Yes, There is a Free-Market Alternative to Obamacare
It often seems that supporters of President Obama’s Patient Protection and Affordable Care Act see only two ways to reform American health care: either PPACA or some version of a single-payer system. What both have in common is a lot more government control, coercion, and spending. As a matter of belief, this crowd views health care as a public good where markets don’t work very well. And as a matter of principle, they have a problem with private companies making a profit from delivering healthcare.
By default, anyone who does not subscribe to these views a) doesn’t much care about healthcare reform and b) doesn’t have much to offer other than criticizing what Obama did.
None of that is true, of course. There is another theory of the case, one that argues government is the problem, not the solution. Government — through the tax code, regulatory code, and social insurance programs — has sabotaged market forces that, if allowed to work, would create a healthcare system with more choice, coverage, quality, value, and efficiency.
For now, let’s just focus on one aspect.
Rising healthcare costs have been driven by public policies which have insulated consumers from recognizing and bearing the true costs of their healthcare decisions. The most important flaw in this system is the tax preference given to employer-based health insurance. Employer payments covering premiums for employer-sponsored health insurance are exempt from federal income and payroll taxes. If you go out and buy a health insurance policy on your own, you do it with after-tax dollars. If you employers buy the insurance for you, it is with pre-tax dollars. This is a problem, as Rep. Paul Ryan has correctly noted:
Under current law, employer-sponsored health insurance plans are entirely exempt from taxation, regardless of how much an individual contributes to their policy. This tilts the compensation scale toward benefits, which are tax-free, and away from higher wages, which are taxable. It also provides ways for high-income earners to artificially reduce their taxable income by purchasing high-cost health coverage – which in turn can fuel the overuse of health services.
Advocates of pro-market, consumer-driven healthcare have suggested a variety of ways. to tackle this distortion.
– Ryan, for instance, wants to replace the inefficient tax treatment of employer-provided health care with a portable, refundable tax credit. It would be available for those who get coverage through their employer or buy insurance themselves. Consumers who wanted Cadillac plans would have to pay the difference. But if they chose less-expensive plans, they could use the leftover money to pay routine, out-of-pocket expense. This would encourage healthcare consumers to finally act like, well, consumers keeping an eye on cost and value.
– Harvard University’s Regina Herzlinger would transform the tax exclusion into a cash-out that employees would use to buy their own health insurance, with the tax exemption eventually extended to all individual buyers of health insurance. Herzlinger:
Republicans could enact Swiss-style universal coverage by enabling employees to cash out of their employer-sponsored health insurance. (Although many view employer-sponsored health insurance as a” free” benefit, it is money that would otherwise be paid as income.) The substantial sums involved would command attention and gratitude: a 2006 cash out would have yielded $12,000 — the average cost of employer-sponsored health insurance — thus raising the income of joint filers who earn less than $73,000 (90 percent of all filers) by at least 16 percent. Employees could remain in with an employer’s plan or use this new income to buy their own health insurance.
– AEI’s Jim Capretta would immediately substitute the tax credit for the tax preference in the case of smaller employers — many of who don’t even offer coverage — giving these workers a chance to get gain insurance they can keep and take with them. For employees at big companies, Capretta would leave them be, for now:
For both political and practical reasons, it would make sense to leave these people where they are, in their large-employer plans, as the reforms in the other parts of the marketplace are implemented and refined. The advantages of these changes — including the expansion of personal and portable health insurance, lower-cost health coverage, and higher take-home pay — would, over time, become evident to workers in large-employer plans. … The only modification that should be pursued immediately is the placement of an upper limit on the amount of employer-paid premiums eligible for the existing federal tax break; this would level the playing field somewhat between the existing tax benefit and the new tax credit. … This would give both employers and employees a stronger incentive than they have today to move toward low-premium, high-value plans.
I think maybe it’s time to create a FAQ or primer on how pro-market, consumer-driven healthcare would work. It might enlighten some folks out there who seem unaware that such a thing even exists.