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Plan To Replace Obamacare Raises Taxes -- And That's A Good Thing

January 31, 2014

By Avik Roy

The point missing here is that preferred networks work because of scale, which community pharmacies are unable to deliver. And economies of scale exist in many industries; mom and pop shops might feel threatened by a new Walmart nearby, for instance. But that’s no reason to discourage big-box retailers, which have enormous benefits for consumers. Discouraging preferred networks to protect community pharmacies makes for bad policy and bad economics.

How To Make Part D More Efficient?

If CMS is truly concerned about making Part D more efficient and less costly, the agency should embrace a recent analysis by Milliman (full disclosure: the analysis was funded by the Pharmaceutical Care Management Association) finding that Medicare Part D can save $7.9 to $9.3 billion over 10 years thanks to preferred pharmacy networks. These networks show significant promise for Part D, but are still in their infancy (they have only become prominent since 2011) – CMS should allow plans to experiment with and expand these innovations rather than stifling them.

CMS proposed regulations could be charitably described as trying to reap minor savings at the margins of a very successful program. In fact, a 2008 Milliman study found that lost rebate savings due to protected drug classes were a meager $1.68 PMPM (per member per month) for all six protected drug classes. For most seniors the tradeoff in premiums that are $1.68 greater, in exchange for unfettered access to these drug classes, is likely worth it. (And this savings estimate may be even lower now, given the large number of branded drugs [including drugs in the protected classes] that have lost patent protection since 2008.)

CMS’s prescriptive and heavy handed approach is almost guaranteed to generate the opposite of its intended goals and undermine the foundations of Part D’s success. While we applaud the agency for its laudable goal of improving Medicare, its resources would be far better devoted to reducing fraud in Medicare (which a RAND Corporation researcher estimated is up to $98 billion annually), rather than "fixing" a program that isn’t broken.

According to the Center for Health and Economy—H&E for short—the Coburn-Burr-Hatch plan will actually cover slightly more people than Obamacare. "By 2023," H&E writes, "the number of insured under the proposal is estimated to be 1 percent higher than under current law." That’s despite the fact that the GOP plan doesn’t contain an individual mandate or an employer mandate, and despite (or because) it repeals most of the other regulatory impositions of Obamacare.

In addition, the plan would reduce the deficit over ten years by a total of $1,473 billion. As I mentioned, the biggest chunk of the deficit reduction comes from changing the tax treatment of employer-sponsored health insurance. Today, if you get health coverage from your employer, you pay no taxes on the value of that plan—federal, state, local, Social Security, Medicare. Economists of all stripes see this as a profoundly inefficient tax exclusion, because it gives employers an incentive to pile more compensation into health coverage instead of actual cash wages. The CBH plan narrows the employer tax exclusion, resulting in a gusher of additional tax revenue.

The key numbers are in the table below:

The H&E score leaves Senate Republicans with plenty of options

This feature of the proposal has been lambasted by my colleague Matt Herper as a "big tax hike." And it is, if the proposal stays as it is. But what’s notable about the table above is that you don’t need to make any changes to the employer tax exclusion for the plan to save money. If Coburn-Burr-Hatch was revenue-neutral on the tax side, it would still lower the deficit by $416 billion over ten years. That’s not chump change.

Even better, they could retain their changes to the employer tax exclusion, and use the $1,057 billion in increased revenue to fund broader tax reform. For example, the authors could lower individual income tax rates, and streamline the corporate tax code. They could move individuals and corporations to a territorial tax system, bringing more jobs back to the U.S. They have, literally, a trillion dollars’ worth of options.

H&E is a major step forward in policy wonkery

H&E is a new think tank, but it’s not your run-of-the-mill startup. It’s led by Douglas Holtz-Eakin, a former director of the Congressional Budget Office, and its board includes some of the most prominent health economists in the country, including Uwe Reinhardt of Princeton, Stephen Parente of the University of Minnesota, and Mark Pauly of the University of Pennsylvania.

H&E has developed what’s called a microsimulation model that can be used to estimate the fiscal effects of proposed changes to the health care system. The Congressional Budget Office, Washington’s official referee on such matters, uses its own microsimulator to accomplish the same goal. Microsims, like all computer models, are far from omniscient, but they are the best instruments we have for getting a ballpark sense of how different reforms might work.

For years, we’ve depended upon the CBO to score bills introduced in Congress. But the problem is that there are lots of proposals that never get scored by the CBO. Say you’re an enterprising young representative who doesn’t sit on one of the key fiscal committees in Congress. Your plan has no shot of being scored, unless it gets taken up by someone else. Let’s say you’re at a think-tank or a university, and you think you have a great reform idea. CBO has no time for you.

H&E can fill in this major policy void, by providing an alternative route to getting health reforms fiscally scored. In addition, it can hold CBO accountable by providing an outside alternative to CBO’s estimates of the fiscal impact of bills before Congress.

The Republican replace plan is even more cost-efficient than we thought

In the case of the Patient CARE Act, the Coburn-Burr-Hatch bill, H&E has helped us understand that the new Republican replace plan is even more fiscally efficient than its authors anticipated. That’s great news—and it speaks to the opportunity ahead for Republicans, to get off their behinds and take on the challenge of proposing market-based health reform.

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