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Jim Tait 02/01-02/28/17

home : news : news August 19, 2017

4/11/2017 7:25:00 AM
Heritage: Unfair tax treatment creates inequity, narrows health choices
Competition is the key to reform, policy group says
Editor’s Note
As the debate over health care continues on the national stage, The Times today begins a series of articles capturing major points of view about the future of federal health care policy, from both the Left and the Right. Today we start with The Heritage Foundation.

Richard Moore
Investigative Reporter

First in a series

After Republicans in Congress promised for years to repeal Obamacare - and the House actually voted 54 times to nix or amend it - and after President Donald Trump promised that he would repeal and replace the Affordable Care Act almost immediately, it was a major surprise to everybody when the Republicans, now in control of both houses of Congress and the presidency, could not do so last month.

It was a spectacular debacle, and not least because it was conservative Republicans, led by the House Freedom Caucus, who torpedoed speaker Paul Ryan's repeal and replace plan.

It wasn't conservative enough, the conservatives complained.

While the Freedom Caucus might have been drumming up the headlines, the opposition to Ryan's plan was actually being driven behind the scenes by two conservative groups, the Club for Growth and the Heritage Foundation.

The Heritage Foundation has long been an established pillar of Washington politics, for many years identified with Ronald Reagan's brand of conservatism but also generally accepted by the Republican Party establishment. That acceptance began to change in 2013 when Tea Party favorite Jim DeMint assumed the presidency of Heritage.

Over the years, though, Heritage has formed perhaps the most academically grounded opposition to the Affordable Care Act from the Right, and it not only has ready answers for why Obamacare needs to be repealed but it offers a set of policy prescriptions for what should take its place.

Why repeal

In a recent piece, Heritage policy analyst Alyene Senger outlined basic reasons why she believes the Affordable Care Act cannot be sustained or fixed.

Number one on that list is its cost, both for middle-class consumers and small businesses. Despite repeated promises of premium reductions, Senger wrote, Obamacare has delivered major increases.

"In the employer-sponsored market, costs continue to increase," she wrote. "According to the Kaiser Family Foundation, average family premiums for employer-sponsored plans have increased almost 32 percent from 2010-2016. In the individual market, where the bulk of Obamacare's new rules and regulations have taken effect, the average nationwide premium increase has been 99 percent for individuals and 140 percent for families from 2013-2017, according to an eHealth report."

In large part, Senger argues, those costs can be attributed to a lack of choice and competition in the health-care market, as well as to excessive regulation. Competition has continued to decline, she wrote, with 2017 being the worst year yet.

"When Obamacare's insurance rules and mandates took full effect in 2014, insurers were forced to cancel existing plans that didn't comply with the new standards," she wrote. "A tally put together by the Associated Press shows that there were at least 4.7 million plan cancellations across 30 states."

The government also loaned 23 new nonprofit health insurers $2.4 billion in taxpayer-funded dollars through the Consumer Operated and Oriented Plan program, but those have collapsed like dominoes, Senger wrote.

"Thus far, 18 out of 23 have gone under, resulting in a combined $1.9 billion in government loans that taxpayers are highly unlikely to ever be repaid," she wrote.

Then, too, Senger argues, the government dumped millions of dollars and millions of people into Medicaid instead of reforming the program - some 11.8 million additional people in the first two years of Obamacare.

The core of the problem: No competition

One major problem and cost-driver in Obamacare is the lack of competition, Heritage researchers argue, and, in another report, Senger and the Heritage's Edmund Haislmaier examined that lack of competition.

"One of the stated aims of the Affordable Care Act was to increase competition among health insurance companies," Senger and Haislmaier wrote. "That goal has not been realized, and by several different measures the ACA's exchanges offer less competition and choice in 2017 than ever before. Now in the fourth year of operation, the exchanges continue to be far less competitive than the individual health insurance market was before the ACA's implementation."

For example, they wrote, one way to measure insurer competition is to assess insurer participation on a state-by-state basis.

"In 2013, the last year before the ACA's implementation, 395 insurers sold coverage in the individual market across all states and the District of Columbia," they wrote. "On the exchanges, in 2017, there are a total of 218 insurers selling coverage across all states and the District of Columbia. Thus, the 2017 exchanges as a whole are about 45 percent less competitive than the individual market was before the ACA was implemented."

And there has been a more significant decline in insurer participation from 2016 to 2017, about 24 percent, they wrote.

"For 2017, the exchanges have the fewest number of insurers since the exchanges launched," the authors wrote. "Relative to 2016, 33 states have fewer insurers selling coverage in the exchange, 16 states and the District of Columbia have the same number of insurers, and just one state - Virginia - has an increase in insurers offering exchange coverage in 2017."

Perhaps most important is the measure of competition at the county level, Senger and Haislmaier assert.

"That is because health plans are offered (and priced) on a local basis, and many insurance carriers do not offer coverage statewide," they wrote. "Therefore, state-level figures can overstate the amount of choice available to consumers."

For example, they point out, in Texas, 10 insurers are selling coverage on the exchange in 2017.

"But no one in Texas can choose from among 10 insurers on the exchange," the authors wrote. "In fact, 86 percent of Texas counties have only one or two insurers selling exchange coverage. The highest number of competing insurers in any Texas county is four, and only six of the state's 254 counties have that many."

For 2017, they assert, nearly 70 percent of U.S. counties will have either an insurer monopoly or duopoly on the exchange.

What to do about it

The Heritage Foundation certainly has a plan they wish would be adopted by Congress and signed by the president.

In yet another report, The Heritage's Robert Moffit joined Senger and Haislmaier in penning a prescriptive replacement plan.

That plans calls for the immediate repeal of Obamacare, they wrote, but it must be accompanied by a careful transition process that places everyone on more solid ground.

Among other things, they call for reforming the tax treatment of health insurance so individuals are treated the same by the government, regardless of where they buy health coverage; restoring common-sense regulation of health insurance and devolving it back to the states; and modernizing Medicare and Medicaid by adopting policies that harness what they call the free-market forces of choice and competition.

All the reforms need to be in place by the 2019 plan cycle, they wrote, though political observers might add that they should be in place in time for the November 2018 elections.

Timing and sequencing is crucial, they observed.

"The provisions affecting private insurance markets should be changed as soon as possible," the authors wrote. "For 2017, insurance plans are already set, but insurers are preparing their 2018 plan offerings, which need to be finalized by May 2017."

Sequencing is likewise crucial, the authors argued.

"To ensure a smooth transition between repeal and replacement, Congress could set the effective dates of provisions so key elements of current law (such as subsidies) do not expire before the relevant replacement components are in place," they wrote.

A 2015 reconciliation package passed by Congress that repealed the major budgetary provisions of Obamacare shows how such sequencing can be accomplished, the authors wrote.

"Specifically, it repealed the various tax provisions, ended the individual and employer mandates, and sunset the subsidies for exchange and Medicaid coverage at the end of two years," they wrote. "President Obama vetoed this package, but the effort provides a clear road map for sending a repeal to the desk of a new president who has made the repeal of Obamacare a top priority. Congress should pass a reconciliation bill this year that repeals at least as much of Obamacare as the 2015 legislation did."

Next, the authors argue, the administration should execute an aggressive regulatory rollback.

"In many instances, the Obama administration's regulations implementing the law further increased costs and exacerbated Obamacare's disruptive effects," they wrote. "The new administration can immediately begin repealing or rewriting those regulations in ways that have the effects of reducing costs and minimizing disruptions. Rolling back or revising insurance market regulations would help to stabilize the non-subsidized insurance markets in 2017 and 2018 and offer consumers tangible evidence that relief is on the way."

In particular, they argued, the Trump administration should reduce the number of special enrollment periods, which they contend opened the door to more people gaming the system by dropping coverage once their medical expenses were paid and then re-enrolling the next time they needed care.

The authors also called for stricter eligibility verification and protection of "grandfathered" plans.

"Having promised Americans that they could keep their existing health care coverage, the Obama administration proceeded to adopt regulations that made it very difficult for insurers and employers to maintain those pre-Obamacare plans," they wrote. "The Trump administration can rewrite those regulations to make it easier for those with such 'grandfathered' coverage to keep their coverage."


Tax fairness is essential to a successful replacement plan, the authors wrote.

"With over 160 million Americans covered by employer-based health insurance, the tax exclusion for employer-provided health insurance is one of the most significant, yet also one of the most misunderstood, features of America's health care system," they wrote. "The tax exclusion allows workers whose employers offer health benefits to exclude the value of those benefits from their incomes when calculating both income and payroll (Social Security and Medicare) taxes."

In other words, the authors explained, the value of those benefits is not treated as taxable income to the employee.

"While this tax policy is very advantageous to workers, contrary to a common misperception, it actually offers little or no tax benefit to employers," they wrote. "Businesses pay income taxes only on their net profits - or what is left after deducting from gross revenues their costs of doing business. Thus, employee compensation, regardless of the form it takes, is a deductible business expense."

The tax policy produces what economists call "horizontal inequity," the authors explained, meaning that if two individuals have the same income, but one has employer-sponsored health benefits while the other buys his own health insurance, the first individual receives a large tax break for insurance and the second does not.

That's profoundly unfair, they continued, but that's not the biggest problem with the tax benefit.

"The biggest problem with the tax exclusion from the health policy perspective is that while it offers workers substantial tax relief, it does so only if the workers let their employers decide how that portion of their compensation is spent," they wrote. "That translates to less choice and competition in health insurance, reduced consumer awareness of the true costs and value of medical care, and incentives to tailor health plans more toward meeting the interests of employers than to the preferences of the workers and their families."

The proper goals for a true reform of the tax treatment of health insurance should be to make the system simpler and fairer, while also ensuring that it is neutral both with respect to how an individual obtains coverage (whether directly or through an employer or an association) as well as with respect to an individual's choice of plan design - a health-maintenance organization (HMO), a preferred-provider organization (PPO), a high-deductible plan, or other arrangement, they wrote.

Most proposals for health care tax reform over the years would repeal the tax exclusion and replace it with a universal tax deduction or tax credit for health expenses, the authors wrote.

"Replacing the current tax treatment of health benefits with a new design for health care tax relief that is both revenue-neutral and budget-neutral is the first step in transforming the American health system into one that is more patient-centered, market-based, and value-focused," they wrote.

To implement today, the authors proposed converting the current limitation on high-cost employer health plans into a straightforward cap on the value of the exclusion; replacing all other health care tax breaks, such as the tax deduction for coverage purchased by the self-employed, and the itemized deduction for medical expenses, with an alternative health care tax relief option available to all taxpayers, regardless of income or source of coverage; and permitting individuals with access to employer-sponsored coverage to choose whether the tax exclusion, or the new tax relief option, should be applied to the value of their employer-sponsored benefits.

Medicare and Medicaid

Finally, the authors argued, both Medicare and Medicaid must be reformed.

For Medicare, they wrote, Congress should increase the age of Medicare eligibility gradually to 68 and index it to longevity; gradually increase the Medicare Parts B and D premiums from 25 percent to 35 percent while retaining existing "hold harmless" rules for the poor; further reduce taxpayer subsidies for wealthy Medicare recipients; combine Medicare Parts A and B and replace the existing complex set of cost-sharing arrangements with a simple and unified deductible, a uniform coinsurance rate, and a catastrophic out-of-pocket limit; and repeal the statutory restrictions on Medicare private contracting.

And, finally, they wrote, Congress should initiate the full transition of Medicare to a premium support program, in which the government would make a defined contribution to the health plan of the enrollee's choice.

As for Medicaid, the authors wrote, Congress should eliminate the enhanced funding for the new expansion population provided to the states under Obamacare.

"Congress could phase out that extra funding over time so as to facilitate a smooth transition out of Obamacare's Medicaid expansion for states that expanded their Medicaid programs while avoiding encouraging other states to expand," they wrote.

In addition, the authors wrote, Congress should allow those currently enrolled in Medicaid - specifically the non-disabled, non-elderly - to opt out of Medicaid and purchase coverage of their choice using existing Medicaid dollars and without the burden of existing restrictions.

"Enrollees would be able to decide whether to stay in the traditional Medicaid program or to purchase private health insurance outside Medicaid," they wrote. "In a post-Obamacare environment, this would provide enrollees with short-term relief that expands their options as Congress tackles more fundamental Medicaid reform."

Finally, they wrote, over the long haul Congress should pursue further structural changes to Medicaid and set a separate funding level for children, a separate funding level for parents, a separate funding level for the elderly, and a separate funding level for the disabled.

"This would begin transitioning Medicaid into more discrete, focused, and manageable programs while creating more stable and predictable budgets with savings for both federal and state taxpayers," they wrote.

Richard Moore is the author of The New Bossism of the American Left and can be reached at www.rmmoore1.com.

Reader Comments

Posted: Friday, April 14, 2017
Article comment by: Jeremy Engdahl-Johnson

Here are questions that should be considered as proposed healthcare legislation is formulated. Review more at: https://www.healthcaretownhall.com/?p=8394#sthash.uUSHV0kP.dpbs

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