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October 16, 2013

A Daring Alternative to Obamacare

Summary:

Although the House Republican Study Committee’s plan is an exciting starting point for replacing Obamacare, it ought not be the finish.

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As the GOP settles in for a long-term fight about what it would like to put in Obamacare’s place, it should look hard at a just-released reform plan from the House Republican Study Committee written principally by Reps. Steve Scalise (R-La.) and Phil Roe (R-Tenn.).

The most revolutionary aspect of the House plan — officially titled the American Health Care Reform Act — is its decoupling of insurance from employment.

Americans have gotten health insurance through their jobs essentially since World War II, when wage and price controls forced employers to compete for workers by offering generous fringe benefits, like health insurance. This insurance, of course, is simply tax-free income provided by employers.

Individuals, by contrast, have had to purchase coverage with dollars that have already been taxed.

This system puts entrepreneurs and the self-employed at a significant disadvantage — and limits people’s employment choices. Workers may stay in jobs they don’t want, simply so that they don’t lose their health insurance, particularly if they or their family members have a pre-existing condition.

The RSC health reform plan would give a tax deduction of $7,500 to every American — and $20,000 to every family. If a person bought coverage that cost less than that, then he could keep the difference as untaxed income.

This system would help arrest the non-stop growth of health costs. After all, most Americans over-consume health care because their employer-subsidized coverage insulates them from the full cost of their care. Such over-consumption drives up costs.

The RSC plan would also grant consumers the ability to purchase health insurance issued in other states, where it may be cheaper.

That makes a lot of sense. There is no reason that health insurance should cost two and a half times as much in Rhode Island as in Alabama. Increasing the size of the insurance marketplace — and therefore increasing competition — will drive down prices.

The RSC proposal would inject consumerism into the healthcare marketplace in other ways, too. For instance, it could lead to more use of Health Savings Accounts (HSAs). These accounts allow patients to save pre-tax dollars for health services — and to keep whatever they don’t spend. Consequently, HSAs encourage Americans to take care of their health and shop smartly for care. About 15 million Americans today have HSAs.

The RAND Corporation estimates that the average American worker who switches from a traditional health plan to a consumer-directed one uses 14 percent fewer medical services – without any associated adverse effect on health outcomes.

Overall health costs come down, too, because providers have to compete for patients’ business. According to RAND, expanding the share of employers with HSA-style plans to 50 percent — from the current 13 percent — would reduce national health costs by $57 billion per year.

Critics of consumer-driven care claim that it prevents those with pre-existing conditions from finding affordable coverage. All the tax-free savings in the world won’t be of use if coverage is too expensive.

The Study Committee’s plan would ensure that folks with pre-existing conditions could get affordable coverage by devoting $25 billion in federal funding for state-level, high-risk pools. Premiums in these pools would be capped at 200 percent of the average premium in the state.

Finally, the RSC plan attempts to rein in the more than $100 billion spent every year on unnecessary treatments and testing ordered by doctors trying to protect themselves from the threat of lawsuits. GOP lawmakers would limit the amount of lawyers’ fees and non-economic damages in medical liability cases.

The RSC plan isn’t perfect. Tax deductions favor the relatively well-off; those with lower incomes often can’t take advantage of the full value of the deduction. So lawmakers should swap out the deduction for a refundable tax credit that applies equally to all Americans, regardless of income. In addition, while the intent is right on limiting lawyers’ fees and damages, tort reform of this sort is better left to the states, which traditionally have jurisdiction in medical-liability cases.

The House Republican Study Committee plan is also incomplete. Lawmakers must reform Medicare and Medicaid, too. Spending in the two programs already exceeds private health insurance spending — and will only grow in the future.

Congress must bring Medicare and Medicaid outlays under control — and vouchers for beneficiaries and states are the best way to do so. Empowering individuals and state leaders to spend their Medicare and Medicaid dollars as they see fit will inject much-needed competition into the healthcare marketplace — and thereby reduce costs.

Although the House Republican Study Committee’s plan is an exciting starting point for replacing Obamacare, it ought not be the finish.

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