fund and extend insurance to more such people, Democrats objected and the president threatened to veto the bill – revealing perhaps what the real priorities were.
Still, the idea of a federal risk pool to take care of the small number of people the Democrats were concerned about is not a bad idea – especially considering that most people who had the problem did so because federal tax law encouraged all of us to get insurance through an employer and made it illegal for the insurance to be individually owned and portable.
Before signing off, let’s return to Ezra Klein. He claims that Obamacare is working because the number of insurers participating is expected to increase by 25% next year and premiums have not increased as much as was originally expected. But as Bob Laszewski points out, the insurance companies are just gambling. They have no idea what the risk profile is for their enrollees and thus they have no idea how to price their products. They are keeping premiums low to gain market share because the federal government has virtually guaranteed it will cover any losses in the near term.
So Obamacare has some good features; but not the ones Klein points to.
Finally, readers will note something that is not on my list. I haven’t said anything about how many people are newly insured. That wasn’t an oversight. Obamacare will try to force low-wage workers to spend half their wages on health insurance for family coverage paid through an employer. Is that a good deal for them? If it is, why didn’t they previously offer to take 50% pay cut and ask for health insurance instead?
Obamacare will force many of these workers to give up their mini med plans and buy insurance with very high deductibles. Is that a good deal? If it is why haven’t they already done that without any federal mandate? As I previously reported, there are good reasons why fast food employees prefer mini med plans over Obamacare.
On these issues, I will wait and see.
