Republicans have their best opportunity in a generation to enact a reform plan for health care that moves decisively toward a market-based approach, with far less reliance on federal regulation and control. A reform plan of this kind would represent a dramatic break from decades of policymaking and would be a major component of an effort to rein in the sprawling federal welfare state.
To succeed in this effort, however, House and Senate Republicans, as well as the incoming Trump administration, must dispense with wishful thinking. There is no plan for replacing the Affordable Care Act (ACA) that is without political controversy. Whatever they do will involve trade-offs, and in some cases they will be attacked by their political opponents for doing what is necessary but perhaps unpopular.
Further, there is no silver bullet for reforming health care that will solve all the existing problems. Health-care policy is complicated and does not lend itself to simple solutions. What’s needed most of all is the discipline of a well-functioning marketplace. Getting there will require many changes, in public insurance, employer plans, Health Savings Accounts (HSAs), and the individual insurance market. While Medicare changes can be addressed separately from other reforms, it will not be possible to replace the main provisions of the ACA in incremental, piecemeal bills, as has been suggested by some in Congress. An effective ACA replacement plan will need to ensure that changes in Medicaid, the individual insurance market, and employer-sponsored plans work well together to provide insurance options for the entire non-elderly population. That will happen only if these changes are made in one coherent reform plan so that interactions among various provisions can be understood and anticipated.
The GOP must accept these realities and address them head-on in a replacement plan.
The GOP must accept these realities and address them head-on in a replacement plan. In fact, Republicans should endeavor to have more Americans enrolled in health insurance that provides protection against high medical expenses than would have occurred in the future under the ACA. That’s not an impossible task. Despite all the talk of “universal coverage,” there were still around 29 million people in the United States without health insurance in 2015, and there’s no prospect of that number dropping significantly in the future. It should be possible for Republicans to provide access to affordable insurance to all Americans, and to put a plan in place that results in actual enrollment in insurance that is at least comparable to what has occurred under the ACA, if not better.
In addition to providing reliable and affordable insurance, the GOP must take steps to inject more cost discipline into both the insurance and the medical-care markets. Many important changes are needed to create the conditions for higher-quality and lower-cost care. Most importantly, consumers need to have strong incentives to seek out low-cost, high-value options, especially through organized systems of care.
To reach these goals, and to prevent unnecessary disruption to the insurance arrangements that are in place today, Republicans should incorporate the following key concepts in their replacement plan:
Grandfathering of existing ACA coverage. Low-income households that are now enrolled in ACA-subsidized coverage or in Medicaid due the ACA’s expansion of that program should be allowed to stay in the coverage they now have indefinitely, with continuation of their existing subsidies. Over time, these households will naturally cycle off of this coverage and into whatever structure is put in place by the replacement plan.
Acceptance and clarification of Medicaid’s role as the safety-net insurance program. Medicaid is badly in need of reform. Today’s federal matching system for paying program costs distorts decision-making by state and federal officials and undermines political accountability at both levels of government. But Republicans must also understand that there is no alternative to Medicaid, or something like it, for providing health insurance to the lowest-income households in the United States. The GOP should seek to reach a compromise among the states, and with Democrats, on the level of income below which households in all states would be eligible for insurance coverage. That compromise level would likely fall somewhere between the level established in the ACA (138 percent of the federal poverty line) and the levels prevalent before 2010.
Employer plans enjoy a large tax subsidy; the GOP should ensure that people who buy insurance on their own enjoy a comparable tax break.
Tax credits for households above Medicaid eligibility without access to employer coverage. It will not be possible to provide reliable access to affordable health insurance without providing refundable tax credits to persons not eligible for Medicaid or employer coverage. These credits are essential to making a Republican plan workable and effective. It is a matter of fairness as well. Employer plans enjoy a large tax subsidy; the GOP should ensure that people who buy insurance on their own enjoy a comparable tax break. Further, it is likely going to be necessary to provide a larger credit to households with incomes just above the Medicaid eligibility level.
An upper limit on the tax preference for employer plans. The ACA imposed a poorly designed 40 percent excise tax — the so-called “Cadillac tax” — on employer plans with high premiums. The GOP should replace this tax with a more rational upper limit on the tax preference for employer-paid premiums. The Cadillac tax is flawed in large part because it does not differentiate between high- and low-wage earners (the tax is the same percentage regardless of the wage level of the workers). Placing an upper limit on the amount of premiums that can be excluded from the taxable compensation of workers would be more progressive because high-wage earners pay taxes at a higher rate than low-wage earners and thus would pay more on any premiums above the threshold amount. Replacing the Cadillac tax with an effective alternative is also crucial for generating the revenue needed to finance a refundable tax credit for households without access to employer coverage.
Promotion of more-flexible Health Savings Accounts. HSAs are an essential tool in the promotion of a market-based health system. Insurance should provide financial protection for major expenses; HSAs provide a tax-preferred vehicle for families to set aside resources to pay for expenses not covered by insurance. A GOP replacement plan should encourage all working-age households to have an HSA by providing a one-time tax credit to taxpayers who have or establish one in 2017 (the credit amount, perhaps $1,000, would be deposited into the taxpayers’ HSAs). It should also encourage more employers to make HSAs a part of their benefit offerings by exempting some portion of contributions to them from the upper limit on employer-sponsored health care. Finally, the GOP plan must make the use of HSAs far more flexible. They should not be restricted to purchasing individual health services and products; it should be possible for account holders to buy access to well-defined packages of medical services directly from organized systems of care for predetermined prices without classifying the payment as an insurance premium.
Auto-enrollment in health insurance. Many Americans who remain uninsured under the ACA are eligible either for the law’s premium credits for health insurance or else for employer coverage. Some portion of the population also would remain uninsured under a GOP replacement plan, even though all Americans would have access to some kind of coverage. Republicans should seek to reduce the number of “eligible but not enrolled” Americans by aggressively pursuing auto-enrollment mechanisms. Employers would be encouraged to place workers into coverage and then allow those workers to opt out if they want. Similarly, using tax and other data, states should place tax-credit-eligible households into default insurance plans if those households fail to make a selection of insurance on their own using their federal tax credits. These default plans would require no insurance premium from the enrollees because the deductibles for these plans would be adjusted so that the premiums for coverage would exactly equal the credits. These default plans should also be made available to anyone who would like to get catastrophic insurance protection with no additional premium above the tax-credit amount.In addition to these concepts, there’s one more crucial ingredient to a successful replacement effort: bipartisanship. The Obama administration made it all but impossible for Republicans to support the ACA by insisting on parameters for the legislation that the GOP could never agree to (such as large tax increases on households to pay for much of the added spending). The GOP should not make the same mistake. Republicans should go out of their way to make their replacement plan acceptable to as many Democrats as possible, especially in the Senate. Embracing the goal of ready access to coverage for all Americans should go a long way toward making that happen. Bipartisan support for whatever is assembled is the best way, and probably the only way, to ensure that what passes in 2017 is accepted by the public in a way that the ACA never was.
— James C. Capretta is a resident fellow and holds the Milton Friedman Chair at the American Enterprise Institute.