Category Archives: Taxes

Updates to House Republicans’ Managers Amendments

On Thursday evening, House leadership released the text of a second-degree managers amendment making additional policy changes. That amendment:

  • Delays repeal of the Medicare “high-income” tax until 2023;
  • Amends language in the Patient and State Stability Fund to allow states to dedicate grant funds towards offsetting the expenses of rural populations, and clarify the maternity, mental health, and preventive services allowed to be covered by such grants;
  • Appropriates an additional $15 billion for the Patient and State Stability Fund, to be used only for maternity and mental health services; and
  • Allows states to set essential health benefits for health plans, beginning in 2018.

Earlier on Thursday, the Congressional Budget Office released an updated cost estimate regarding the managers amendment. CBO viewed its coverage and premium estimates as largely unchanged from its original March 13 projections. However, the budget office did state that the managers package would reduce the bill’s estimated savings by $187 billion — increasing spending by $49 billion, and decreasing revenues by $137 billion. Of the increased spending, $41 billion would come from more generous inflation measures for some of the Medicaid per capita caps, and $8 billion would come from other changes. Of the reduced revenues, $90 billion would come from lowering the medical care deduction from 7.5 percent to 5.8 percent of income, while $48 billion would come from accelerating the repeal of Obamacare taxes compared to the base bill. Note that this “updated” CBO score released Thursday afternoon does NOT reflect any of the changes proposed Thursday evening; scores on that amendment will not be available until after Friday’s expected House vote.

Updated ten-year costs for repeal of the Obamacare taxes include:

  • Tax on high-cost health plans (also known as the “Cadillac tax”)—but only through 2026 (lowers revenue by $66 billion);
  • Restrictions on use of Health Savings Accounts and Flexible Spending Arrangements to pay for over-the-counter medications (lowers revenue by $5.7 billion);
  • Increased penalties on non-health care uses of Health Savings Account dollars (lowers revenue by $100 million);
  • Limits on Flexible Spending Arrangement contributions (lowers revenue by $19.6 billion);
  • Medical device tax (lowers revenue by $19.6 billion);
  • Elimination of deduction for employers who receive a subsidy from Medicare for offering retiree prescription drug coverage (lowers revenue by $1.8 billion);
  • Limitation on medical expenses as an itemized deduction (lowers revenue by $125.7 billion)
  • Medicare tax on “high-income” individuals (lowers revenue by $126.8 billion);
  • Tax on pharmaceuticals (lowers revenue by $28.5 billion);
  • Health insurer tax (lowers revenue by $144.7 billion);
  • Tax on tanning services (lowers revenue by $600 million);
  • Limitation on deductibility of salaries to insurance industry executives (lowers revenue by $500 million); and
  • Net investment tax (lowers revenue by $172.2 billion).

Obamacare Repeal Will Destroy the Republican Agenda Unless Congress Gets Smart

With Congress heading towards its first recess at week’s end, it’s time to summarize where things stand on one of Republicans’ top objectives—repealing Obamacare—and might be headed next. While those who want further details should read the entire article, the lengthy analysis below makes three main points:

  1. Congress faces far too many logistical obstacles—the mechanics of drafting bill text, procedural challenges in the Senate, budgetary scoring concerns, and political and policy disagreements—to pass a comprehensive “repeal-and-replace” bill by late March, or indeed any time before summer;
  2. Congressional leaders and President Trump face numerous pressures—both to enact other key items on their agenda, and from conservatives anxious to repeal Obamacare immediately, if not sooner—that will prevent them from spending the entire spring and summer focused primarily on Obamacare; therefore
  3. Congressional leaders will need to pare back their aspirations for a comprehensive “repeal-and-replace” bill, slim down the legislation to include repeal and any pieces of “replace” that can pass easily and swiftly with broad Republican support, and work to enact other elements of their “replace” agenda in subsequent legislation.

What Has Happened In the Last Month

Before the New Year, congressional leaders had endorsed a strategy of repealing Obamacare via special budget reconciliation procedures, using legislation that passed Congress (but President Obama vetoed) in late 2015 and early 2016 as a model. Subsequent efforts would focus on crafting an alternative to the law, whose entitlements would sunset in two or three years, to allow adequate time for a transition.

However, some observers questioned this “repeal-and-delay” strategy, arguing that insurance markets would quickly collapse without a clear vision from Congress for what will follow Obamacare. President Trump seemed to ratify these concerns when he called for “simultaneous,” or near-simultaneous, “repeal-and-replace.”

Due to Trump’s intervention and angst amongst some Republicans toward moving forward with a repeal-first approach, congressional leaders pivoted. Various press reports in the last week suggest House committees are drafting a robust “replace” package that will accompany repeal legislation. This “repeal-and-replace” bill will use the special reconciliation procedures that allow budget-related provisions to pass with a 51-vote majority (instead of the usual 60 votes needed to break a filibuster) in the Senate, with non-budgetary provisions being considered in subsequent pieces of legislation.

The press reports and strategic leaks from House offices attempt to show progress towards a quick markup—a March 1 markup date was floated in one article—and enactment before Congress next recesses, in late March. But these optimistic stories cannot hide two fundamental truths: 1) Enacting comprehensive “replace” legislation along with repeal will take far longer than anyone in Congress has yet admitted; and 2) Leadership does not have the time—due both to other must-pass legislation, and political pressure from the Right to pass repeal quickly—necessary to fashion a comprehensive “repeal-and-replace” bill.

He may not realize it at present, but in going down the simultaneous “repeal-and-replace” pathway, President Trump made a yuuuuge bet: holding the rest of legislative agenda captive to the rapid enactment of such legislation. Once it becomes more obvious that “repeal-and-replace” will not happen on its current timetable—and that other key elements of the Republican agenda are in jeopardy as a result—it seems likely that Speaker Ryan, President Trump, or both will scale back the “replace” elements of the “repeal-and-replace” bill, to allow it to pass more quickly and easily.

Adding Layers of Complexity

A Politico story last Tuesday claiming that an Obamacare alternative was coalescing in the House listed four elements of “replace” incorporated into a repeal bill: 1) incentives for health savings accounts (HSAs); 2) funding for high-risk pools for individuals with pre-existing conditions; 3) a refundable tax credit for the purchase of health insurance; and 4) comprehensive Medicaid reform in the form of per capita caps on beneficiary spending.

But every element added to a piece of legislation makes it that much more complex. Republicans have an easy template to use for repealing Obamacare: the reconciliation bill that already passed Congress. That bill has been drafted, passed procedural muster in the Senate, and received both a favorable budgetary score and enough votes for enactment.

Conversely, crafting “replace” policies will require more time, conversations with legislative counsel (the office in Congress that actually drafts legislation), discussions about policy options for implementation, and so forth.

House Republicans did engage in some of these conversations when compiling their Better Way agenda last spring. But that plan ultimately did not get translated into legislative language, and the plan itself left important details out (in some cases deliberately).

Moreover, because Republicans want to use special budget reconciliation procedures to enact this “repeal-and-replace” bill, they must consult heavily with the Senate parliamentarian, who advises the Senate on whether legislative provisions are primarily budgetary in nature, and thus can be included in a reconciliation bill. Reports last week suggested some of those discussions are underway. But if the Senate parliamentarian raises objections to the way House Republicans have drafted certain sections of their legislation, House staff may have to start from scratch and re-draft the legislative language to comply with the Senate rules.

It seems plausible that House Republicans could fairly easily incorporate some elements of their “replace” agenda—for instance, HSA incentives or funding for high-risk pools—into a repeal reconciliation bill. There are several “off-the-shelf” (i.e., previously drafted) versions of these policy options, and the budgetary effects of these changes are relatively straight-forward (i.e., few interactions with other policy elements).

But on tax credits and Medicaid reform, House Republicans face another major logistical obstacle: Analysis by the Congressional Budget Office (CBO). Longtime observers and congressional historians may recall that CBO was where Hillarycare went to die back in 1994. While Republicans are not necessarily doomed to face a similar fate two decades later, the idea that budget analysts will give “repeal-and-replace” a clean bill of fiscal health within a fortnight—or even a month—defies both credulity and history.

Running the CBO Gauntlet

As someone who worked on Capitol Hill during the Obamacare debate eight years ago, I remember the effect when CBO released one of its first scores of Democrats’ legislation. As the New York Times reported on June 17, 2009, in a piece entitled “Senate Faces Major Setback on Health Care Bill”:

The Senate Finance Committee is delaying its first public drafting session on major health care legislation until after the July Fourth recess, a lengthy setback but one that even Democrats say is critically needed to let them work on reducing the costs of the bill…. The drafting session had been scheduled for Tuesday. But new cost estimates by the Congressional Budget Office on health care proposals came in much more expensive than expected, emboldening critics and alarming Democrats.

I recall well hearing from Senate staffers about the massive fiscal gap between Democrats’ spending wish list and their revenue-raising proposals. That setback forced Democrats to go back to the drawing board, and sparked the “Gang of Six” discussions among Finance Committee Republicans and Democrats that spanned the months of July and August 2009. Eventually, Democrats did enact Obamacare, but on March 23, 2010—279 days after the CBO debacle the Times chronicled.

Given the role CBO played in delivering Hillarycare a mortal blow in the 1990s, and the more than nine-month gap between the initial (horrible) CBO scores of Obamacare and that law’s enactment, House leadership’s implication that its “repeal-and-replace” legislation can move straight to passage by receiving a clean bill of health from CBO on the first go-round seems highly unrealistic.

Just like any player moving up from the minor leagues will need time to adjust to big-league pitching, so too will any legislation with as many moving parts as a comprehensive “repeal-and-replace” bill require several, and possibly significant, adjustments and tweaks to receive a CBO score Republicans find acceptable.

While House Republicans’ Better Way plan included a much less complicated and convoluted formula for providing insurance subsidies than Obamacare, they may face other difficulties in achieving a favorable CBO score, particularly regarding to the number of Americans covered under their refundable tax credit regime. These include the following.

No Mandate:  While conservatives view the lack of a requirement to purchase insurance as a feature of any Obamacare alternative, CBO has a long history of viewing a mandate’s absence as a bug—and will score legislation accordingly. In analyzing health reform issues in a December 2008 volume, CBO published an elasticity curve showing take-up of health insurance based on various levels of federal subsidies. The curve claimed that, even with a 100 percent subsidy—the federal government giving away health insurance for “free”—only about 80 percent of individuals will actually obtain coverage. In CBO’s mind, unless the government forces individuals to buy insurance, a significant percentage will not do so.

President Obama didn’t want to include a mandate in Obamacare, not least because he campaigned against it. But CBO essentially forced Democrats to include one to receive a favorable score on the number of Americans covered. If Republicans care about matching the number of individuals insured by Obamacare (some view it as more of a priority than others), the lack of a mandate will cost them on coverage numbers. Alternative mandate-like policies such as auto-enrollment may mitigate that gap, but CBO may not view them as favorably—and they come with their own detractors.

Age-Rated Subsidies: Obamacare uses income as a major factor in calculating its insurance subsidy amounts, which creates two problems. First, because subsidies decline as individuals’ income rises, Obamacare effectively discourages work. CBO has previously calculated that, largely because of these work disincentives, the law will reduce the labor supply by the equivalent of 2.5 million full-time jobs.

Second, the process of reconciling projected income to actual earnings creates administrative complexity. It poses large paperwork burdens on the Internal Revenue Service and taxpayers alike, and requires some individuals to forfeit their refunds and pay back subsidies at tax time.

House Republicans have proposed a simpler system of insurance subsidies, based solely upon age. However, because the subsidies are solely linked to age, low-income individuals receive the same subsidy as millionaires. While much more transparent and fair, this system also does not target resources to those who would need them most. To borrow an analogy, it spreads the peanut butter (i.e., insurance subsidies) more evenly, but also more thinly, over the proverbial piece of bread (i.e., Americans seeking insurance). Given CBO’s beliefs about the likelihood of individuals purchasing insurance outlined above, this change could also cost Republicans significantly in the coverage department.

Medicaid Reform: Republicans have consistently argued that providing states with additional flexibility to manage their Medicaid programs in exchange for a defined federal contribution will allow them to reduce program spending in beneficial ways. Rhode Island’s innovative global compact waiver provides an excellent example of providing better care within an overall budget on expenditures.

However, CBO analysts have publicly taken a different view. In analyzing per capita spending caps for Medicaid—the policy option House Republicans are reportedly incorporating into their alternative—last December, CBO wrote that

States would take a variety of actions to reduce a portion of the additional costs that they would face [from the caps], including restricting enrollment. For people who lose Medicaid coverage, CBO and the staff of the Joint Committee on Taxation estimate that roughly three-quarters would become uninsured.

CBO has therefore made rather clear that it will score reforms to Medicaid as increasing the number of uninsured.

Speaker Ryan may have pushed for the comprehensive “repeal-and-replace” strategy in part to appease Republican members of Congress who want to see their alternative to Obamacare provide as many Americans with insurance as current law. But it seems highly improbable that CBO will score any Republican tax credit proposal as covering as many Americans as Obamacare. It is also not outside the realm of possibility for CBO to score an alternative as covering fewer Americans than the pre-Obamacare status quo.

The first two CBO scoring issues nixed any attempt by House Republicans to include tax credits as part of their alternative to Obamacare in 2009, when I worked in House leadership. Sources tell me unfavorable scores also nixed House Republicans’ attempt to include a refundable tax credit when the party was crafting responses to a potential Supreme Court ruling striking down the law’s subsidies in 2015. It therefore ranges from likely to certain that an initial CBO score of a comprehensive “repeal-and-replace” bill will go over about as well as it did for Republicans in 2009 and 2015—with generally poor coverage figures compared to Obamacare.

In theory, Republicans could work to surmount some of these obstacles and achieve more robust coverage figures. But such efforts would require time to sort through policy options—time that Republicans don’t currently have—and money to fund insurance subsidies, even though Republicans don’t have an obvious source of funding for them.

Pay-For Problems

Over and above the purely technical problems associated with scoring a “repeal-and-replace” bill, other issues present both policy and political concerns. To wit, if Republicans include refundable tax credits in their plan, how exactly will they finance this new spending? The possibilities range from unpalatable to implausible.

  • They could try to keep some of Obamacare’s tax increases to fund their own spending. But key Republican lawmakers and key constituency groups have strongly supported repealing all of Obamacare’s tax hikes. It seems unlikely that a bill that failed to repeal all of the law’s tax increases could gather enough votes for passage.
  • They could include their own revenue-raisers after repealing all of Obamacare’s tax hikes. For instance, House Republicans could limit the value of employer-provided health coverage. But while economists of all political stripes support such efforts as one key way to reduce health costs, members of the business community would likely oppose this measure, judging from recent news stories. Unions and the middle class likely wouldn’t be keen either. Moreover, by using limits on employer-provided health coverage as a new source of revenue rather than reforming the tax treatment of health insurance in a revenue-neutral way, Republicans would repeal Obamacare’s tax increases, but replace them with other tax increases—an unappetizing political slogan for the party to embrace.
  • They could use Medicaid reform to fund the credits, but that causes the potential problems with coverage numbers outlined above, and will likely generate additional squabbling among governors and states over the funding formula, as outlined in greater detail below.
  • They could use the remaining savings after repealing Obamacare’s tax increases and entitlements—which in the 2015/2016 reconciliation bill totaled $317.5 billion—to fund a new insurance subsidy regime. But such a move raises both policy and political problems. While Republicans could re-direct the $317.5 billion in savings during the first ten years to pay for insurance subsidies, the subsidies would likely have to expire after a decade. Creating a permanent new entitlement (the subsidies) funded by temporary savings would result in a point of order in the Senate—one that takes 60 votes, which Republicans do not have, to overcome—because budget reconciliation bills cannot increase the deficit in any year beyond the ten-year budget window. Thus any subsidies funded by the reconciliation bill’s savings would have to sunset by 2026—a far from ideal outcome. On the political side, the savings in last year’s reconciliation bill came from keeping Obamacare’s reductions in Medicare spending. If Republicans turn around and use that money to fund a new subsidy regime, they would be “raiding Medicare to fund a new entitlement”—the exact same charge Republicans used against Democrats to great effect during the debates over Obamacare.

To put it bluntly, while some Republicans may want to include refundable tax credits in their Obamacare alternative, they have no clear way—and certainly no pain-free way—to fund these credits. Even if they do push forward despite the clear obstacles, finding the right blend among the options listed above will require conversations among members and constituency groups, and multiple rounds of CBO scores for various policy options—all of which will take much more time than House leadership currently envisions.

Then There Are the Political Obstacles

Layered on top of the pay-for difficulties lie other political obstacles preventing quick enactment of a comprehensive “repeal-and-replace” package.

Medicaid: With 16 Republican governors ruling states that expanded Medicaid under Obamacare, and 17 Republican governors in states that did not, the fate of Medicaid expansion remains one of the thorniest questions surrounding repeal. Many states that did expand wish to keep their expansion, while states that did not do not want to be disadvantaged by making what they view as the conservative choice to turn down the new spending from Obamacare. Lawmakers have admitted they have yet to craft a solution on this issue. Attaching Medicaid reform to a “repeal-and-replace” measure will only complicate matters further, by giving states another issue (namely, the new funding formula for the per capita spending caps) to fight over.

House-Senate Differences: While House Republicans gear up to pass a comprehensive “repeal-and-replace” package, reports last week also indicated that Senate leadership still intends to consider legislation more closely resembling the 2015/2016 reconciliation bill. If Speaker Ryan continues to craft a “repeal-and-replace” bill while Majority Leader McConnell pushes “repeal-and-delay,” something will have to bring the two leaders to an agreement reconciling their disparate approaches.

Insurers:Those opposed to the “repeal-and-delay” strategy initially advocated by congressional leaders cited the needs of insurers as reason to pass a full “replacement” of Obamacare concurrent with repeal. Insurers will need to start submitting bids for the 2018 plan cycle by spring, and will want some certainty about how next year’s landscape will look before doing so. Hence the call for a full “repeal-and-replace,” to give insurers fast reassurances about the policy landscape going forward.

But if “full replace” will take until summer to pass—as it almost invariably will—then that argument gets turned on its head. In such circumstances, Congress should act swiftly to include some type of high-risk pool funding for those with pre-existing conditions, to prevent the insurer community from ending up with an influx of very sick, very costly enrollees.

Passing a repeal bill with high-risk pool funding may provide insurers with less certainty than a full “repeal-and-replace” measure, but it would yield infinitely more certainty than Congress arguing until September over the details of “full replace,” with the entire legal and regulatory realm in limbo as insurers must prepare for their 2018 plan offerings.

Conservatives: Some conservatives have philosophical objections to refundable tax credits, or indeed to any “replacement” legislation. Sen. Mike Lee this week called including “replacement” provisions on a repeal bill a “horrible idea.” Lee was one of three Republicans (the others being Ted Cruz and Marco Rubio) who in fall 2015 pushed for more robust repeal legislation, issuing a statement demanding that year’s reconciliation measure include the greatest amount of repeal provisions possible consistent with Senate rules. After the conservatives laid down their marker, the Senate ultimately passed, and the House ratified, the reconciliation measure repealing the law’s entitlements and all of Obamacare’s tax increases.

Some within the party have acknowledged the fractious nature of the “replace” discussions. Ramesh Ponnuru has publicly worried that some conservatives agnostic or skeptical on the merits of a “replace” plan would do nothing following repeal, and therefore wants to link repeal with replace, to force conservatives to vote for a vision of “replace.”

Such maneuvering pre-supposes that conservatives will swallow a “replace” plan they dislike to repeal Obamacare, a dicey proposition given conservatives’ success at obtaining a more robust repeal measure in 2015. It also pre-supposes that conservatives will stand idly by while leadership takes the months necessary to create full-scale “replace” legislation.

If the process continues to drag on in the House, it would not surprise me one bit were conservatives to introduce a discharge petition to force a House floor vote on the 2015/2016 reconciliation bill. Conservatives in the House Freedom Caucus and the Republican Study Committee, likely in conjunction with outside conservative groups, would turn the discharge petition into a litmus test for Republican members of Congress: Are you for repeal—and repeal in the form of legislation that virtually all returning Republicans voted for one short year ago—or not?

While a discharge petition needs 218 member signatures before its sponsor can force a floor vote, the mere introduction of a discharge petition would increase the pressure on House leadership to move quickly on repeal. Moreover, it would highlight the fact that neither Speaker Ryan nor President Trump can afford to spend the entire spring and summer slogging through a long legislative process regarding Obamacare.

Now We Come to the Opportunity Costs

Most of this year’s major action items require the Obamacare reconciliation bill to pass. Once and only once that legislation passes can Congress pass a second budget, allowing for a second budget reconciliation measure to move through the Senate. Specific items held in limbo due to the Obamacare debate include the following.

Tax Reform: Republicans want to use the second reconciliation bill to overhaul the tax code. (President Trump may also want to use the tax reform bill to finance his planned infrastructure package.) But because the current budget does not include reconciliation instructions regarding revenues, Congress must pass another budget with specific reconciliation instructions before tax reform can move through the Senate with a simple (51-vote) majority. But before Congress passes another budget, it must first pass the reconciliation bill (i.e., the Obamacare bill) related to this budget.

Debt Limit: The current suspension of the debt limit expires on March 15. While the Treasury can use extraordinary measures to stave off a debt default for several months, Congress will likely have to address the debt limit prior to its August recess. As with tax reform, the debt limit (and spending and entitlement reforms to accompany same) can be enacted with a simple majority in the Senate via budget reconciliation. But, as with tax reform, doing so first requires passing another budget, which requires enacting the Obamacare reconciliation bill.

Appropriations: The current stopgap spending agreement expires on April 28. Congress will need to pass another spending measure by then—quite possibly including a request by the president for additional border security funds—and begin considering spending bills for the new fiscal year that starts September 30. Here again, passage of these legislative provisions would be greatly aided by passage of another budget to set fiscal parameters, but that cannot happen until the Obamacare reconciliation bill is on the statute books.

As other observers have begun noting, many of the major “must-pass” and “want-to-pass” pieces of legislation—tax reform; Trump’s infrastructure package; a debt limit increase; appropriations legislation; funding for border security—remain essentially captive to the Obamacare “repeal-and-replace” process. The scene resembles the airspace over New York during rush hour, with planes circling overhead while one plane (the Obamacare bill) attempts to land. Unfortunately, the longer the planes circle, one or more of them will run out of fuel, effectively crashing major pieces of the Trump/Ryan agenda due to legislative inaction and neglect.

The Available Political Options

With a legislative process for “repeal-and-replace” likely to take months longer than currently advertised, and a series of other competing priorities contingent on it, Speaker Ryan and President Trump face three options.

Punt: Focus on passing the other agenda items first, and come back to Obamacare later;

Plow Ahead: Remain on the current course, knowing that Obamacare will jeopardize much of Trump’s and Ryan’s other agenda items; or

Pivot/Pare Back: Return to something approaching last year’s reconciliation bill, and postpone major “replace” legislation until a future reconciliation measure.

Given the current environment, the third option seems the clear “least bad” outcome. The first would represent a major political setback, effectively admitting defeat on the president’s top agenda item and betraying Republicans’ seven-year-long commitment to repeal that conservatives sharply opposed to Obamacare will never forget, and may never forgive. The second jeopardizes, if not completely sacrifices, most of the party’s legislative agenda, including items the president will want to tout in his re-election bid.

Therefore, it seems likely that Ryan, Trump, or both will eventually move to pare back the current comprehensive “repeal-and-replace” legislation towards something more closely resembling the 2015/2016 repeal reconciliation bill.

The legislation may include elements of “replace,” but only those with a clear fiscal nexus (due to the Senate’s rules regarding reconciliation) and broad support among Republicans. HSA incentives and funding for high-risk pools might qualify. But more robust provisions, such as Medicaid reforms or refundable tax credits, will likely get jettisoned for the time being, to help pass slimmed down legislation yet this spring.

Time’s a Wastin’

To sum up: The likelihood that House Republicans can get a comprehensive “repeal-and-replace” bill—defined as one with either tax credits, Medicaid reform, or both—1) drafted; 2) cleared by the Senate parliamentarian; 3) scored favorably by CBO; and 4) with enough member support to ensure it passes in time for a mark-up on March 1—two weeks from now—is a nice round number: Zero-point-zero percent.

Likewise the chances of enacting a comprehensive “repeal-and-replace” bill by Congress’ Easter recess. It just won’t happen. For a bill signing ceremony for a comprehensive “repeal-and-replace” bill, August recess seems a likelier, albeit still ambitious, target.

Republicans have already blown through two deadlines on “repeal-and-replace”: the January 27 deadline for committees to report reconciliation measures to the House and Senate Budget Committees, and the President’s Day recess, the original tentative deadline for getting repeal legislation to President Trump’s desk. Any further delays will accelerate both conservative angst and the same types of process stories from the media—“Republicans arguing amongst themselves on repealing Obamacare”—that plagued Democrats from the summer of 2009 through the law’s enactment.

Some may find this analysis harsh, or even impertinent. Some may want to take issue with my assumptions—Newt Gingrich would no doubt dispute CBO’s scoring methods, long and loudly. But policy-making involves crafting solutions given the way things are, not the way we wish them to be. And every day that goes by while Congress remains on the current “repeal-and-replace” pathway—which seems increasingly like a strategic box canyon—will only jeopardize the success of other critical policy priorities.

For all his wealth, Trump gets the same amount of one thing as everyone else: Time. For that reason, his administration and Speaker Ryan should re-assess their current strategy on Obamacare—the sooner the better. Time’s a wastin’, and the entire Republican agenda is at stake.

This post was originally published at The Federalist.

Three Concerns with Rand Paul’s Obamacare Replacement Act

On Wednesday, Politico reported that the House Freedom Caucus, an influential group of House conservatives, was considering whether to give its official endorsement to Sen. Rand Paul’s Obamacare Replacement Act (S. 222). The report indicated that word from the Freedom Caucus about an endorsement could come as soon as next week.

To this conservative health policy analyst, this development raises some serious concerns. Although not as objectionable as the Collins-Cassidy Patient Freedom Act, Paul’s legislation contains several features that, if widely embraced by conservatives, could lead to strategic and policy missteps going forward.

1. Doesn’t Repeal Obamacare

While the Paul bill provides an alternative vision for health care, it does not repeal most of Obamacare. The bill does repeal virtually all of the law’s major mandates: the individual and employer mandates to obtain insurance, the guaranteed issue and community rating regulations, the essential health benefits, and other various insurance mandates that have raised premiums.

However, the bill does not repeal either of Obamacare’s new entitlements—the subsidies for exchange health insurance, and the massive Medicaid expansion to the able-bodied—leaving in place nearly $2 trillion in spending over the coming decade. Likewise, the bill does not repeal any of the Obamacare taxes used to fund that spending, except those associated with the individual and employer mandates.

Paul’s office may view the bill as a successor and complement to the reconciliation bill that Congress passed, but President Obama vetoed, in 2016. That bill would have repealed the law’s entitlements (after two years), and its tax increases (effective immediately), but not its regulations. Paul’s office might argue that his bill repeals the critical portions of Obamacare not included in last year’s reconciliation bill—the major insurance regulations—while providing a replacement vision to go beyond repeal.

But that position assumes last year’s reconciliation bill will be the starting point for this year’s discussion—and it may not be. Politico reported Tuesday evening that Republicans were having difficulty figuring out how to square Medicaid reform with Obamacare’s massive Medicaid expansion. Likewise, some Republicans have discussed not repealing the law’s tax hikes. On these controversies, the Paul bill, by omitting any provisions relating to the entitlement expansions and tax increases, contains a deafening silence.

Paul’s bill repealed the individual and employer mandates, even though last year’s reconciliation measure also effectively repealed them. Why didn’t his bill repeal all the other tax hikes and spending increases as well? Is it because Paul, whose home state expanded Medicaid to the able-bodied under Obamacare, wants to avoid taking a position on whether to keep that expansion?

2. Tax Credit Slippery Slope

The Paul bill does provide tax credits for health coverage, but largely of the non-refundable kind, an arcane but important difference. Paul’s bill provides a $5,000 tax credit to individuals who contribute to Health Savings Accounts (HSAs), but only to the extent such individuals have income tax liability. The Paul bill does include a refundable tax credit for health insurance premiums, but the refundable portion of the credit only applies up to the limit of an individual’s payroll taxes paid.

Many Republican health reform plans would offer refundable tax credits to individuals in excess of tax liabilities, which represents pure welfare/outlay spending—the government issuing “refunds” to people with no net income or payroll tax obligations. By contrast, the Paul bill would ensure that credits only apply to individuals with actual payroll and income tax obligations.

However, this critically important distinction will likely be lost on many members of the press—and perhaps members of the Freedom Caucus themselves. “House Freedom Caucus Endorses Tax Credits” will blare the headlines. Having endorsed tax credits once, the pressure on Freedom Caucus members to then go further and endorse the House leadership plan for refundable tax credits will be immense. Put simply, the slippery slope to endorsing a major spending package in the form of refundable tax credits starts with the Paul bill.

3. Budget-Busting Health Care Giveaways

While the Paul bill includes no outlay spending—its incentives all come via tax cuts—those incentives are numerous, and costly. The legislation would supplement the current, uncapped exclusion on employer-provided health insurance with a new, uncapped deduction for individual-provided health insurance. It would eliminate contribution limits to HSAs, and introduce a new federal subsidy (via the tax credits) of up to $5,000 for HSA contributions.

Apart from the fiscal implications of the tax incentives, are these tax cuts smart tax cuts? Evidence suggests they may not be. Economists on all sides of the political spectrum believe that the current uncapped exclusion for employer-provided health insurance encourages over-consumption of health insurance, and thus health care. Rather than reining in this tax incentive as one element of pro-growth tax reform, Paul’s bill goes in the other direction, creating two new uncapped tax incentives for health insurance.

As a medical doctor, Paul has shown little inclination to rein in health care spending. He voted for budget-busting Medicare physician payment legislation in 2015 that raised the deficit by more than $140 billion in its first decade alone, while failing to solve the long-term problems it purported to address. He has also previously proposed budgets with minimal reductions in Medicare spending, although he has introduced more substantive reforms in recent years.

But with health care already consuming nearly one-fifth of our economy, and our national debt approaching $20 trillion, does the solution to these problems really lie in creating new, uncapped incentives for tax-free spending on health care and health insurance?

Therein lies but one of the Paul bill’s problems. While ostensibly promoting market-oriented solutions, the legislation contains several strategic trip-wires that could contaminate any attempt to repeal Obamacare, or enact a conservative alternative. Members of Congress should tread cautiously.

This post was originally published at The Federalist.

Four Ways the Patient Freedom Act is Worse Than Obamacare

Last week, I wrote about how the Patient Freedom Act—introduced by senators Bill Cassidy (R-LA) and Susan Collins (R-ME)—would dramatically expand taxpayer funding of abortions, even when compared to Obamacare.

But that’s not the only way in which their bill (S. 191) exceeds Obamacare’s standards for government intervention. Other details of their legislation reveal why its short title serves as a misnomer.

1. It Has More Spending Than Obamacare

The PFA (text available here, and a summary available here) gives states a choice of three options regarding the health care system within their borders. They can either 1) essentially keep Obamacare in place; 2) use an allotment, based on 95 percent of a state’s Obamacare spending, to create their own insurance regime (albeit with several federal mandates remaining); or 3) go out on their own and not receive any federal funds.

Section 104 of the bill contains a complicated formula to determine state allotments for option two—the default option for states under the PFA. Section 104(b)(2) provides that states that did not expand Medicaid under Obamacare will receive 95 percent of the amount they would have received had they accepted the Medicaid expansion.

In other words, rather than reducing Obamacare’s spending, the Patient Freedom Act could well increase it—by giving new Medicaid funds to states that declined to expand.

Medicaid reform should not disadvantage states that did not expand Medicaid under Obamacare. But the proper solution to that problem does not lie in adding to Obamacare’s nearly $2 trillion in spending over the coming decade. Instead, it lies in freezing enrollment in the Medicaid expansion, unwinding that new spending, and transitioning beneficiaries over time off the rolls and into work.

2. It Repeals Health Savings Accounts (Not Obamacare)

The Patient Freedom Act includes what amounts to “Lie of the Year” redux: if you like your Health Savings Account (HSA), you can’t keep it. While the bill does not repeal any of Obamacare—the word “repeal” appears exactly zero times in its 73 pages—it effectively ends the current HSA regime, making Health Savings Accounts less attractive to individuals.

Current law makes HSAs tax-privileged in two ways. First, contributions to an HSA can be made on a pre-tax basis—either via a payroll deduction through an employer, or an above-the-line deduction on one’s annual tax return. Second, HSA distributions are not taxable when used for qualified health expenses under Obamacare.

The Patient Freedom Act would abolish the first tax preference while retaining the second. Individuals must contribute to an HSA using after-tax dollars, but their contributions could grow tax-free, and distributions would be tax-free when used for qualified health expenses, as under current law. Section 201(b) prohibits additional contributions to “traditional” HSAs following enactment of the bill, instead diverting new contributions to the Roth (i.e., after-tax) HSAs created by the measure. While the bill does not require individuals to convert their existing HSAs to the new Roth HSAs, account administrators (e.g., banks, mutual funds, etc.) could require their customers to do so at some point—and individuals could face a hefty tax bill when they do.

Health Savings Accounts are a proven vehicle to help control the growth of health costs. While Obamacare included new restrictions on HSAs, Democrats did not upend the accounts nearly as much as contemplated by the Patient Freedom Act. Significantly reducing the tax preferences for Health Savings Accounts would not lower health care costs. If anything, it would raise them.

3. It Supports Government-Imposed Price Controls

In recent years, some Americans have faced the problem of “surprise” medical bills. These can occur when individuals seek emergency care at (or are taken by ambulance to) an out-of-network hospital, or when some providers at a facility remain outside an insurer’s network (e.g., a surgeon and the hospital are in-network, but the anesthesiologist is out-of-network). To address these issues, Section 1001 of Obamacare included new mandates that insurers not impose prior authorization requests on emergency care, and require only in-network cost-sharing for all emergency care, regardless of whether the patient was treated at an in-network hospital or not.

Section 121(a)(2) of the Patient Freedom Act goes further than Obamacare, imposing maximum charges for emergency services: 85 percent of insurers’ usual, customary, and reasonable charges for physician care; 110 percent of Medicare payment rates for inpatient and outpatient hospital care; and acquisition costs plus $250 for drugs and biological pharmaceuticals.

While the issue of “surprise” medical bills does present a policy problem—individuals caught in the middle of stand-offs between providers and insurers regarding payment rates—there are other ways to resolve it short of government price controls. To borrow a medical metaphor, the PFA uses a blunt knife when a sharp scalpel would be more appropriate.

4. It Would Create an Automatic Enrollment Program

Sections 105(c) and 107(c) of the PFA create parameters through which states can automatically enroll their residents in health insurance—complete with restrictions on the type of coverage states can auto-enroll individuals into. While individuals can opt out of insurance should they wish to do so, this mandate-without-a-mandate could prove even more problematic than Obamacare’s requirement that all individuals purchase health coverage.

Over at the Weekly Standard, Jeffrey Anderson explains all the reasons why automatic enrollment represents bad policy. Much of it comes down to two questions: With the most recent enrollment estimates in Obamacare’s Exchanges dating back to June 30—seven months ago—how on earth will states determine who is insured, and who should be auto-enrolled in coverage, in real time? And even if states could compile all that data, why should individuals have to give their personal insurance details to another government database?

Nearly four years ago, then-Rep. Bill Cassidy said this about the IRS’ power in enforcing Obamacare:

Obamacare requires thousands of IRS agents to implement the law…They’re going to go through the small businesswoman’s books, to make sure that she actually has the number of employees that she claims, and that she has adequate insurance. That’s a little scary when you see what the IRS has been doing with their political targeting.

Granted, the PFA doesn’t have an employer mandate to enforce, but why is Sen. Cassidy’s “solution” to big government overreach at the federal level allowing states to impose their own intrusive requirements on individuals and businesses…?

Conservatives looking to repeal Obamacare should be disappointed by the ways in which the Patient Freedom Act exceeds Obamacare in several key respects, while liberals will undoubtedly oppose its (insufficient) attempts to devolve or deregulate health care to the states. Its Senate sponsors notwithstanding, the bill appears to lack a natural constituency. Or, to put it another way, if the Patient Freedom Act is the answer, then what exactly is the question?

This post was originally published at The Federalist.

An Obamacare “Fix” That Isn’t

Astute political observers might have noticed disconsonant views coming from Republicans on Capitol Hill recently. Even as many rightly criticized Obamacare for the massive premium increases many Americans face—and noted that the law’s framework makes Obamacare inherently unfixable—other unnamed Republican sources may be already laying the groundwork for efforts to repair the law after next week’s election. Such efforts would not only undermine the party’s pre-election messaging, they could well prove ineffective at best in solving the law’s twin problems of too many regulations and too much spending.

Two weeks ago, President Obama attempted to sell his unpopular law in Miami, encouraging people to sign up for exchange coverage in 2017 despite higher premiums for coverage of questionable quality. In response, House Speaker Paul Ryan issued a statement taking issue with the structure of the law itself:

After listening to the president’s speech, I’m not sure what health care law he’s talking about. He wondered out loud why there’s been such a fuss. It’s no secret: It’s because of Obamacare. That’s why we’ve seen record premium hikes. That’s why millions of people—including millennials—have lost their plans, or been forced to buy plans they don’t like. That’s why we’ve seen waste, fraud, and abuse. And at this point, one thing is clear: This law can’t be fixed. [Emphasis mine.]

Last week, however, a different story emerged, in a story highlighting proposed changes to the law that Congress could consider in 2017. The article in The Hill quoted unnamed congressional sources as saying that Republicans have in fact offered to help Democrats “fix” Obamacare:

A Democratic health adviser spoke to congressional Republicans recently about changing the age rating ratio, with a subsidy for older people, and said the reaction was “favorable.”

To translate the article’s policy-speak into English: Obamacare requires that insurers charge older individuals no more than three times what younger enrollees pay. In most cases, however, older individuals incur costs about five to six times what the youngest enrollees incur in medical bills. The three-to-one age rating therefore charges younger people more, so that older individuals pay slightly lower premiums.

Younger and healthier individuals aren’t enrolling in Obamacare, because they don’t see it as a good value—which, under the age rating restrictions, it isn’t. As a result, Obamacare’s exchanges face a pool of enrollees sicker than the average employer plan—one of the main reasons why insurers are losing money, and not offering exchange coverage. The unnamed Democratic staffer mooted changes that would loosen the age rating ratio—providing slightly lower premiums for younger enrollees, in the hope they will sign up in greater numbers—in exchange for richer subsidies for the older individuals who would pay more under the change.

It remains unclear whether these discussions have advanced to any degree of seriousness, or whether Speaker Ryan would in fact bring Obamacare “fixes” to the House floor after publicly stating that the law can’t be fixed. But what is clear is what new subsidies would entail—adding more spending to the nearly $2 trillion the law will already spend in the coming decade, at a time when our nation faces a staggering $19.8 trillion in federal debt. New subsidies would also likely entail new tax increases that will impede economic growth, or additional reductions in Medicare to pay for more spending on Obamacare, at a time when Medicare itself faces funding shortfalls—an inconvenient truth neither presidential candidate has bothered to consider.

Just as important, it’s also unclear whether changing the age rating regulations alone would bring premiums down enough to encourage young people to enroll. Over and above age rating, Obamacare included massive new regulations on health insurance policies, most of which raised premiums dramatically: A new list of “essential health benefits” that all plans must cover; requirements for coverage of preventive services without cost-sharing; requirements that plans cover a greater percentage of expected medical expenses. Even if more favorable age rating lowers premiums by one-third, it won’t take insurance rates much below where they were before the 25 percent premium increase facing plans this January. How will taking premiums back to they are now—when young people haven’t enrolled in Obamacare for the past three years—fix the problem?

The answer’s simple: It won’t. “Favorable” reactions from unnamed staffers aside, more spending and more taxes won’t fix an inherently unfixable law—even if accompanied by some regulatory changes that might do some good. As the old saying goes, if you’re in a hole, stop digging. When it comes to Obamacare, that means staff on both sides of the aisle shouldn’t waste time with “solutions” that involve throwing more of someone else’s money at the problem. Future generations already face a nearly $20 trillion—and counting—hole of debt; if we won’t solve that problem, let’s at least agree not to make it any bigger.

Bill Clinton’s Right: Obamacare’s Tax on Success Is “Crazy”

Taxes are back in the news on the presidential campaign trail — and this time, the controversy has nothing to do with Donald Trump. While the commentariat have seized on Bill Clinton’s description of Obamacare as “crazy,” it’s important to recognize exactly what he considered so nonsensical: the fact that Obamacare increases already sizeable government-imposed penalties on work, entrepreneurship, and success. Its perverse incentives will leave more Americans stuck in a poverty trap, making Obamacare even more warped than Bill Clinton’s description of the law.

In their full context, Clinton’s comments look more damning of the law, rather than less. Before uttering the “crazy” epithet, his remarks focused on those whose income puts them right above the cutoff line to receive federal subsidies. These people are, in the former president’s words, getting “whacked” because they have succeeded in life and in business:

The current system works fine if you’re eligible for Medicaid if you’re a lower-income working person, if you’re already on Medicare, or if you get enough subsidies on a modest income that you can afford your health care. But the people who are getting killed in this deal are the small businesspeople and individuals who make just a little too much to get in on these subsidies. Why? Because they’re not organized, they don’t have any bargaining power with insurance companies, and they’re getting whacked. So you’ve got this crazy system where all of a sudden 25 million more people have health care, and they’re out there busting it, sometimes 60 hours per week, wind up with their premiums doubled and their coverage cut in half. It is the craziest thing in the world. [Emphasis is mine.]

During the 2012 campaign, Mitt Romney was roundly criticized when he said in an interview,  “I’m not concerned about the very poor. We have a safety net there.” Bill Clinton’s comments emphasized that Obamacare is not concerned about the middle class. It’s not aimed to support those who want to rise in station in life; it actually discourages them from doing so.

And whereas Romney’s 2012 impromptu “gaffe” came in a live television interview, Obamacare represents considered policy — the result of a legislative process of nearly a year and policymaking developed long before that. As I noted in a 2013 Heritage Foundation paper, the law contains numerous subsidy cliffs that create enormous inequities. In some cases, as little as an additional dollar of income could cause the loss of thousands of dollars in premium or cost-sharing subsidies paid by the federal government, or both. “Families facing these kinds of poverty traps may ask the obvious question: If I will lose so much in government benefits by earning additional income, why work?”

The nonpartisan Congressional Budget Office (CBO) has answered that question simply: In many cases, individuals will not work. A 2010 CBO report concluded that “the phaseout of the [insurance] subsidies as income rises will effectively increase marginal tax rates, which will also discourage work.” All told, the nonpartisan budget scorekeepers have concluded that the law will reduce the labor supply by the equivalent of 2 million jobs next year alone.

Obamacare only exacerbated an existing poverty trap identified by scholars on both sides of the political spectrum, including those at the left-of-center Urban Institute. As income rises above the poverty level, government-funded benefits such as Medicaid, food stamps, and the earned-income tax credit phase out or disappear altogether, eroding or eliminating much of the income effect from higher wages. If a single parent with two children can receive nearly $30,000 in government benefits with no earnings, but only about $10,000 in benefits with $35,000 in earnings, many parents may make the calculated decision that the comparatively modest net increase in family income does not justify work. Moreover, both the prior welfare system and Obamacare impose financial penalties on marriage, discouraging one of the best ways for families to rise out of poverty.

It’s ironic that Bill Clinton, the president who signed the largest tax increase in American history, would express such outrage at the way Obamacare raises effective marginal tax rates for the middle class. But for a party that purports to stand for the interests of the poor and working class, Obamacare will only work to perpetuate the cycle of poverty down to future generations. And that is perhaps the craziest idea of all.

This post was originally published at National Review.

The Dirty Little Secret of Hillary Clinton’s Health Plan

On Monday, President Bill Clinton committed a Kinsley gaffe, criticizing Obamacare as “the craziest thing in the world,” whereby small business owners “wind up with their premiums doubled and their coverage cut in half.” In response to her husband’s accurate depiction of Obamacare’s problems, Hillary said on Tuesday: “We got to fix what’s broken and keep what works, . . . We’re going to tackle it and we’re going to fix it.” Secretary Clinton is exactly correct — if by “fix” she means enacting a proposal that could line the pockets of businesses to the tune of nearly a trillion dollars while simultaneously jacking up premiums and deductibles for millions of Americans.

Hillary Clinton’s plan for a new federal tax credit to subsidize out-of-pocket costs for all Americans will encourage businesses to make their health benefits skimpier — raising premiums, co-payments, and deductibles — because they know that the new tax credit will pick up the difference for the hardest-hit families. While Secretary Clinton’s other major health-care proposals (to increase federal subsidies on insurance exchanges and to create a government-run “public option” on them) would apply only to those without employer-based coverage, the out-of-pocket tax credit would apply to both insurance that is employer-based and insurance that is individually purchased.

In analyzing her proposals, the liberal Commonwealth Fund noted that Secretary Clinton’s out-of-pocket tax credit would affect a pool of 177.5 million potentially eligible Americans, which is more than four times as many as those who would be eligible to avail themselves of the government-run “public option.” The broader reach for the tax credit, plus its generous amount (up to $2,500 per individual or $5,000 per family for out-of-pocket spending that exceeds 5 percent of income) creates a sizable cost for the federal government: net spending of $90.3 billion in 2018 alone, according to the Commonwealth analysis. In 2009, President Obama made this pledge to Congress: “The plan I’m proposing will cost around $900 billion over ten years.” But one element alone of Secretary Clinton’s plan will cost at least that much — and probably more than $1 trillion.

The Commonwealth analysis of Clinton’s plan attempts to estimate how much the out-of-pocket tax credit will reduce health-care expenses for middle-class and working-class families. What the Commonwealth researchers did not mention in the report, and instead buried in a technical appendix, is this doozy of an asterisk: “Potentially, this [tax credit] approach gives firms an incentive to increase workers’ premium contributions, so that more workers are eligible to claim the credit.”

The Commonwealth researchers did not even attempt to model the impact of the tax credit on the actual behavior of businesses, claiming that employers might not know their workers’ income or out-of-pocket expenses, and saying they could not make decisions based on incomplete information. Nonsense. Even if businesses decide not to increase employees’ premium contributions, they could jack up deductibles instead. A firm could raise its deductible by $2,500, offer all workers a $1,000 bonus — to help employees whose out-of-pocket costs don’t meet the 5 percent of income threshold to obtain the tax credit, or assist workers’ cash flow until they receive it — and still come out ahead.

Whether by accident or design, the Commonwealth researchers assumed that employers will not respond to incentives — an assumption that belies three years of experience with Obamacare’s exchanges. Thousands of Americans have gamed the law’s special enrollment periods to sign up for coverage outside the annual enrollment window, incurred above-average costs – and then dropped their coverage at above-average rates, un-enrolling after returning to health. And because Section 1412 of the law allows enrollees a three-month grace period before insurers can drop their coverage for non-payment, one insurer found that 21 percent of its customers didn’t bother to pay their premiums last December, because the law effectively said they didn’t have to.

Given the ways in which Americans have gamed Obamacare’s morass of new regulations to create a system of barely functioning insurance exchanges, it beggars belief to think that businesses would not similarly work to maximize profit. According to the Kaiser Family Foundation’s survey of employer-sponsored health plans, only 23 percent of workers face a deductible above $2,000. With the average deductible rising 12 percent last year, firms would now have an even greater incentive to privatize their gains – because the new tax credit would allow them to socialize their workers’ losses by moving them to the federal fisc.

Why would Secretary Clinton propose a costly plan that encourages large businesses to pocket profits while jacking up costs on struggling families? Simple: The plan will make employer coverage less desirable, and it might even make the Obamacare exchanges look attractive by comparison. If liberals’ end goal is to erode employer-provided health coverage and migrate all Americans to government-run exchanges, offering a tax credit that will effectively erode that coverage faster isn’t a bad way to start.

This post was originally published at National Review

The Daunting Math Behind the House Republican Health Plan

A House Republican alternative to Obamacare is coming this week, and some reports suggest it will include a refundable tax credit to subsidize health insurance. This would present some tough political and policy choices about whether and how to pay for a new program of tax credits.

Changing the tax treatment of employer-provided health insurance could provide one of the largest potential sources of financing for a new refundable credit. It also would bring hefty trade-offs. On the political side, capping the deductibility of employer-based health plans to finance refundable credits that are considered government spending would not please some Republicans. Put another way: Repealing Obamacare’s tax increases to replace them with other revenue increases is unlikely to go over well with conservative voters, as I wrote in Think Tank late in 2014.

On a more technical level, such tax changes pose a “Goldilocks” problem. Some believe that an Obamacare alternative could cap the deductibility of employer-based insurance in a way that would raise enough revenue to fund subsidies for most, if not all, of those newly covered by the law, while leaving employer-based coverage unchanged for the vast majority of plans and workers. Achieving one of these goals would be difficult; achieving both simultaneously could be impossible.

Financing a refundable tax credit through reforms to Medicaid would raise other concerns. Some noteworthy examples suggest that giving states additional flexibility over benefit parameters would flatten the growth of Medicaid spending. But the Congressional Budget Office might conclude that such changes would cause states to reduce the number of individuals covered by Medicaid. Liberal advocates of Obamacare’s coverage expansions are almost certain to argue this. And if achieving coverage gains is an objective of an Obamacare alternative, budget scorekeepers are likely to note that reforming Medicaid to finance a refundable tax credit could work at cross-purposes.

House Republicans could decide to use Medicare savings to finance a new refundable tax credit. That, however, could lead to charges of hypocrisy because of the political attacks Republicans have leveled against President Barack Obama for funding the 2010 health-care law this way and because of the optics of using one entitlement program to fund another. Likewise, Republicans could, in theory, propose a new refundable credit without any method of paying for it—but such a proposal may not receive enough support to ensure passage.

It’s also possible that House Republicans’ proposal may attempt to obscure the conflicts and trade-offs that come with crafting a health plan. Mr. Obama arguably did that as a presidential candidate in 2008, and it’s a major reason his health-care efforts enjoyed widespread popularity through early 2009. Once the messy trade-offs necessary to construct the law—the individual mandate, tax increases, and Medicare reductions—were clear, the effort’s approval ratings plummeted. They remain low today. Given what happened with Obamacare’s crafting and rollout, Republicans’ failure to acknowledge the policy trade-offs necessary to enact an alternative to that law could win a short-term political battle—but cost them a long-term policy war.

This post was originally published at the Wall Street Journal’s Think Tank blog.

How Hillary Clinton’s Credit for Out-of-Pocket Health Costs Could Backfire

Hillary Clinton said recently that she supports efforts to allow some under 65 to buy into Medicare and suggested that this would help lower health-care costs. A key element of her broader health-care platform could, however, increase them–at a sizable cost to the federal government.

A plan the Clinton campaign unveiled in September would create a refundable tax credit worth as much as $2,500 per individual and $5,000 per family to cover out-of-pocket health-care expenses. The campaign has said that the credit would be “available to insured Americans with qualifying out-of-pocket health expenses in excess of five percent of their income, and who are not eligible for Medicare or claiming existing deductions for medical costs.” This means people eligible for the credit would include not only those who have plans through the Obamacare exchanges but also those insured through their employer. Making the credit refundable could allow individuals with little or no income tax liability to receive a refund from the federal government toward their out-of-pocket health costs.

The potential breadth of this proposal could prove its undoing. For one thing, the most recent Census Bureau survey, published in September, estimates that 175 million Americans are covered by employer plans. That’s nearly 14 times the 12.7 million individuals covered by plans through the Affordable Care Act exchanges. While there have been proposals to increase federal subsidies provides to those enrolled through the ACA exchanges, this is the only plan suggesting new federal subsidies for those with employer coverage.

Extending federal subsidies for out-of-pocket costs incurred by those with employer-provided plans could dramatically remake that market. Companies could opt to increase employee cost-sharing, knowing that workers would recoup some or possibly all of their new costs through the federal program. A Kaiser Family Foundation survey of employer plans last year found that only 19% of workers with single coverage faced a deductible of more than $2,000. The Clinton plan sets the maximum credit for individuals at $2,500. If the federal government provides individuals with high health costs a refundable credit to help subsidize their expenses, employers would have reason to try to offload their costs onto employees—which ultimately could end up costing the U.S. Treasury more.

Details of the Clinton plan are still limited. Should it be implemented, policy makers could attempt to shape or amend the tax credit’s effects. Still, it’s possible that a policy designed to absorb higher health costs would shift them from employers and workers to federal taxpayers. That cost-shifting wouldn’t lower spending–and could increase it. Knowing there is a federal credit might give employees incentive to incur additional expenses to exceed the subsidy threshold. That would mean a credit aimed at mitigating the effects of rising health costs for some families could end up exacerbating the problem on a broader scale.

This post was originally published at the Wall Street Journal’s Think Tank blog.

Obamacare and Taxes? It’s Complicated…

In a January Think Tank post, I noted potential complications the health-care law’s interactions with the tax code could present for millions of filers this season. In just the past week, we’ve seen:

* Many recipients of federal subsidies have been required to repay some of that money when they filed their taxes. Although some people overestimated their 2014 income when they applied for subsidies, and received a larger-than-expected refund as a result, the majority of subsidy recipients (52%) did the opposite, according to an H&R Block analysis released Tuesday. Those who underestimated their income and collected oversize subsidy payments in 2014 have seen their refunds reduced, H&R Block said, by an average of $530—or, approximately 17%—as the federal government collects the overage.

* Some filers are paying an average $172 in taxes for non-compliance with the individual mandate, the H&R Block analysis said.

* On Friday, the Obama administration announced that about 800,000 recipients of subsidies had been mailed incorrect tax forms. If these households have not yet filed their 2014 taxes, their tax returns—and thus their refunds—will be delayed until they receive the corrected form from the federal government.

*The administration also said Tuesday that the estimated 50,000 households that had received incorrect tax forms and had already filed their 2014 taxes would not be required to repay monies to the federal government if, because of the incorrect forms, they had underpaid their tax and subsidy obligations. The announcement did not explain why an error discovered in January was not made public until last week, or how much this leniency will cost the federal government, or whether the office or contractor responsible for the mistake will face financial penalties for its error.

Last week, the administration announced a special extension of the Obamacare enrollment period, from March 15 to April 30, for households that discovered during the tax-filing season that they were subject to the individual mandate tax. The administration said that the enrollment extension would be limited to individuals who attest they were unaware of the mandate tax penalty before filing their taxes, and that it would not return in future years. There is, however, no independent verification of people’s claims about the tax penalty, and the administration could easily find reasons to implement an open-enrollment extension in the future.

The administration’s enrollment strategy seems inclined toward leniency—for the policy reason of trying to enroll as many individuals as possible and for the political reason of avoiding actions that could make the law more unpopular. Some advocates of a longer enrollment period have cited the ability to “diminish hostility” toward the law as one reason to allow Americans a second bite at the enrollment apple.

This raises two questions. First, whether and how much executive actions such as the forgiveness associated with the tax form errors will cost taxpayers. Second, whether future administrations, which may not be as favorably inclined toward the health-care law, will take as many steps to cushion citizens from adverse effects of the law.

This post was originally published at the Wall Street Journal’s Think Tank blog.