POLICY & ANALYSIS
GOP Obamacare Replacement Leaked
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• JED GRAHAM
• 2/24/2017
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Social Security’s day of reckoning is a dozen years away, according to the Congressional Budget Office. ObamaCare may be headed for crisis as early as next year. Here’s how to save both, offering more affordable coverage and preserving the old-age safety net — without breaking the Treasury.
ObamaCare was sick and in need of major surgery no matter who won the election, but with the Trump administration unwilling to promote enrollment or step up enforcement of the individual mandate, the exchanges could be headed for a crisis.
Humana (HUM) said on Feb. 14 that it’s making a complete exit. UnitedHealth (UNH) and Aetna(AET) already have one foot out the door, while Anthem (ANTM) and Molina (MOH) won’t commit to sticking around in 2018.
Democrats may be tempted, watch ObamaCare unravel and let the GOP reap the whirlwind, but they have an obligation to play a constructive role. Even before this year’s enrollment decline, the pool of customers was too small, too old and too costly, and premiums have soared as a result.
Here’s ObamaCare’s harsh reality: Even among working-class households earning 150% to 250% of the poverty level, supposedly the law’s big beneficiaries, just 1 in 3 people who lack insurance from other sources are getting coverage that will protect them from financial disaster. Most of the other two-thirds are uninsured, either because they or a spouse work full time and don’t qualify for exchange subsidies, or else they’ve spurned subsidized bronze plans that carry $6,000-$7,000 deductibles.
Yet here’s the truth about Republican repeal-and-replace plans: They all give a better deal to young, healthy and middle-class insurance shoppers by making health care unaffordable for older, higher-cost and low-income individuals. For a 64-year-old, low-income couple, the same plan that costs $1,000 under ObamaCare could cost $18,000 under new Department of Health and Human Services Secretary Tom Price’s Empowering Patients First plan.
So this is the key question: Can’t we come up with a more uplifting approach that doesn’t treat health insurance markets as a zero-sum game, creating millions of losers as well as millions of winners?
Yes, definitely. If enough Democrats are willing to be honest about ObamaCare’s flaws and the extent of our budget challenges, and enough Republicans are willing acknowledge that taking away ObamaCare’s protections for millions who depend on it is not a good idea, it just might be possible to change the debate and accomplish some big things.
Let People Choose
Politics aside, there are two big hurdles standing in the way. The first is a hurdle of understanding. No one on Capitol Hill seems to realize that the best step forward for public policy, within the realm of what might be possible, is to give people a choice between the comprehensive coverage that Democrats want them to have (and that many people with chronic conditions or low incomes clearly need) and the consumer-driven model that Republicans believe in, which allows people to opt for catastrophic coverage and set aside funds to cover basic medical needs.
The second hurdle is one of resources. Replacing ObamaCare with something that works much better and gives people more freedom to choose options that work for their finances won’t be free. Yet, realistically, any bipartisan plan put forward can’t raise tax rates and must deliver big budget savings. Some of those savings can be found within the health care system, as explained below.
There is also very good reason to marry Social Security reform with a health insurance fix that keeps care affordable for people under 65. RomneyCare, the model for ObamaCare, reduced work among adults age 55 to 64, the Boston College Center for Retirement Research found.
Health insurance subsidies that rise as income falls encourage people to claim Social Security benefits early, replacing a bigger paycheck. Spending a bit less on early retirement — without pulling away the floor of support for those who really need it — would give people a nudge to work longer. That would lead to better personal financial outcomes, limiting penalties people will face for retiring early — a lifelong 30% hit to annual benefits for those who claim Social Security at age 62 — and averting the need to cut Social Security benefits in very old age to restore the program to solvency.
The plan here would close more than half of Social Security’s financing hole without raising the retirement age or cutting any benefits for the very old, while creating a stronger minimum Social Security benefit for modest-wage workers to keep them from falling into poverty late in life — something policymakers on the left and right have wanted to do forever.
ObamaCare’s Stacked Deck
A central problem with ObamaCare is that the rules stacked the deck in favor of those needing comprehensive coverage and gave a bad deal to pretty much everyone else.
Think of a couple, age 30, in St. Louis, Mo., with income of $40,000 (about 200% of the poverty level) and a child covered by Medicaid. For this couple, the cheapest silver plan under ObamaCare offers pretty solid coverage but costs $2,430 — likely too much for a family that’s probably already struggling to save anything. The cheapest bronze plan, costing $1,068, might be doable, but the $13,300 deductible could make a hospital stay financially devastating.
The chasm between silver and bronze deductibles — $700 vs. $13,300 — is by design, though clearly a poor one. ObamaCare provides extra cost-sharing subsidies that shrink deductibles for modest-income households, but only if they buy silver plans. Those cost-sharing subsidies work exactly like premium subsidies, paid directly from the government to insurers each month, even if the policyholder gets no medical care.
Republican Principles, Democratic Values
Looking through the lens of this 30-year-old St. Louis couple, a bipartisan replacement, merging Republican principles and Democratic values, is easy to identify.
First, don’t get rid of the comprehensive option. If this couple is trying to have a second child or one spouse has a chronic condition, they will be desperate for a low-deductible plan with a wide range of essential benefits.
IBD’S TAKE: The difficulty of Republicans in settling on a replacement for ObamaCare is threatening to sidetrack the rest of President Trump’s economic agenda, including tax cuts and infrastructure spending. That’s been good for gold prices.
Second, offer people the flexibility to choose a Republican option. A replacement for ObamaCare could give young, modest-income families the chance to set aside some savings for health expenses with two simple tweaks. Relax ObamaCare’s age-rating restrictions that inflate insurance costs for the young, but only for high-deductible plans, keeping comprehensive plans affordable for older adults. (That could mean silver plans with a 3:1 age rating, bronze 4:1 and catastrophic 5:1.)
Next, let people use cost-sharing subsidies to reduce premiums. Those two steps would shrink that 30-year-old St. Louis couple’s bronze premium to zero, and they’d have about $900 left to put in a Health Savings Account to defray medical expenses — not nirvana, but a dramatic improvement over what ObamaCare offers.
Families above 200% of the poverty level, who are more likely to be uninsured, should be able to opt for coverage with higher deductibles than bronze, roughly around the “copper” option proposed by the insurance industry and some moderate Democrats. These steps could make premiums essentially free for everyone up to 250% of the poverty level.
Third, give people fair treatment. There are some 4.5 million uninsured full-time workers — and their spouses — who don’t qualify for exchange subsidies, even if workplace coverage costs close to 10% of income. They shouldn’t be denied the help given to people buying coverage on the individual market.
Further, members of the middle class who earn too much for ObamaCare subsidies should be treated more equitably relative to their peers covered through the workplace. A logical solution would give a tax credit equal to 25% of the cost of a silver plan, while limiting the income-tax benefit to 25% of the cost of employer-provided coverage and capping that benefit for high-income households. People in the 25% tax bracket (up to $91,151 for singles and $151,900 for married couples) wouldn’t be hurt by the tax change, while there would be minimal effect for those in the 28% bracket (up to $190,150 for singles and $231,450 for couples).
Fourth, get rid of the mandates. The employer mandate is easy to dodge and ends up harming the low-wage workers it was supposed to help. As for the individual mandate, if people earning up to 250% of the poverty level can get coverage essentially for free, and most will get extra cash on top, there’s probably no need to threaten them.
The Right Incentives
Above 250% of the poverty level, post-ObamaCare rules should eliminate the incentive to go without coverage when one is young and healthy, then sign up when one’s health starts deteriorating. A logical approach, much like Medicare’s late-enrollment penalties, would very gradually shrink future tax subsidies based on how long people go without coverage. This should apply to both the individual market and employer market, or else people would have reason not to get coverage between jobs that offer insurance.
Republican plans would steer people who develop costly conditions while their coverage has lapsed to separate subsidized high-risk pools. The idea is understandable, since a small number of high-cost patients can substantially raise premiums for the whole pool, particularly in relatively small markets. Yet, if these separate high-risk pools are supposed to offer good and affordable coverage (as they should), the availability of this option could provide peace of mind for the uninsured and encourage people to go without coverage. That’s just one of the reasons why it makes more sense to hold down premiums in the individual market through another mechanism that accomplishes the same goal.
That would entail an ongoing federal reinsurance program that recoups a portion of insurer expenses for the highest-cost patients, much like Alaska is doing to keep its individual market viable (while asking the federal government to foot the bill). Republican governors should be in favor of federal reinsurance, or else states with an older population or less-healthy pool of customers could end up bearing a disproportionate share of the cost of repairing and replacing ObamaCare. Reinsurance may have come under attack as part of overall opposition to ObamaCare, but it’s hardly a partisan idea. It’s a feature of Medicare’s Part D prescription drug benefit that came into being under President George W. Bush.
Allowing states to expand Medicaid but limit the expansion to 100% of the poverty level, as suggested by Urban Institute scholars, also could be a popular option among Republican governors.
All of these features would create a broad, stable risk pool, with affordable coverage options and plenty of flexibility to let people get the coverage that suits them best.
Fixing Social Security
So how would Social Security change? One provision called Old-Age Risk-Sharing, introduced in the 2010 book “A Well-Tailored Safety Net,” reduces benefits in the first year of retirement, with progressively smaller cuts for lower earners, and the cuts steadily diminish over 20 years, falling to zero at age 82 for someone who claims benefits at 62.
As longevity rises — though in a very unequal fashion across income groups — and people face growing risk of outliving their savings, it’s sensible to carefully scale back support for early retirement. Yet because many people don’t have a choice about when they stop working, it’s critical to include a fail-safe function, and in this case there will be three:
1. Benefit reductions steadily and, over time, fully disappear.
2. A higher minimum benefit neutralizes the reductions for lower earners.
3. Early-retirement accounts help people delay benefit claiming.
No. 3 involves another idea introduced in “A Well-Tailored Safety Net,” called a progressive saving offset. Everyone would be required to save an additional 1.5% of income per year, with the funds going into a personal account rather than to the Treasury. For low earners, two-thirds of this savings will go to an early-retirement account, with the other one-third deposited in an account that will eventually fund 5% of annual benefits, offsetting the amount by which benefits are reduced. For average earners, one-third of the 1.5% savings would go into an early-retirement account, with the other two-thirds eventually used to fund 10% of annual benefits.
Here’s why this mandated savings shouldn’t be considered a tax hike. First, people are going to need more retirement income than Social Security will be able to afford. People can always choose to save less outside of Social Security or hold riskier investments outside of Social Security to compensate for the extra mandated savings that would likely be invested in Treasuries. Second, this is money people will own. If they die, the account is transferred to their estate. Lastly, the 1.5% of income will be matched by Social Security, though in a notional account (meaning it won’t require government borrowing). This will give modest-income workers the chance to leave an inheritance via Social Security — now only possible if they die when their children are still minors — without undercutting income security.
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