The Proposed Republican Replacement For ObamaCare Is A Big Tax Hike
Sen. Orrin Hatch (AP Photo/J. Scott Applewhite)
Yesterday, three Republican Senators — Tom Coburn (Okla.), Richard Burr (N.C.), and Orrin Hatch (Utah) – put forward a plan to “repeal and replace” the Affordable Care Act, otherwise known as Obamacare. They call it the Patient CARE Act, and my colleague Avik Roy says it is “the most credible plan yet” offered by the GOP.
Except the Coburn-Burr-Hatch plan (read it here) amounts, among other things, to a big tax increase. The main way that it remains budget neutral is by making employer-provided health insurance plans, which are currently not taxed, partially taxable as income. In fact, this income replaces income that, under ObamaCare, comes from taxing companies, including the tax on medical device companies paid by firms like Medtronic and Stryker .
This fact has not escaped the notice of some prominent health reform allies. “It is a huge tax increase on workers without any confidence that they will be able to afford health insurance in the future,” says Bob Kocher, a partner at venture capital firm Venrock who previously worked in the Obama administration.
It is “essentially a very large Republican tax increase,” says Ezekiel Emanuel, the Diane V.S. Levy and Robert M. Levy University Professor of Medical Ethics and Health Policy at the University of Pennsylvania and another former Obama advisor. “It’s quite clear the plan is to put a bigger burden on middle class Americans.”
Here’s what the Senators propose: right now, health insurance is not taxed as income. This is arguably the original sin of the U.S. healthcare system, which has insulated consumers from health costs and allowed prices to skyrocket. During World War II, wages were frozen but pensions and benefits were exempted; in 1943 the Internal Revenue Service ruled that these benefits weren’t taxable, either.
Many health economists believe this is a bad thing, because it shields people from paying their own premiums, and Coburn, Burr, and Hatch deserve credit for tackling this head on. But that doesn’t make this any more politically workable – or appealing to those of us who get health insurance through our employers.
Therefore, our proposal caps the tax exclusion for employee’s health coverage at 65 percent of an average plan’s costs. The value of employer-sponsored health insurance would be capped and indexed to grow at an annual rate of CPI +1.
Taxing 35% of the average plan – and more than that for plans that are above-average, as half are, could amount to a substantial tax. Tying the growth of the tax-exempt portion of the plan to the Consumer Price Index would also limit the cost of plans, pushing cost-saving measures.
How big a tax might this be for an average American family? Ezekiel has some numbers. The average employer health plan for a family of four costs $16,351, according to the Kaiser Family Foundation, and the employer covers 72% of that, or $11,772. Thirty-five percent of $11,772 is $4,120.35. The employee’s share of the Social Security and Medicare payroll tax is 7.65%, or $315.21. Assuming this family of four is in the 25% marginal income tax bracket, that would add another $1,030.09, for a total tax increase of $1,345. (For more from Emanuel, see this Times piece.)
Up to 300% of the poverty line, there would be subsidies to help people buy insurance. It’s not immediately clear how these compare to the subsidies offered by Obamacare; they don’t look greater.
Removing a bunch of corporate taxes so that the middle class can pay more seems like a political non-starter, even given the public backlash against Obamacare. This plan would likely mean that more people would lose insurance, or be forced to go to smaller networks of doctors. Those are the same criticisms levied against the Affordable Care Act.
Another notable thing about the proposal is how much of the ACA it keeps: it gets rid of state healthcare exchanges, but it keeps the basic structure of trying to keep people in the insurance system (in this case by making pre-existing conditions something that insurers can’t use against you until you fail to sign up for coverage – and then you get slammed) and of paying subsidies to help poor people get insurance. Allowing less comprehensive benefits and allowing insurers to charge five times as much for their sickest and oldest customers as for their youngest and healthiest, compared to three times under Obamacare, could lower the cost of insurance for young people and get more of them in the system.
“The plan makes specific proposals worthy of serious consideration- although I doubt it receives it at this moment,” says Ronald Williams, the former chairman of Aetna. “Perhaps in the future it could be the foundation of serious conversations which could lead to bipartisan evolution of the current bill.”
What the plan does emphasize is the degree to which any plan to reform the insurance system can seem like a zero-sum game – the money has to come from somewhere. For insurers involved in the ObamaCare exchanges, like Humana, Molina Healthcare, and Centene, the legislative roller-coaster ride may be far from over.
Senator Hatch’s office did not return a request for comment.