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Is The Republican Tax Bill Worse Than Obamacare?

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According to Kimberly Clausing, a contributor at The Hill, the GOP's final tax bill has four fatal flaws:

  • It increases income inequality;
  • It adds $1 trillion to the national debt;
  • It increases the complexity of the tax code;
  • It increases the incentive for multinational companies to offshore income.

That got me to thinking that the tax plan's flaws sound strikingly similar to those of Obamacare!

  • It created 3 new huge inequities;
  • It added trillions to the national debt over the long term;
  • It increased the complexity of the health care system;
  • It increased the incentive for hospitals to consolidate, thereby increasing prices and jeopardizing quality.

My expertise is in health policy, not tax policy. So for purposes of discussion, I will accept without challenge Ms. Clausing's claims about the tax plan and compare these to the 4 major adverse impacts just listed regarding Obamacare (I will further assume the Republican plan passes this week on a party-line vote since that's the widespread consensus). Readers can then judge which bill was worse. An important common feature is that both were enacted on pure party-line votes.

Three Large Inequities Created by Obamacare

Let's be clear that due in large part to misguided policies, the American health care system was replete with inequities prior to Obamacare. The missed opportunity of Obamacare lay in the fact that rather than clearing away the major well-known inequities in the prior system, Obamacare instead tilted the playing field in a different but still inequitable direction and then added a few new inequities to the mix!

Employer Tax Exclusion. One huge inequity was created by the tax exclusion for employer-provided health benefits. This gave workers in firms offering health benefits a tax benefit measured in thousands of dollars. Workers in companies without health benefits got nothing and self-employed workers received a tax benefit that was smaller than that received by their same-wage counterparts. Both are examples of horizontal inequity [1].

Worse, the tax exclusion gave a much higher benefit to high wage workers compared to low wage workers. Workers earning $200,000 to $500,000 got a subsidy exceeding 35% of their health premiums while their minimum wage counterparts got subsidies of less than 10% (Fig. 4.2a). This upside-down subsidy was a classic illustration of vertical inequity [2].

The most visionary conservative health reformers had long argued for scrapping the tax exclusion and replacing it with universal tax credits that would have eliminated all the horizontal and vertical inequities created by the tax exclusion [3]. Obamacare instead took steps that were sideways at best and backwards at worst:

  • Disadvantaging Low Wage Workers in Large Firms Relative to Those in Small Firms. To be sure, Obamacare did rectify the problem of giving families without access to employer provided health coverage tax subsidies to help them better afford it. But for low wage families, it essentially strongly tilted the playing field sharply in favor of those in small firms. There was no need or good policy reason to penalize low-wage workers employed by large firms, but that's exactly what Obamacare did.
  • Penalizing Low Wage Workers in Firms With High Cost Health Plans. Low wage workers in firms with the most expensive health plans were doubly penalized. Rather than get rid of the tax exclusion or cap it as Republicans had long proposed, Obamacare instead imposed a 40% excise tax on the amount that premiums exceeded the level that government experts deemed acceptable. This so-called "Cadillac tax" was designed to encourage (force?) employers with expensive health plans to take steps to reduce premiums to get below the dollar threshold at which the 40% tax applied. But there were two problems with that theory:
    • First, in high tax states such as California, the tax benefit still might approach 50% of premiums for some workers in the highest tax bracket. So for law and accounting firms, for example, there still would be an incentive to retain lavish health plans since the combined federal and state tax subsidies would still exceed whatever amount was being taken away by the Cadillac tax. Thus, there was every theoretical reason to believe that at least some high cost plans would persist despite the tax. This was confirmed by the Joint Tax Committee's original scoring of the Cadillac tax showing that it was expected to produce $32 billion in revenue just in 2018-2019. That implies taxing $40 billion per year in "excess" premiums, which in turn implies a sizable number of workers affected by said plans taxed.
    • Second, because the threshold at which the tax would apply was only adjusted based on general inflation, not medical inflation, a growing number of workers were expected to be forced to pay the tax each year. Indeed, the principal purpose and importance of the tax was as a revenue-raiser in the downstream years. By 2029, fully three quarters of employer health plans were expected to be subject to the tax!
    • The bottom line is that Obamacare's designers fully expected (or conveniently overlooked) the reality that millions of low-wage workers would unjustly get ensnared paying a 40% excise tax on a growing share of their employer-provided health benefits even while their counterparts lucky enough to qualify for Exchange subsidies that could exceed $15,000 in some cases [4].

Tilting the Playing Field in Favor of Small Firms. On a related point, the pre-Obamacare system arguably was tilted in favor of large employers in several ways. First, for a variety of reasons, including economies of scale, large employers historically have been far more likely than small firms to offer health benefits (in the year Obamacare was enacted, 99% of firms with 200 or more employees offered health benefits versus only 28% of firms with 3-199 worker) making them much more likely to get a tax subsidy through the tax exclusion. Second, large firms tend to have higher wage workers than small firms, making the value of that exclusion greater for the average large firm employee than small firm employee even when both firms are offering benefits.

Giving a uniform tax credit to everyone (regardless of work status) hypothetically would have eradicated this tilt resulting in a world that favored neither small firms nor large firms nor favored employer-provided plans over non-group coverage [5]. Instead Obamacare created a parallel world of extremely generous income-related subsidies for non-group coverage while retaining the upside-down regressive subsidy structure of the tax exclusion on the employer side, using an employer mandate to force all employers above a certain size to offer coverage and generally denying employees in such firms from being able to purchase the highly subsidized non-group coverage on the Obamacare Exchanges.

Ironically, the employer mandates and add-ons to coverage have the effect reducing wages of low-income workers by roughly $1 an hour even while their counterparts working at small firms receive actual subsidies for coverage equivalent to $9 an hour. There is no good policy rationale whatsoever for so heavily tilting the playing field towards small employers in this fashion.

Coverage Gap: Uninsured Poor Ineligible for ANY Obamacare Subsidies. Finally, Obamacare's designers deliberately prevented anyone below poverty from qualifying for the extremely generous subsidies available through the Obamacare Exchanges. The consequence is that there are 2.4 million uninsured poor adults who do not qualify for Medicaid but also are denied lavishly subsidized coverage available to their counterparts whose income is just above the poverty level.

Obamacare's defenders will say that's the fault of states that opted not to undertake the Medicaid expansion. But punishing vulnerable uninsured adults for the sins of policymakers in their states is akin to denying an infant food because that baby's was caught speeding. Sure, threatening to take away a baby's food might well induce greater compliance with speeding laws but it's difficult to argue that makes it right.

The reality is that Obamacare's Medicaid expansion was deeply flawed. There are very good reasons states might wish to avoid jumping on the Medicaid expansion bandwagon. Creating a grossly unfair coverage gap simply to arm-twist states into doing Uncle Sam's bidding seems like a particularly odious policy choice.

Increased National Debt

President Obama famously pledged I will not sign a plan that adds one dime to our deficits.” Using rules that everyone recognized were grossly misleading, the CBO scored the plan as a small deficit reducer. However, the president was well aware that his plan was “full of gimmicks and smoke-and-mirrors” (in the words of Rep. Paul Ryan) many weeks before the final bill was passed. Ryan’s analysis left no doubt that the president was trying to put a $2.3 trillion health plan (over 10 years) into a wrapper appearing to cost only $1 trillion. Mr. Ryan's assessment was vindicated by subsequent analyses:

  • According to a June 2010 analysis by former CBO director Douglas Holtz-Eakin and Michael Ramet of the American Action Forum, “A more comprehensive and realistic projection suggests that the new reform law will raise the deficit by more than $500 billion during the first 10 years and by nearly $1.5 trillion in the following decade.”
  • Medicare Public Trustee Charles Blahous released a study in April 2012 showing the Obamacare would add $340 billion to the deficit over the next 10 years.
  • An analysis released in January 2013 by the Government Accountability Office showed that Obamacare would add $6.2 trillion to the deficit over the next 75 years.

Increased Complexity

The American health care system has long been ridiculed for its complexity. In contrast, the Swiss system is a model of simplicity. There are no separate publicly financed programs for the poor (Medicaid in the U.S.), elderly and disabled (Medicare in the U.S.) or upside-down tax subsidy structure for incenting employer-provided health coverage (the tax exclusion in the U.S.). Instead, there is a single income-related subsidy structure (coupled with an individual mandate) the results in virtually universal private health insurance coverage.

Obamacare did adopt an individual mandate and income-related subsidy structure to encourage purchases in the non-group market. But instead of using these to replace all the existing silos of coverage and subsidies, these were grafted on top of the existing patchwork, resulting in a poorly functioning contraption that would make Rube Goldberg proud. Now we have three instead of just two poorly functioning health entitlements (4 if the tax exclusion is counted in this fashion).

Similarly, the American health system already was one of the most highly regulated industries in the U.S. prior to Obamacare. Rather than strip away the complex and expensive morass of regulations, Obamacare simply added thousands of pages of additional regulation and greatly shifted health insurance regulation in the direction of Washington, D.C.. The result?

Tara O’Neill, a health care policy analyst for the American Action Forum (AAF),says a new AAF report reveals the 106 regulations finalized since 2010 to implement Obamacare have forced businesses and individuals to fill out 165 million hours of paperwork to comply with Obamacare’s many requirements. AAF says these regulations have cost more than $45 billion.

Hospital Consolidation

Hoover Institution senior fellow Scott Atlas has neatly summarized the havoc wrought by Obamacare in the hospital industry:

  • The pace of hospital mergers has roughly doubled post-Obamacare relative to the pre-Obamacare era.
  • ACA regulations on insurers and on physician practices have driven many doctors to be bought up by hospitals, leading to higher prices for consumers:
    • J. Robinson and K. Miller in the Journal of the American Medical Association reported that when hospitals owned doctor groups, per-patient expenditures were 10 to 20 percent higher, or an extra $1,200 to $1,700 per patient per year.
    • C. Capps of Northwestern University’s Institute of Policy Research in 2015 found that physician prices increased on average by 14 percent for medical groups acquired by hospitals; specialist-services prices increased by 34 percent after such groups joined a health system.

Not only is this consolidation leading to higher prices for consumers, but it likely may jeopardize quality to boot. Previous work by Martin Gaynor shows that at least for some procedures, hospital concentration reduces

quality.

Bottom Line

Based on the foregoing, readers can decide for themselves whether the tax bill is worst than Obamacare. But one thing we know for certain is that both laws were passed on strict party-line votes. I've long argued that was a bad idea and the instant Donald Trump was elected I cautioned against trying to repeal Obamacare on a strict party line vote.

The very fact that our country is so divided on these issues is just one more strong argument against shifting so much power over health policy into Washington, D.C.  We would be much better served by a system that reflects the sharp diversity of opinion over the merits of single-payer vs. patient-centered market reforms.

Let California be California: I personally view a single-payer health system of the type envisioned by Senator Sanders to be a deeply flawed idea. But if Californians want to test-drive the idea and let their own citizens be guinea pigs in that experiment, all power to them. But trying to cram that crazy idea down the throats of Southerners might ignite a rebellion not seen in over 150 years.

We will see if the tax plan results in the myriad of disasters predicted by Democrats. But as I listen to their hysteria, I can't help but wonder: where were they in March 2010?

Update #1: December 19, 2017

To drive home my point about the inadvisability of party-line votes on major legislation, I thought the following might be useful.

Obama's promise:  The president repeatedly promised a new bipartisanship, saying in October 2007  “we’re not going to pass universal health care with a 50-plus-one strategy.”

Reality: The ACA was enacted without a single Republican vote in the House or Senate. Apart from breaking candidate Obama's promise, this was an unprecedented act in modern history in that no major piece of domestic policy legislation has been enacted without at least some (usually considerable) bipartisan support:

As for tax bills, the 1986 tax bill passed Congress by overwhelming bipartisan margins:

  • House. The bill to accept the final conference report on the tax overhaul passed 292-136 (68%-31% with 4 not voting). Democrats: 176-74 (70%-29% with 2 not voting); Republicans: 116-62 (64%-34% with 2 not voting).
  • Senate. The same bill passed the Senate 74-23 (74%-23% with 3% not voting). Democrats: 33-12 (70%-26% with 2 not voting); Republicans: 41-11 (with 1 not voting).

Our spiral into a nation of tribes is most regrettable and certainly does not make for wise policy. In a radio interview today on The Michael Castner Show (Portland, OR), I conceded that I am not a politician. But from a policy perspective, I would view a grand bargain in which we opted to repeal both of these laws would be more than a fair swap.

Why did I say this? Because this would return us to a level playing field in which both parties might work together on bipartisan health and tax reforms. We somehow managed to do this for more 200 years; both sides willing, there's no reason we cannot do so again for the sake of our children and grandchildren and all their progeny.

Update #2: December 20, 2017

My AEI colleague, Jonah Goldberg, has an excellent piece at National Review arguing that the Republican tax bill could be the GOP’s Obamacare. In it, he elaborates on some of the process and content similarities between both pieces of legislation and why the tax bill might produce the same adverse political consequences for Republicans as Obamacare did for Democrats.

Update #3: December 21, 2017

Eugene Volokh, at the newly relocated Volokh Conspiracy (which moved from Washington Post to Reason) has articulated my concerns about the party-line vote used to push through the tax plan better than I ever could:

I know there are some people who respond to this charge with some variant of "Well, the Democrats did that too, when they controlled Congress and the White House, in 2008-09, with Obamacare . . ." The response is the same as to the "But he started it!" defense familiar to anyone with a 9-year old around the house: other peoples' misbehavior does not justify your own. There's a right, and there's a wrong, way to conduct yourself, and it does not depend on the extent to which others do or do not conform. The Republicans had a chance to do this the right way, a chance I thought they might seize after the initial failure of the Obamacare repeal. But they didn't seize it. Quite the contrary; they've made it, I fear, the new normal. And we will pay the price for that down the road, for sure.


READ CHRIS’ BOOK, The American Health Economy Illustrated (AEI Press, 2012), available at Amazon and other major retailers or as a pdf at AEI. With generous support from the National Research Initiative at the American Enterprise Institute, an online version complete with downloadable Powerpoint slides and companion spreadsheets has been made available through the Medical Industry Institute’s Open Education Hub at the University of Minnesota.

Follow @ConoverChris on Twitter, and The Apothecary on Facebook. Or, sign up to receive a weekly e-mail digest of articles from The Apothecary.

INVESTORS’ NOTE : The biggest publicly-traded players in Obamacare’s health insurance exchanges are Aetna AET -0.28% (NYSE: AET ), Humana HUM -0.78% (NYSE: HUM), Cigna CI -0.25% (NYSE: CI ), Molina (NYSE: MOH ), WellPoint (NYSE: WLP ), and Centene CNC -2.15%(NYSE: CNC ), in order of the number of uninsured exchange-eligible Americans for whom their plans are available.


Footnotes

[1] Horizontal equity entails "equal treatment of equals."

[2] While reasonable people might disagree on whether vertical equity is best achieved by a proportional or progressive tax system, nearly everyone would agree that a regressive subsidy scheme that gives the highest tax benefits to those with the highest incomes creates a vertical inequity. In everyday parlance, most Americans would agree it makes no sense to give Warren Buffett a much larger tax subsidy for health insurance than his secretary.

[3] I've described and included links to these various plans in a much more detailed earlier post.

[4] In a law firm, for example, a low-wage janitor might receive a tax benefit from the exclusion equivalent to less than 10% of premium costs, but if "excess" premiums amounted to 1/3 of total premiums, the tax on this excess (40% x 33%) would amount to 13.2% of premiums, meaning these workers would no longer have subsidized coverage, but instead be actually paying a tax for the privilege of having health coverage! How crazy is that?

[5] Admittedly, the most Republican tax credit plans made the tax credit contingent on securing "adequate" health insurance coverage (where "adequate" was defined much less stringently than under Obamacare). To the degree that large firms would continue to outpace small firms in terms of their likelihood of offering employer-sponsored coverage, the tax credits still would have gone disproportionately to workers in large firms. However, because the tax credits were designed to allow for the purchase of non-group coverage they would have allowed many more small workers to get coverage than previously (since it finally made available tax-subsidized plans on the non-group market even in cases that the firm itself elected not to offer coverage). However, the most far-reaching plans would have included an auto-enrollment feature that would have given everyone a catastrophic health plan that matched whatever tax credit they were eligible to receive (see a discussion of these various plans here). Except for people who elected to opt out of this voluntary free coverage, this approach essentially would have ensured universal coverage in a fashion that did not advantage either large firms or small firms.