How to Achieve Universal Coverage Without Mandates
Now that the Supreme Court has declared the individual mandate constitutional, what’s next? Republicans say “repeal and replace” the president’s law. But what should we replace it with?
When Barack Obama was a candidate for president, he endorsed universal health insurance, but opposed forcing individuals to buy their own insurance. As president, he signed into law a bill that violated both those promises. ObamaCare gives the federal government the authority to tell all Americans what insurance they must have, where they will get it, and what they will pay for it. Even so, the most optimistic estimate expects 23 million people will remain uninsured once the new health care reform law is fully implemented.
Here is my suggestion: Return to the two original ideas Obama said he was for: universal coverage and no mandate. How can that be done? Ironically, the first step is to consider a health care policy idea proposed by Obama’s presidential opponent, John McCain.
The Current System
Most people who purchase private insurance today benefit from the fact that, unlike wages, employer-provided health insurance is not taxed. The amount of tax subsidy any particular individual receives depends upon whether the insurance is obtained through an employer, what options the employer offers, the family’s tax bracket, and other factors. For a middle-income family facing a 25 percent federal income tax rate, a 15.3 percent payroll tax, and a 5 percent state income tax rate, the ability of an employer to pay premiums with pre-tax dollars is a huge subsidy. Government is effectively paying almost half the cost of the insurance.
Because the amount of subsidy depends on the employee’s tax bracket, the largest subsidies are given to people who need them least. In addition, the more expensive the insurance, the larger the subsidy. And since most of the uninsured do not have access to employer provided coverage, they get little or no tax rebate when they purchase insurance on their own.
Under ObamaCare, tax and spending subsidies for private health insurance will become even more arbitrary and unfair. For example, a family earning just over $30,000 a year will get no additional tax relief for employer provided insurance. Yet the government will pay as much as 95 percent of the premium if the family gets insurance through a health insurance exchange. In the latter case, the family can get a subsidy as high as $20,000 from the government in some cases.
A Better Way
Suppose the government offered every individual a uniform, fixed-dollar subsidy for the purchase of health insurance, say $2,500 for every adult and $1,500 for every child. A two-adult, two-child family would get $8,000. The credit would be refundable, so that it would be available even to those with no tax liability. This was essentially Sen. McCain’s proposal in 2008, an idea included in legislation proposed by Sen. Tom Coburn (R-OK), Rep. Paul Ryan (R-WI), and others.
To make the arrangement universal, however, one more step is needed. If an individual chooses to be uninsured, the unclaimed tax credit should be sent to a safety net agency in the community where the person lives—in case he generates medical bills he cannot pay from his own resources. To implement the program, all the federal government needs to know is how many adults and how many children live in each community.
Where would the federal government get the money to fund this proposal? We could begin with the $300 billion in tax subsidies the government already “spends” to subsidize private insurance. Add to that the money the federal, state, and local governments spend on indigent care. For the remainder, the federal government could make certain tax benefits conditional on proof of insurance. For example, the $1,000 child tax credit could be made conditional on proof of insurance for a child. For middle-income families, a portion of the standard deduction could be made conditional on proof of insurance for adults. For lower-income families, part of the Earned Income Tax Credit (EITC) refunds could be conditional.
Paying for What You Need
Is an $8,000 refundable tax credit for families adequate? The typical employer plan these days costs twice that amount. But the typical employer plan buys a lot of wasteful and unnecessary care. The $8,000 would pay for core, catastrophic insurance that everyone should have. Any additional coverage purchased by employees and their employers would have to be made with after-tax dollars.
Every dollar spent on additional insurance would be unsubsidized. It would be a dollar that would otherwise be take-home pay. Under this new subsidy structure, it is highly likely insurers would begin offering plans that cost $8,000 or close to it. Of course, these plans would have fewer options than the typical employer plan today.
To complete the idea of “universal coverage,” why not let everyone use their tax credit to buy into Medicaid if they choose? At the same time, allow those currently on Medicaid to leave the program and apply their Medicaid dollars to private insurance.
Bottom line: we can have a reasonable system that provides basic coverage to everyone without dictating what insurance people have to have, where they must get it, and what they have to pay for it.