Taxes and the Labor “Discount”: What Could Go Wrong?

29 Wednesday Nov 2017

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BEA, Bureau of Economic Analysis, CBO, Congressional Budget Office, Federal Discount, Federal Wages, Labor Discount, Labor Supply, Pass-Through Income, Private Sector Wages, Procyclical Effect, The CATO Institute, Tyler Cowan

A supposed labor market distortion that I’d never considered is that government receives a “discount” on labor services because public employees’ income tax liability is returned to the very government coffers from which they are paid. Tyler Cowen regards this as a “wacky” idea, but not easy to refute. Suppose the income tax rate is 20%. If the government pays a worker $10, then $2 is returned to that same government via the tax. The net cost to government is just $8. But a tax “discount” on cost is not unique to government, though the form it takes may differ.

Who Gets a Labor “Discount”?

Does it cost a private employer more than government to pay a worker $10? It depends on the situation. Maybe more, maybe less. If the private employer pays the same 20% tax rate on its profits, the wage payment creates a tax deduction worth $2 in avoided tax. The net cost is $8, so there is no difference. However, a firm must be profitable to get that deduction, so unprofitable startups, strugglers, and nonprofits do not get the same wage “discount” as government. Of course, losses can be carried forward to reduce taxes if the firm ever becomes profitable, and non-profits have tax advantages of their own.

The value of the tax deduction (the private “discount”) depends on the tax rate paid by the firm. A profitable C corporation with a marginal tax rate of 35% (under current law) gets a steeper discount than a small businessperson in the 28% tax bracket. To some extent, a steeper discount subsidizes the cost of hiring employees who are highly compensated. A highly successful pass-through entity like a sole proprietorship, partnership or S corporation can face the highest individual marginal rates, so the “discount” for such a firm could be the largest relative to wages.

Economic Distortions

There are a couple of potential distortions involved here: one is the standard wedge driven between the value of workers’ marginal product and the after-tax wage they receive. This discourages labor supply. There is a second distortion to the extent that the “discount” gives government and profitable firms an artificial competitive advantage of over unprofitable buyers of labor services. Furthermore, the loss of the labor discount for firms falling into unprofitable positions imparts an undesirable procyclical element into the tax system, potentially aggravating episodes of under-production and high unemployment.

The government’s labor “discount” may reduce the available supply of labor to the private sector. Government does not operate under the profit motive, and unlike private firms, it need not concern itself with efficiency standards for survival. Government production does not face a market test, so it is difficult to measure worker productivity, which is the key to the efficient pricing and use of labor in the private sector. The penalty to government for paying an above-market wage is zero.

The same “discount” argument can be made for government contracts with private firms. The profits earned on those contracts are taxed by the government payer, so the total cost to the government is essentially discounted. Contracts between private firms are on the same footing if the payer is profitable, since the paying firm can deduct its costs from taxable profits. A payer that is not profitable is at a disadvantage. The government “discount” might not be the primary reason to suspect that government contracting is subject to distortion and inflated values, but it is a reason nevertheless. One could be forgiven for thinking that the “discount” creates additional leeway for graft!

Does the government labor “discount” really impinge on the federal agency budget process? I doubt that anyone having a critical role in the Congressional or executive budget process thinks much about it, to say nothing of agency hiring and compensation managers. Yet spending levels may “bake-in” a certain amount of over-payment of wages or fat in government contracts. In any case, historically, federal spending has not been tightly constrained by the flow of tax revenue.

Federal Wages vs. Private Wages

There is empirical evidence on government vs. private wages. These data are of interest in their own right, but since so much of the private sector receives the same tax “discount” as government, it’s not clear that it should cause much if any differential in pay. The Congressional Budget Office (CBO) compared differences in compensation from 2005-2010 and again from 2011-2015 and found that federal wages and benefits exceeded private sector wages and benefits over both periods. The gap decreased with increases in education. For workers with a bachelor’s degree or less (71% of the CBO’s latest federal workforce sample), the gap was substantial. The difference was just a few thousand dollars for those with a master’s degree. The professional degree/Ph.D. category stood in fairly sharp contrast to the others, with private workers having a fairly large advantage. It is possible that the most highly-educated category, being the most scarce and probably the most specialized, has unique market characteristics. It should also be noted that the sample of federal workers was about 4 years older, on average, than the private sector sample, which might have skewed the results.

The CATO Institute used data from the U.S. Bureau of Economic Analysis (BEA) and found that federal civilian workers earned 80% more than private sector workers in 2016. The CATO report cites several other studies, including the CBO’s, which consistently find that federal workers earn more. This could be partly attributable to the government labor discount, bureaucratic laxity, the heavy unionization of the federal work force, and even the geographical distribution of federal workers.

Discount My Taxes, Please

The worst aspect of the tax “discount” on federal and many private-sector wage payments is the taxation itself. However, the fact that some firms and organizations don’t qualify for the discount represents a significant distortion. To some extent, labor input is discouraged for unprofitable startup firms, firms struggling for survival, and of course the non-profit sector. These organizations are at a distinct disadvantage in terms of resource allocation relative to those who qualify for the “discount”.

Nevertheless, this unevenly applied discount may be an unfortunate mathematical implication of a public sector with income-taxing and spending powers. The discount on wages and contract payments provides additional margin along which government can be wasteful. A partial solution is to maintain whatever firewalls exist between taxing and spending authorities, but that won’t unwind past distortions. Of course, the best solution is to shrink government: reduce taxes and reduce the federal role in everything from infrastructure to public health, dismantle the administrative state, and reduce military spending. I didn’t really need another reason to warn of the dangers of big government, but count this one as duly noted!

Can Health Care Bill Get GOP Off the Schneid?

29 Thursday Jun 2017

Posted by pnuetz in Health Insurance, Obamacare

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AHCA, Avik Roy, BCRA, Better Care Reconciliation Act, CATO Institute, CBO, Community Rating, Corporatism, David Harsanyi, John C. Goodman, Means Testing, Medicaid Reform, Michael Cannon, Obamacare Exchanges, Peter Suderman, Planned Parenthood, Refundable Tax Credits, Seth Chandler, Stabilization Funds, State Waivers, The CATO Institute, Yuval Levin

For those who are “woke” to Obamacare’s failures, the Senate GOP’s health insurance reform bill has plenty to hate and maybe some things to love. There are likely to be some changes in the bill before it goes to a vote, which now has been delayed until sometime after Congress’ July 4th recess. Known as the Better Care Reconciliation Act of 2017 (BCRA), the bill is another mixed bag of GOP health care reforms and non-reforms. It is the Senate Republicans’ effort to improve upon the bill passed by the House of Representatives in May. The non-reforms are tied to an inability to repeal all aspects of Obamacare (the Affordable Care Act, or ACA) within the context of budget reconciliation, a process which permits a simple majority for approval of changes linked in some way to the budget (the so-called Byrd rule). Yuval Levin offers an excellent discussion of the bill and the general motivations for the form it has taken:

“They are choosing to address discrete problems with Obamacare within the framework it created and to pursue some significant structural reforms to Medicaid beyond that, and they should want the merits of their proposal judged accordingly. Their premise is politically defensible — it is probably more so than my premise — and the proposal they have developed makes some sense in light of it.“

It’s necessary to get one thing out of the way at the outset: the CBO’s scoring of the Senate bill is flawed in a massive way, like the earlier score of the House bill. The estimate of lost coverage for 22 million individuals is based on the CBO’s errant predictions of Obamacare coverage levels. (See here and here, and see Avik Roy’s latest entry on this topic.) Does anyone believe that enrollment on the exchanges will decline by 15 million in 2018 due to the elimination of the individual mandate? That’s over 40% more than total enrollment in 2017, by the way. Even if we attribute the CBO’s prediction to the elimination of both the individual and employer mandates, it would be an incredible plunge, especially given the means-tested tax credits in the BCRA. Does anyone believe that coverage levels under Obamacare would increase by 18 – 19 million by 2026 (mostly on account of the individual mandate)? That is the baseline assumed by the CBO in its scoring of the BCRA, which is laughable. A more realistic estimate of lost coverage under the BCRA might be 2 to 3 million, but remember that many of those coverage losses would not be “forced” in any sense. Rather, they would be purposeful refusals to take coverage with the demise of the individual mandate. But they would tend to be the healthiest of the current, coerced enrollees.

A related point has to do with hysterical claims that the BCRA will “kill thousands of people”. Someone cooked-up this talking (screaming?) point to rally the ignorant left and perhaps frighten the ignorant right (including a few GOP Senators). As Ira Stoll explains, there are several reasons to dismiss these assertions, not least of which is its tradeoff-free conceit. More ugly detail on the basis of these claims can be found here.

Will the BCRA “gut” Medicaid, as Charles Schumer, Nancy Pelosi and other have claimed? Program spending would not decline by any means, only its growth rate. Enrollment would decline with tougher eligibility rules, but as noted above, tax credits more generous than the Medicaid savings (relative to Obamacare) would help replace lost Medicaid coverage with private insurance. Steve Chapman has contributed one of the most nitwitted commentaries on Medicaid reform that I have seen. Not only do critics consistently ignore the proposed tax credits for coverage at low incomes, but they never address the monumental waste in the program., something that would likely improve under the budgeting requirements and additional discretion given to states by the BCRA.

An even crazier scare story going around is that the Senate bill will cut Medicare benefits. That is not the case, though the bill repeals an Obamacare Medicare tax increase on the self-employed.

Getting back to the broader BCRA, here are some of the major provisions:

Medicaid reform to replace the budgetary disaster of federal matching with per capita caps or block grants, and state program control.
Means-tested tax credits for insurance purchases would extend to low-income individuals who might otherwise lose their expanded Medicaid eligibility. According to Levin, this group is heavily weighted toward the unmarried and childless.
Greater state authority over regulation of the individual insurance market. This is accomplished through the availability of state waivers from many Obamacare regulations, including essential health benefits.
Almost all Obamacare tax provisions would be repealed. One exception is the “Cadillac” tax on high-cost employer plans starting in 2026 (after a temporary hiatus). Many of these repeals would benefit individuals broadly as taxpayers, employees, business people, and patients.
Expanded allowable age rating to 5/1 from 3/1. This helps limit adverse selection by pricing more risk where it exists, and the means-tested credits would help offset higher premiums for older individuals with low incomes.
Provides about $130 billion in “stabilization” funds for insurers over a three-year period. This is an attempt to keep premiums down during a transition over which the GOP probably hopes to enact additional deregulatory measures. Is this a practical maneuver? Yes, but it also reflects a bit of “corporatism-when-it’s-convenient” hypocrisy.
Eliminates funding for Planned Parenthood. Presumably funding could be restored later were the organization to split off its abortion services into a financially distinct division, which the Hyde Amendment would seem to require.
Retains coverage for pre-existing conditions.
Elimination of the individual and employer mandates, including the tax penalty. However, individuals who go without coverage for two months would face a six-month waiting period before they could re-qualify for coverage.

Eliminating the mandates is great from a libertarian and an economic perspective. The coercion inherent in those requirements is bad enough. In practice, the individual mandate has proven less effective in encouraging enrollment than Obamacare’s architects had hoped, which makes the CBO’s conclusions all the more puzzling. The employer mandate gives firms an incentive to reduce hours and employment, so it has extremely undesirable labor-market implications.

Most criticism of the BCRA from the right has centered on its failure to fully repeal Obamacare insurance and health care regulations. The continuation of Obamacare community rating is a major shortcoming of the bill, as it distributes the financial risks of medical needs in ways that do not correspond to the actual distribution of health risks. The result is the very same adverse selection problem we have witnessed on the Obamacare exchanges. Unfortunately, this raises the specter that we’ll be stuck with some form of community rating in the long-term, along with employer-provided coverage and the ill-advised premium tax deductions, which tend to inflate premium levels.

Michael F. Cannon of the CATO Institute calls the BCRA an Obamacare rescue package. John C. Goodman is largely in agreement with Cannon, stating that Republicans have no real desire to repeal Obamacare. Peter Suderman at Reason has many of the same concerns. In addition to community rating, Cannan (and Senator Rand Paul) are unhappy that Medicaid spending continues to grow under the bill with a new program of subsidies (tax credits) to boot! They also condemn the so-called “stabilization” or “cost-sharing” subsidies that would be paid to insurers under the bill. While a broader range of plans would become available, there is little confidence that insurers will be able to bring down premiums and/or deductibles substantially without the added subsidies.

Avik Roy has defended the Senate bill for its proposed reforms to Medicaid, replacement of Obama’s Medicaid expansion with tax credits for private coverage, and transitional tax credits to smooth jumps in premium levels as income rises from low levels. This is an improvement over the House bill. However, marginal tax rates would be high under the BCRA for individuals in the range of income over which the credits phase out, which is a legitimate “welfare trap” criticism.

David Harsanyi also believes the bill is a good start:

“If Republican leadership had told conservatives in 2013 that they could pass a bill that would eliminate the individual and employer mandates, phase out Obamacare’s Medicaid expansion, cut an array of taxes, and lay out the conditions for full repeal later, I imagine most would have said ‘Sign me up!’“

Naturally, most critics of Obamacare have strong misgivings about a bill that would leave major components of the ACA’s structure in place. That includes Obamacare’s regulation of health care delivery itself, not just health insurance coverage. The BCRA might incorporate signifiant changes before it goes to a vote, however. One can only hope! Rand Paul has suggested breaking the bill into two parts: repeal of the ACA and other spending provisions, though it’s not clear how a repeal bill would qualify under the Byrd rule. Either way, the GOP intends to follow-up with additional health care legislation and administrative changes. Were a bill enacted soon, there is some chance that additional legislation could garner limited bi-partisan support. Long-term stability of the health insurance and health care markets would be better-served by a stronger semblance of political equilibrium than we have seen in the years since Obama was elected.

Musings II: Avik Roy on Health Insurance Reform

12 Friday May 2017

Posted by pnuetz in Health Care, Obamacare

≈ 1 Comment

Tags

Actuarial Value, AHCA, American Health Care Act, Avik Roy, Benefit Mandates, CBO, Community Rating, Congressional Budget Office, Dylan Scott, Essential Benefits, Exchange Market, Interstate Competition, Medicaid, Risk corridors, Vox

Vox carried an excellent Dylan Scott interview with Avik Roy this week. Roy is a health care policy expert for whom I have great respect. Among other health care issues, I have quoted him in the recent past on the faulty Congressional Budget Office (CBO) projections for Obamacare enrollment, which have consistently overshot actual enrollment. In this interview, Roy explains his current views on the health care insurance reform process and, in particular, the American Health Care Act (AHCA), the bill passed by the House of Representatives last month. The interview provides a good follow-up to my “musings” post on Sacred Cow Chips earlier this week.

Roy provides good explanations of some of the AHCA’s regulatory changes that have merit. These include:

relaxation of Obamacare’s community rating standards, meaning that insurers have more flexibility to charge premia based on age and other risk factors, thus mitigating the pricing distortions caused by cross-subsidies on the individual market;
a rollback in the required minimum actuarial value (AV) of an insurance plan (the ratio of plan-paid medical expenses to total medical expenses);
elimination of federal essential benefits requirements.

Roy provides context for these proposed changes relative to Obamacare. For example, regarding AV, he says:

“[In] the old individual market, prior to Obamacare, the typical actuarial value of a plan was about 40 percent. Obamacare drives that up effectively to 70 percent. That has a corresponding effect on premiums; it makes premiums a lot more expensive. In the AHCA, those actuarial value mandates are repealed. Which should provide a lot more opportunity for plans to design more affordable insurance policies for individuals.“

Even with Obamacare’s high AV requirements, an insurer could make money by virtue of the law’s “risk corridors”, which were intended to cover losses for insurers as they adjusted to the new regulations and as the exchange market matured, but those bailouts were temporary, and development of the exchanges did not go exactly as hoped. Insurers have been ending their participation in the exchange market, leaving even less than the limited choices available under Obamacare and little competition to restrain pricing.

On essential benefits, Roy reminds us that every state has essential benefit regulations of its own. These mandates create an unfortunate obstacle to interstate competition, as I discussed in March in “Benefit Mandates Bar Interstate Competition“. Nevertheless, the federal mandates have created additional complexities and added costs to cover risks that a) are not common to the risk pool, or b) cover benefits that are not risk-related and therefore inappropriate as insurance.

Roy also defends the AHCA’s protection of individuals with pre-existing conditions. One fact often overlooked is that burdening the individual market with coverage of pre-existing conditions made Obamacare less workable from the start, simultaneously driving up premiums and sending insurers for the hills. These risks can and should be handled separately, and the AHCA offers subsidies that should be up to the task:

“… if you look at Obamacare, the mechanisms in Obamacare’s exchanges that served as a way to fund coverage for sick people, they were spending $8 billion a year on that program. If you look at it that way, if $8 billion was enough under Obamacare, then maybe $15 billion a year is enough. I really don’t think that’s the problem with this bill.“

Roy contends that the big weakness in the AHCA is inadequate assistance to the poor in arranging affordable coverage. While highly critical of the CBO’s wild estimate of lost coverage (24 million), he does believe that the AHCA, as it stands, would involve a loss. He favors means-tested subsidies as a way of closing the gap, but acknowledges the incentive problems inherent in means testing. With time and a growing economy, and if the final legislation (and the purported stages 2 and 3 of reform) is successful in reducing the growth of health care costs relative to income, the subsidies would constitute a smaller drain on taxpayers.

As for Medicaid reform, Roy defends the AHCA’s approach:

“You start with the fact that access to care under Medicaid and health outcomes under Medicaid are very poor, far underperforming other health insurance programs and certainly way underperforming private insurance. Why does that problem exist? It exists because states have very little flexibility in how they managed their Medicaid costs. They’re basically not able to do anything to keep Medicaid costs under control, except pay doctors and hospitals less money for the same amount of care. As a result of that, people have poor access. By moving to a system in which you put Medicaid on a clear budget and you give states more flexibility in how they manage their Medicaid costs, you actually can end up with much better access to care and much better coverage.“

One point that deserves reemphasis is that a final plan, should one actually pass in both houses of Congress, will be different from the AHCA. From my perspective, the changes could be more aggressive in terms of deregulation on both the insurance side and in health care delivery. The health care sector has been overwhelmed by compliance costs and incentives for consolidation under Obamacar. Nobody bends cost curves downward by creating monopolies.

I’ve hardly done justice to the points made by Roy in this interview, but do read the whole thing!

The CBO’s Obamacare Fantasy Forecast

28 Tuesday Mar 2017

Posted by pnuetz in Health Care, Obamacare

≈ 4 Comments

Tags

American Health Care Act, Avik Roy, CATO Institute, CBO, Congressional Budget Office, Exchange Enrollment, Individual Mandate, Medicaid enrollment, Obamacare, Trump Administration

The Congressional Budget Office (CBO) is still predicting strong future growth in the number of insured individuals under Obamacare, despite their past, drastic over-predictions for the exchange market and slim chances that the Affordable Care Act’s expansion of Medicaid will be adopted by additional states. Now that Republican leaders have backed away from an unpopular health care plan they’d hoped would pass the House and meet the Senate’s budget reconciliation rules, it will be interesting to see how the CBO’s predictions pan out. The “decremental” forecasts it made for the erstwhile American Health Care Act (AHCA) were based on its current Obamacare “baseline”. A figure cited often by critics of the GOP plan was that 24 million fewer individuals would be insured by 2026 than under the baseline.

It was fascinating to see many supporters of the AHCA accept this “forecast” uncritically. With the AHCA’s failure, however, we’ve been given an opportunity to witness the distortion in what would have been a CBO counterfactual. What a wonderful life! We’re stuck with Obamacare for the time being, but this glimpse into the CBO’s delusions will be one of several silver linings for me.

Again, the projected 24 million loss in the number of insured under the AHCA was based on an actual predicted loss of about 5 – 6 million and the absence of an Obamacare gain of 18 – 19 million. Those figures are from an excellent piece by Avik Roy in Forbes. I drew on that article extensively in my post on the AHCA prior to its demise. Here are some key points I raised then, which I’ve reworded slightly to put more emphasis on the Obamacare forecasts:

The CBO has repeatedly erred by a large margin in its forecasts of Obamacare exchange enrollment, overestimating 2016 enrollment by over 100% as recently as 2014.
The AHCA changes relative to Obamacare were taken from CBO’s 2016 forecast, which is likely to over-predict Obamacare enrollment on the exchanges by at least 7 million, according to Roy.
The CBO also assumes that all states will opt to participate in expanded Medicaid under Obamacare going forward. That is highly unlikely, and Roy estimates its impact on the CBO’s forecast at about 3 million individuals.
The CBO believes that the Obamacare individual mandate has encouraged millions to opt for insurance. Roy says that assumption accounts for as much as 9 million of total enrollment across the individual and employer markets, as well as Medicaid.

Thus, Roy believes the CBO’s estimate of the coverage loss of 24 million individuals under the AHCA was too high by about 19 million!

In truth, Obamacare will be watered down by regulatory and other changes instituted by the Trump Administration, which has said it will not enforce Obamacare’s individual mandate. Coverage under the “new” Obamacare will devolve quickly if the CBO is correct about the impact of the individual mandate.

The CBO’s job is to “score” proposed legislation relative to current law; traditionally, it made no attempt to account for dynamic effects that might arise from the changed incentives under a law. The results show it, and the Obamacare projections are no exception. In the case of Obamacare, however, the CBO seems to have applied certain incentive effects selectively. The supporters of the AHCA might have helped their case by focusing on the flaws in the CBO’s baseline assumptions. We should keep that in mind in the future with respect to any future health care legislation, not to mention tax reform!

Cleaving the Health Care Knot… Or Not

18 Saturday Mar 2017

Posted by pnuetz in Health Care, Obamacare

≈ 2 Comments

Tags

AHCA, American Health Care Act, Avik Roy, Budget Reconciliation, CBO, Community Rating, Congressional Budget Office, John C. Goodman, Medicaid Reform, Michael Cannon, Michael Tanner, Obamacare, Patient Freedom Act, Rand Paul, Refundable Tax Credits, Rep. Pete Sessions, Se. Bill Cassidy, Universal Basic Income, Yuval Levin

Republican leadership has succeeded in making their health care reform plans in 2017 even more confusing than the ill-fated reforms enacted by Congress and signed by President Obama in 2010. A three-phase process has been outlined by Republican leaders in both houses after the initial rollout of the American Health Care Act (AHCA), now billed as “Phase 1”. The AHCA was greeted with little enthusiasm by the GOP faithful, however.

As a strictly political matter, there is a certain logic to the intent of “three-phase plan”: limiting the provisions of the AHCA to issues having an impact on the federal budget. That would allow the bill to be addressed under “budget reconciliation” rules requiring only 51 votes for passage in the Senate. Phase 2 would involve regulatory rule-making, or rule-rescinding, as the case may be. The putative Phase 3 would require additional legislation to address such unfinished business as allowing health insurance competition across state lines, eliminating anti-trust protection for insurers, and medical tort reform. How the sponsors will get 60 Senate votes for Phase 3 reforms is an unanswered question.

Legislative Priorities

Yuval Levin wrote a great analysis of the AHCA last week In which he described the structure of the House bill as a paranoid reaction to the demands of an “imaginary parliamentarian”. By that he means that the reforms in the bill conform to a rigid and potentially flawed interpretation of Senate budget reconciliation rules. Levin’s view is that the House should not twist itself up over what might be negotiated prior to a Senate vote. In other words, the House should concern itself at this stage with passing a bill that at least makes sense as reform, without bowing to any of the awful legacy provisions in Obamacare.

Medicaid reform is one piece of the proposed legislation and is reasonably straightforward. It imposes caps on federal funding to states after 2020, but it grants more flexibility to the states in managing the program. It also involves a tradeoff by allowing Medicaid funding to increase over the first few years, in line with the expansion under Obamacare, in exchange for capped growth later. The expectation is that long-term costs of the program will be reduced through a combination of the caps and better management at the state level.

The more complex aspects of the AHCA attempt to effect changes in the individual market. Levin offers a good perspective on these measures. First, he describes the general character of earlier Republican reform proposals from which the AHCA descends:

“Those various proposals all involved bringing premium costs down by enabling insurers to sell catastrophic coverage plans (along with more comprehensive plans) and enabling everyone in the individual market to afford at least those catastrophic coverage plans. This would enable far greater competition and let anyone not otherwise covered by insurance enter the individual market as a consumer. …

The House proposal bears a clear resemblance to this approach. It involves some deregulation from Obamacare, it includes a refundable tax credit for coverage, it gestures toward incentives for continuous coverage. But it is also fundamentally different from this approach, because it functions within the core insurance rules established by Obamacare, which means it can’t really achieve most of the key aims of the conservative reforms it is modeled on.”

The rules established by Obamacare to which Levin refers include the form of community rating, which is merely loosened somewhat by the AHCA. However, the AHCA would impose a 30% penalty for those who fail to enroll while still healthy. This is a poorly designed incentive meant to substitute for Obamacare’s individual mandate, and it is likely to backfire. Levin is clear that this feature could have been avoided by scrapping the old rules and introducing a new form of community rating available only to the continuously insured.

The AHCA also fails to cap the tax benefits of employer-provided coverage, which retains a potential imbalance between the incentives for employer versus individual coverage. Levin believes, however, that some of these shortcomings can be fixed through a negotiation process in either the House or the Senate, if and when the bill goes there.

The CBO’s Report

As it is, the bill was “scored” by the Congressional Budget Office (CBO) with results that are widely viewed as unsatisfactory. The CBO’s report states that the AHCA would reduce the federal budget deficit, but the ugly headline is that relative to Obamacare, it woud cause 24 million people to lose their coverage by 2024. That number is drastically inflated, as Avik Roy demonstrated in his Forbes column this week. Here are the issues laid out by Roy:

The CBO has repeatedly erred by a large margin in its forecasts of Obamacare exchange enrollment, overestimating 2016 enrollment by over 100% as recently as 2014.
The AHCA changes relative to Obamacare are taken from CBO’s 2016 forecast, which still appears to over-predict Obamacare enrollment substantially. Roy estimates that this difference alone would shave at least 7 million off the 24 million loss of coverage quoted by the CBO.
The CBO also assumes that all states will opt to participate in expanded Medicaid going forward. That is highly unlikely, and it inflates CBO’s estimate of the AHCA’s negative impact on coverage by another 3 million individuals, according to Roy.
Going forward, the CBO expects the Obamacare individual mandate to encourage millions more to opt for insurance than would under the AHCA. Roy estimates that this assumptions adds as much as 9 million to the CBO’s estimate of lost coverage across the individual and employer markets, as well as Medicaid.

Thus, Roy believes the CBO’s estimate of lost coverage for 24 million individuals is too high by about 19 million! And remember, these hypothetical losses are voluntary to the extent that individuals refuse to avail themselves of AHCA tax credits to purchase catastrophic coverage, or to enroll in Medicaid. The latter will be no less generous under the AHCA than it is today. The tax credits are refundable, which means that you qualify regardless of your pre-credit tax liability.

Fixes

Despite Roy’s initial skepticism about the AHCA, he thinks it can be fixed, in part by means-testing the tax credits, rather than the flat credit in the bill. He also believes the transition away from the individual mandate should be more gradual, allowing more time for markets to being premiums down, but I find this position rather puzzling given Roy’s skepticism that the mandate has a strong impact on enrollment. Perhaps gradualism would convince the CBO to score the bill more favorably, but that’s a bad reason to make such a change.

It’s impossible to say how the bill will evolve, but certainly improvements can be made. It is also impossible to know whether Phases 2 and 3 will ultimately bring a more complete set of cost-reducing regulatory and competitive reforms. Phase 3, of course, is a political wild card.

Michael Tanner notes a few other advantages to the AHCA. Even the CBO says the cost of health insurance would fall, and the AHCA will bring greater choice to the individual market. It also promises over $1 trillion in tax cuts and lower federal deficits.

Alternatives

The GOP faced alternatives that should have received more consideration, but those alternatives might not be politically viable at this point. Some of them contain features that might be negotiated into the final legislation. Rand Paul’s plan has not attracted many advocates. Paul took the courageous position that there should be no entitlements in a reform plan (i.e., subsidies); instead, he insisted, with liberalized market forces, premium costs would decline sufficiently to allow affordable coverage to be purchased by a broad cross-section of Americans. Paul is obviously unhappy about the widespread support in the GOP for refundable tax credits as a replacement for existing Obamacare subsidies.

John C. Goodman has advocated a much simpler solution: take every federal penny now dedicated to health care and insurance subsidies, including every penny of taxes now avoided via tax deductions on employer-provided coverage, and pay it out to households as a tax credit contingent on the purchase of health insurance or health care expenses. This is essentially the plan put forward by Rep. Pete Sessions and Sen. Bill Cassidy in the Patient Freedom Act, described here. While I admire the simplicity of one program to replace the existing complexities in the federal funding of health care coverage, my objection is that a health care “dividend” of this nature resembles the flat tax credit in the AHCA. Neither is means-tested, amounting to a “Universal Basic Health Insurance Benefit”. Regular readers will recall my recent criticism of the Universal Basic Income, which is the sort of program that smacks of “universal state dependency”. But let’s face it: we’re already in a state of federal health care dependency. In this case, there is no incremental cost to taxpayers because the credit would replace existing outlays and tax expenditures. In that sense, it would eliminate many of the distortions currently embedded in federal health care policy.

A more drastic approach, at this point, is to simply repeal Obamacare, perhaps with a lengthy phase-out, and attempt to replace it later in the hope that support will coalesce around a reasonable set of measures leveraging market forces, and with accommodations for high-risk individuals and the economically disadvantaged. Michael Cannon writes that CBO estimated a simple repeal would increase the number of uninsured by 23 million over ten years, slightly less than the 24 million estimate for the AHCA! Of course, neither of these estimates is likely to be remotely accurate, as both are distorted by the CBO’s rosy assumptions about the future of Obamacare.

Where To Go?

Tanner reminds us that the real alternative to Republican legislation, whatever form it might take, is not a health care utopia. It is Obamacare, and it is collapsing. That plan cannot be effectively reformed with additional subsidies for insurers and consumers, or we’d find ourselves in a continuing premium spiral. The needed reforms to Obamacare would resemble changes contemplated in some of the GOP proposals. While I cannot endorse that AHCA legislation in its current form, or as a standalone reform, I believe it can be improved, and the later phases of reform we are told to anticipate might ultimately vindicate the approach taken by GOP leadership. I am most skeptical about the promise of subsequent legislation in Phase 3. I’ll have to keep my fingers crossed that by then, the path to additional reforms will be more attractive to democrats.

Obamacare Swampland: Mendacity Made the Sale

27 Friday Mar 2015

Posted by pnuetz in Obamacare

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CBO, Edmund Haislmaier, Exchange enrollments, Exchange subsidies, health care costs, Kaiser Family Foundation, King v. Burwell, Medicaid expansion, Obamacare, Scott Atlas, uninsured Americans

Perhaps I’d quit writing about Obamacare if President Obama would quit lying about it. No, probably not, because the flaws of Obamacare are so numerous that they deserve to be exposed again and again. In fairness to Obamacare, the president lies about many other things, but tonight’s topic is his latest assertion about the supposed success of the health care law. On the occasion of the five-year anniversary of the passage of the ACA, the president said:

“… one thing couldn’t be clearer: This law is working, and in many ways, it’s working even better than anticipated… After five years of the Affordable Care Act, more than 16 million uninsured Americans have gained the security of health insurance – an achievement that has cut the ranks of the uninsured by nearly one third.”

Actually, the Administration claims that the ACA is responsible for an additional 16.4 million insured Americans, 14.1 million of which are presumed to have gained coverage since the start of open enrollment in late 2013. The latter figure was extrapolated by HHS from Gallup survey data, and its full attribution to the ACA is gratuitous. Even if we stipulate to the integrity of the extrapolation, it is severely at odds with information reported on actual enrollments, as noted here by Edmund Haislmaier:

“Taken together, the administrative data tell us that the number of Americans with health insurance coverage increased by around 9.7 million individuals during 2014—not the 14.1 million estimated by Health and Human Services.”

Not only are the incremental insureds severely overstated, but Obama now asks us to judge the “success” of the law based on an implied 35% reduction in the number of uninsured, which still leaves well over 25 million people uninsured. Lest anyone forget, the original projections for exchange enrollments were far higher than even the rosy numbers reported by Obama. The so-called “target” population remains mostly unserved. The vast bulk of the coverage gains have come from Medicaid, which is free to eligible enrollees. Exchange enrollments have been light relative to expectations despite the promise of subsidies. (About half of the enrollees receiving subsidies will have to pay some of those benefits back to the IRS, according to the Kaiser Family Foundation. While the other half of subsidy recipients will get refunds, on average, the taxes owed by the first group will pose hardships.)

As noted above, a number of previous posts on Sacred Cow Chips have covered the flaws inherent in Obamacare. These fall into two general categories of destructive effects: 1) on the market for health care insurance; and 2) on actual access to, and delivery of, patient care. See here, here, and here for discussions of various clumsy and shortsighted ways in which the law attempts to regulate care. Scott Atlas points to another fundamental truth about Obamacare: it fails the poor and middle class by inhibiting access to care and making employer-based coverage less likely. Edmund Haislmaier has another excellent article on four key design flaws in the ACA as it relates to health care coverage. The negative employment effects of the law will continue to play out.

The cost of Obamacare to taxpayers is staggering, despite the CBO’s recent reduction in its estimates due entirely to lower than expected enrollments:

“The CBO now projects that the law will cost nearly $2 trillion over the next ten years. Obamacare’s subsidies alone will cost $1.1 trillion. In 2010, the agency put the cost of the entire law at $940 billion over its first decade.”

The author at the last link above also notes that the employment effects of Obamacare will be costly to taxpayers:

“Obamacare hasn’t just failed to expand coverage as projected — it’s caused more people to lose their insurance than its architects intended. The CBO now estimates that 10 million people will lose their employer-provided health benefits by 2021. That’s a tenfold increase over the agency’s 2011 projections…. Employers might cut back on their workers’ hours so that they’re considered part-time — or stop hiring workers. Some firms may dump their health plans altogether, thanks to Obamacare’s many other cost-inflating mandates and regulations. The fine may be cheaper than the cost of coverage.”

Some of the statist cheerleaders of the administration offer anecdotes and testimonials from the new class of happily insured. Given the (expected) subsidies and some of the expanded coverage provisions, these individuals certainly think they have something to be happy about, but anecdotes are easy. A great many anecdotes have also been heard about lost individual coverage, severely limited and even lost access to physicians and care, lost work hours and reduced employment opportunities. Further disappointments lie ahead, even for the newly insured. Provisions of the Affordable Care Act (ACA) that are least likely to be popular have been delayed by executive fiat.

We have a destructive health care law that should be replaced at our earliest “convenience”. That will be either when Obama leaves office or, more optimistically, in June if the Supreme Court rules against federal exchange subsidies in the King v. Burwell case.

This is unlikely to be my last post on Obamacare, if the history of Obama’s mendacious claims about the law is any guide: “If you like your coverage, you can keep your coverage“. “If you like your doctor, you can keep your doctor“. “The individual mandate is not a tax“. “No family making less than $250,000 a year will see any form of tax increase“. “I will not sign a plan that adds one dime to our deficits – either now or in the future.” The ACA will “cut the cost of a typical family’s premium by up to $2,500 a year.” “I don’t believe that government can or should run healthcare“. All lies about Obamacare issued from the lips of President Obama. And I could go on…

Negative Net Taxes For Most Is Not A Good Sign

18 Tuesday Nov 2014

Posted by pnuetz in Uncategorized

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Carpe Diem, CBO, Corporate tax, Cronyism, Inequality, Mark Perry, OECD, Progressive Taxes, rent seeking, Senate Budget Committee

Carpe Diem (Mark Perry) reports on a new CBO study showing that nearly all net federal taxes (taxes net of transfer payments received) are paid by households in the highest income quintile. The fourth quintile pays a small, positive amount of net taxes, but the lowest 60% of households pay negative net taxes, with average tax rates on market income plus transfers ranging from -13.7% for the middle income quintile to -35% for the lowest quintile. From Perry:

“The second-highest income quintile basically just barely covers its transfer payments, so it’s really the top 20% of “net payer” households that are financing transfer payments to the entire bottom 60% AND financing the non-financed operations of the entire federal government.”

A heavy concentration of taxes at one end of the income distribution is not a healthy development for a democracy when it comes to fiscal responsibility.

In a second post, Perry uses the same study to show that adjusting market income for net taxes reduces income inequality by almost 50%. Advocates for greater income equality always focus on market income alone because it tends to show a more dramatic gap between rich and poor. This distortion understates the extent to which policies already in place reduce income inequality and amplifies the unabating contention that more must be done. In addition, standard measures of income inequality tend to distort trends, as SCC has noted in the past.

At the same time, OECD data reveal that the U.S. has the most progressive tax system in the industrialized world. The author of the OECD post cited the data in testifying before the Senate Budget Committee:

“This prompted one Senator to point out that if the richest 10% of taxpayers earn the most of any OECD country, shouldn’t it make sense that they bear the largest tax burden of any country?”

The Senator’s premise was false, as there are countries with higher or similar income shares earned by the top decile, but the tax burden on that decile in the U.S. is the highest. In addition, the U.S. has the highest corporate tax rate in the industrialized world, a point on which SCC has posted before.

The ongoing debate over inequality is counterproductive. Calls for higher taxes will certainly do nothing to encourage economic growth and job creation. Quite the opposite. And inequality, in principle, is not in any way synonymous with decreasing standards of living. However, I certainly agree that inequality can be harmful when it is induced by rent-seeking activity and cronyism, which become a way of life with growth in the public sector.