Shaking Things Up

From Gracie-Marie Turner
The Galen Institute
May 22, 2009

Four Republican members of Congress shook up the health reform debate this week when they were the first to reach the floor of the House and Senate with comprehensive health reform legislation.

The Patients' Choice Act puts the $300-billion tax break for employment-based health insurance front and center in the debate. Reps. Paul Ryan and Devin Nunes and Sens. Tom Coburn and Richard Burr use it to create generous refundable tax credits for Americans to buy health insurance ($2,300 for individuals and $5,700 for families).

They even offer a way out of the Medicaid ghetto for recipients, offering them as much as $5,000 more to pay for health insurance and care -- which means up to $10,700 a year for lower-income Americans. States can add more to help those who have disabilities, high health costs, and low incomes through federal grants and programs they can fund with their share of the Medicaid savings.

As Joe Antos of AEI and I reported in the commentary article we wrote for The Wall Street Journal on Wednesday, it provides a clear alternative to the government-centric plan the White House and Democratic leaders in Congress are developing.

The bill even won praise from Grover Norquist of Americans for Tax Reform. Grover has been a skeptic of tax credits, but he said in a letter to the senators that he is reassured there will be no net tax increase and that the legislation could even result in "a net tax cut."

Criticism came quickly, of course. Michael Cannon of the Cato Institute was one of the first to offer a critique that left me wondering if he had even read the bill.
Charlotte Ivancic of the House Budget Committee, who helped draft the legislation for Mr. Ryan, addressed Michael's criticisms point by point and showed that most of the concerns he raised aren't even in the bill.

The Washington Post editorialized on Tuesday that "President Obama is avoiding one of the best options" to pay for reform. Wonder what that might be? "What if there were a way to pay for expanding health coverage that would also help hold down health-care costs and be fairer to low-income Americans than the current system?" the Post wrote. "You'd think that President Obama would leap at the opportunity."

"Well, there is such a way," the Post said. "Unfortunately, Mr. Obama campaigned against it," -- the tax-free treatment of employer-provided health insurance. The editors call the tax break "costly," "unfair," and "counterproductive."

Lobbyists mobilized on Capitol Hill "to head off proposed taxes on employer-provided health benefits, alcoholic beverages, and soft drinks," wrote Robert Pear of The New York Times. (What's next, we wonder? Chocolate, hamburgers, and potato chips? Where does it end?)

Labor unions, including teachers, are attacking Republicans and Democrats alike for supporting changes to the tax treatment of employee benefits. Senate Finance Chairman Max Baucus is standing firm. "It's too regressive," he told the Times. "It just skews the system."

Get involved! Sen. Orrin Hatch, R-UT, wrote a piece in The Washington Times on Sunday actually encouraging businesses -- and presumably their lobbyists -- to become more vocal in representing their clients' interests.

"Why," he asks, "is the business community supporting a blank check on health care reform? It can, should and will be a major player in the reform debate."

He warns against price controls resulting from a government health plan and a mandate on employers "to provide politically determined health benefit packages." And he particularly warns about new taxes to pay for the expensive plan.

Arguments. After our Journal piece appeared, there was a lot of email traffic about the state exchanges and the size of the tax credit. Here's a sample: How can you support those awful Health Insurance Exchanges? one writer asked. The exchanges in the Patients' Choice bill are simply portals to provide information about the policies that are available. States can set them up or not. They are organized by the states, not the federal government, and are voluntary, not mandatory. Most important, they are not vehicles for the huge regulatory morass that the White House and some Democratic leaders in Congress are planning.

They are voluntary state-based vehicles to organize information to help people buy insurance in the new tax credit world. Let's call them portals and not exchanges to avoid the confusion. How is someone supposed to afford a $12,000 health insurance policy with a $5,700 credit? I don't know of any proposals being offered that would offer grants to pay for the full cost of a health insurance policy. Among other reasons, this would be prohibitively expensive.

The Patients' Choice bill replaces the tax break that employees get today (an invisible tax exclusion) with a more sensible and direct tax credit. The tax exclusion is worth anywhere from a few hundred dollars a year for low-income workers to many thousands of dollars for high-income workers with generous coverage. (You might ask what is wrong with this picture. The regressivity of the subsidy is something that clearly needs fixing.)

For those with job-based insurance, a big part of their pay is going (invisibly) to pay for their health insurance. If they get a health insurance policy at work, they may be paying $3,000 directly toward their premiums but another $9,000 is coming out of their compensation package to pay for the insurance. Health insurance is not a gift from employers; workers pay for all of it. Tax law just keeps them from knowing that.

The $5,700 credit for families is designed to replace the current invisible tax exclusion with a new, direct, and more generous refundable tax credit. Combine this money with the money employees are spending directly and indirectly on health insurance, and almost all workers would come out ahead.

For those without employer-provided insurance, the credit provides $5,700 toward health insurance -- real money they aren't getting today. eHealthInsurance data show that this would cover the full price of the policies that most families buy on their own.