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Forbes.com

 

Senate Republicans Develop Most Credible 'Repeal And Replace' Plan Yet

January 27, 2014

By Avik Roy

"Repealing and replacing" Obamacare with market-oriented reforms has been the Republican mantra for years now. If you’re a long-time follower of this space, you know that we’re skeptical that Obamacare will ever be repealed, GOP slogans to the contrary. Today, however, a trio of experienced Senate Republicans—Tom Coburn (Okla.), Richard Burr (N.C.), and Orrin Hatch (Utah)—have put forth the most thoughtful and constructive plan yet developed to repeal and replace Obamacare. The plan seeks to ensure that as many Americans have health coverage as Obamacare does. It’s a proposal grounded in the real-world tradeoffs that all serious reformers must make. Want to know how those tradeoffs might affect you? Read on.

Republicans have long been complacent about health reform

Republicans are united in their opposition to President Obama’s health law. But they are far from united as to what reforms they would seek in its stead.

Much of the Republican base—what some people call the Tea Party—would be just fine with repealing Obamacare and calling it a day. The vast majority of the Republican base is employed or retired; these active GOP primary voters are sometimes unaware of the degree to which their health coverage is heavily subsidized by the tax code (more than $300 billion a year, in the case of the tax exclusion for employer-sponsored coverage) or financed by the government (more than $750 billion a year in Medicare spending).

But if you’re a Republican member of Congress, it’s these voters who elected you. And so it’s not surprising that conservative politicians have often been the most complacent about the brewing problems in our health-care system.

Conservative fiscal wonks have long known that this complacency has been unwarranted, that broad reform is necessary: both to improve the country’s fiscal stability, and to make health coverage more affordable. But Republican politicians, historically, have had little electoral incentive to do anything about it.

That all changed with the passage of Obamacare. Republican politicians know that they won’t be able to repeal Obamacare without having something credible to replace it with. And that’s where things get messy. Those most aligned with the base are fine with simple, incremental reforms like malpractice reform and buying insurance across state lines. That won’t fly as a replacement for Obamacare.

GOP divided over whether to expand coverage

The Republican Study Committee, a caucus of House Republican conservatives, put out a plan last fall that would replace Obamacare by capping the employer tax exclusion, and making a standard deduction for health coverage available to everyone. A similar plan proposed by George W. Bush in 2007 would have expanded coverage by 11 million, compared to the pre-Obamacare status quo. The best thing about this approach is that it would reduce spending and reduce the deficit; Obamacare is deficit neutral, but it substantially increases federal health spending, along with its massive expansion of federal health-care regulation.

But Obamacare aims to expand coverage by 30 million, not 11 million. And so a replace plan that attempts to go into effect in 2017 will have to contend with the fact that it is likely to throw people off of their existing, Obamacare-sponsored insurance.

A separate cohort of Republican health plans has taken a different approach. They aim to offer universal coverage—though they rarely use that term—by ensuring that every American who needs one can get a federal subsidy to purchase health insurance. These plans include the Patients’ Choice Act of 2009, introduced by Reps. Paul Ryan (R., Wisc.) and Devin Nunes (R., Calif.) along with Senators Coburn and Burr; and the Empowering Patients First Act of 2013, developed by Rep. Tom Price (R., Ga.).

The latest entry into this field—and thus far, the best—is the new Coburn-Burr-Hatch proposal, called the Patient Choice, Affordability, Responsibility, and Empowerment Act. (They abbreviate this as the "Patient CARE Act"; I’ll call it Coburn-Burr-Hatch, or CBH.)

Coburn-Burr-Hatch retains some popular Obamacare provisions

CBH would repeal Obamacare, and replace it with a set of more market-oriented reforms. One key point right at the start: the authors "believe our proposal is roughly budget neutral over a decade." That is to say, for all the reconfiguring it does to the health-care system, it doesn’t substantially reduce the deficit. It may modestly reduce the amount of federal spending and taxation. The Senate trio aims to have their proposal fiscally scored by an outside group of economists, most likely Doug Holtz-Eakin’s Center for Health and Economy.

While the plan would repeal Obamacare, it would preserve some of the law’s most popular features, such as its ban on lifetime limits on insurer payouts, and its requirement that insurers cover adult children younger than 27. It would replace Obamacare’s premium hike on young people, known as age-based community rating, with a more traditional 5:1 rating band.

It wouldn’t maintain Obamacare’s individual mandate, nor its requirement that insurers offer coverage to everyone regardless of pre-existing health conditions. Instead, the plan would require insurers to make offers to everyone who has maintained "continuous coverage," while aiding states in restoring the high-risk pools that served those who insurers won’t otherwise cover. Subsidy-eligible individuals who failed to sign up for a plan would be auto-enrolled in one priced at the same level as the subsidy for which they qualified.

The proposal would do some things highly popular on the right. It would encourage medical malpractice reform by "adopting or incentivizing states to adopt a range of solutions to tackle the problem of junk lawsuits and defensive medicine." It would strive to expand price transparency and the supply of physicians.

Means-tested tax credits for the uninsured, funded by the employer tax exclusion

Most importantly, the CBH plan would make substantial changes to the tax exclusion for employer-sponsored coverage, in order to fund subsidies for the uninsured. "Our proposal caps the tax exclusion for employee’s health coverage at 65 percent of an average plan’s cost" today, and then grows the cap at the rate of the Consumer Price Index—a common measure of inflation—plus one percent (CPI+1%).

The revenues gained from this change would then be used to offer tax credits for the uninsured, so long as their incomes were below 300 percent of the federal poverty level (FPL). Importantly, the subsidies are structured on a sliding scale so that those at 300% FPL get a smaller subsidy than those below 200% FPL. In addition, the subsidies increase as you get older; an individual aged 18-34 would get a subsidy of $1,560, whereas one aged 50-64 would get $3,720: 2.4 times what the young’uns get. The size of the subsidies would grow, again, at CPI+1%. (Obamacare offers subsidies to those below 400% of FPL.)

This is a substantial improvement from previous "repeal and replace" plans, that offered a uniform tax credit to every American, regardless of their prior health or wealth. The CBH plan aims to let younger pay lower premiums, but subsidize those premiums at a lower level. Similarly, the subsidy level is means-tested. This is a much fairer approach, though it will run into trouble in certain states, like New York, that require insurers to charge identical rates to the young and the old, because the young will be under-subsidized (and the old over-subsidized) in that situation.

This structure, though described as a "repeal and replace" plan, is remarkably similar to the one that Obamacare uses. What are the key differences? The CBH plan would grow its subsidies and tax exclusion cap at a higher rate than Obamacare does—CPI+1% vs. CPI+0% for Obamacare. That means the CBH plan would spend more on subsidies, and recoup less in revenues, than Obamacare does.

Milder Medicaid reform using per-capita caps

Finally, the plan would reform Medicaid using an approach first proposed by Bill Clinton, and endorsed by former Democratic Senate Majority Leader Tom Daschle: per-capita caps. Under the per-capita cap approach, the federal government would give states a fixed amount of money per person enrolled in Medicaid. It would be up to the states to use that money in the most cost-efficient way possible.

In some ways, it’s a milder form of block-granting. There are a number of pitfalls in the per-capita cap approach, as I discussed in a September 2012 article for Forbes:

"Per-capita caps aren’t problem-free. Without other fiscal controls, states might enroll an unexpectedly high number of people into Medicaid, further straining the budget. In addition, Medicaid patients are highly heterogeneous, with the elderly and disabled costing more money than, say, children…Urban Institute researchers noted that "a single aggregate cap would create incentives to add low-cost enrollees such as children," and that even dividing patients into broad categories could lead to gaming.

An attractive feature of CBH is that Medicaid enrollees could take the dollars allotted to them in the per-capita cap and spend it on a regular private-sector insurance plan. Indeed, CBH could be improved if this became universal: that is to say, instead of giving states the Medicaid money, give it directly to poor people to buy the coverage of their choice with an auto-enroll feature.

Bottom line: A constructive, center-right approach

The bottom line is this. The Coburn-Burr-Hatch plan is a serious, constructive, and pragmatic one. Precisely for those reasons, it won’t satisfy the purest Obamacare haters for whom there is not a single provision in the law worth retaining, nor those who think the health care system was just fine as it was. And it won’t drastically shrink the scale and scope of federal spending on health care, at least in the near term.

What it will do is substantially deregulate the health insurance market, a process that is likely to make health insurance less costly over time. If health insurance is less costly, then federal spending on health insurance can shrink alongside. And it will do all of these things while approximating the number of Americans under Obamacare who have the security of health insurance coverage.

It’s not perfect—no health reform plan can be—and I’ve listed above some of the things I would want to improve on it. I continue to believe that Republicans would be better off taking advantage of Obamacare’s existing exchange structure, and using the exchanges as a vehicle for entitlement reform. But it’s not politically possible for most elected Republicans to call off the repeal-or-bust rhetoric.

Short of that, this is a worthwhile entry into the debate. Tom Coburn and his colleagues have done yet one more service to their country. When Coburn retires in 2014, he will be missed.

Original Source: http://www.forbes.com/sites/theapothecary/2014/01/27/senate-republicans-develop-the-most-credible-plan-yet-to-repeal-and-replace-obamacare/

 

 
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