Reforming Obamacare: How Congress, and the President, Can Win after King v. Burwell

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Executive Summary

A congressional response to King v. Burwell will be successful if President Obama signs a bill making at least one permanent change to the law that removes at least one of Obamacare’s harmful effects.

Six Reform Buckets. This proposal contains reforms in six buckets, which can be adopted independently or comprehensively:

  • Reforming Obamacare tax credits for premiums to reduce disincentives for beneficiaries to work more hours and increase their incomes.
  • Combine Obamacare tax credits and cost sharing subsidies so beneficiaries can decide themselves how much to pay directly for health goods and services versus how much to pay in premium to health insurers.
  • Allow beneficiaries to buy health insurance from brokers or agents, instead of the broken exchanges, and receive tax credits through the IRS directly.
  • Remove federal mandates on health insurance, such as age bands and mandated benefits, which increase cost.
  • Remove the mandates on individuals and employers to purchase government-compliant health insurance.
  • Combine these reforms with reforms unrelated to King v. Burwell or even Obamacare itself, in order to increase the likelihood of winning the president’s signature.

Outcomes. If enacted fully, these reforms will:

  • Reduce Obamacare incentives for workers to limit their hours and earnings.
  • Give beneficiaries more control of the dollars spent on their health care.
  • Free beneficiaries and taxpayers from the unnecessary and expensive Obamacare exchanges.
  • Reduce health insurance costs and increase the number of choices available.
  • Free employers to add hours and hire more workers without fear of being penalized.
  • Reduce the cost to taxpayers of Obamacare, Medicare and Medicaid.

Some of these reforms require very little work. Indeed, they simply require the government to stop doing certain things. They would not require any “transition” in the wake of a Supreme Court ruling that strikes down Obamacare’s federal exchange tax credits.

For example, the age bands which limit the premium difference between younger and older people, and artificially increase premiums for young people, never existed at the federal level before Obamacare, although some states imposed them. All the federal government has to do is stop this regulation, and premiums will drop.

Similarly, removing the employer and individual mandates simply stops the government from enforcing a rule that is hindering employers from growing their businesses and adding workers. Repealing it just lifts a weight off them. It does not require them to do anything.

Other reforms will require more technical analysis, such as changing the way the tax credits are calculated in order to minimize their negative impact on workers’ willingness to add hours. Nevertheless, their benefits are so significant that including them in a legislative response to King v. Burwell would be a worthy achievement for both Democrats and Republicans in Congress who recognize their duty to propose responsible reforms to the Affordable Care Act.

Even if the Supreme Court rules in favor of the government and Health and Human Services Secretary Sylvia Mathews Burwell, these reforms would solve some of the problems created by the Affordable Care Act while helping fulfill the goals of increasing health insurance coverage and reducing costs to consumers, employers and taxpayers.

Introduction

The U.S. Supreme Court decision in King v. Burwell, the lawsuit which asserts tax credits currently being paid to health insurers in 34 to 37 states that use the federal health insurance exchange (healthcare.gov) are illegal, could require almost seven million people to pay the full premiums for their Obamacare policies.1 Many would choose to drop coverage if and when they have to face paying full premium for their policies. This will cause a crisis, and demand a response, giving Congress the opportunity to remove some of Affordable Care Act’s most harmful features.

A congressional response to King v. Burwell will be successful if President Obama signs a bill making at least one permanent change to the law that removes at least one of Obamacare’s harmful effects.

Congress Must Act. Congress must prepare a response to a Supreme Court decision favoring King, because President Obama will immediately propose an amendment to change the law to accord with how he is executing it. That would be a very simple amendment — just a sentence or two: Let tax credits continue to flow through the federal exchange. But the risk of Congress panicking and simply voting for that amendment, and finally surrendering to Obamacare, is unacceptable.

Americans have had their health coverage upended not only by the Affordable Care Act, but also by the allegedly illegal execution of the law by the administration. Congress has a duty to respond to a court decision favoring King with a new law. However, the new law has to be one the president will sign, but will not require the Republican majority in Congress to take ownership of Obamacare. This is a tricky needle to thread.

President Obama’s Advantage. This proposal makes a few assumptions about what is possible if the court rules for King. First, it recognizes that President Obama himself is not up for re-election, and can likely withstand a backlash in public opinion longer than Congress. A congressional bill that simply provokes the president with anti-Obamacare talking points will be self-defeating.

Second, the proposal recognizes that even the governors and state legislators in the 34 to 37 states who have pledged to oppose Obamacare — to the extent of passing statutes or constitutional amendments prevent their states from establishing exchanges — will feel overwhelming pressure from beneficiaries, insurers, hospitals, doctors and others in the health care system to quickly restore the cash flows lost to them from a victory for King.

Third, this proposal recognizes that an alternate health reform — the much discussed but never seen bill to “repeal and replace Obamacare” might be very many years down the road. A congressional response to King v. Burwell should incorporate permanent changes to Obamacare — no matter how small they might appear — rather than simply turn on the cash spigot until after the next election (also known as “kicking the can down the road”).

A short-term extension of Obamacare subsidies, even for a year or two, risks being extended again and again as the years roll by and Congress and a new president fail to coalesce around an alternative, patient-centered reform.

A congressional response to King v. Burwell will be successful if it achieves two things. First, it must be signed by President Obama. Second, it must make at least one permanent change to the law that removes at least one of Obamacare’s harmful effects.

Six Reform Buckets. This proposal contains a number of reforms in six buckets:

  • Reforming Obamacare tax credits for premiums to reduce disincentives for beneficiaries to work more hours and increase their incomes.
  • Combine Obamacare tax credits and cost-sharing subsidies so beneficiaries can decide themselves how much to pay directly for health goods and services versus how much to pay in premiums to health insurers.
  • Allow beneficiaries to buy health insurance from brokers or agents, instead of the broken exchanges, and receive tax credits directly from the IRS.
  • Remove federal mandates on health insurance, such as age bands and mandated benefits, which increase cost.
  • Remove the mandates on individuals and employers to purchase government-compliant health insurance.
  • Combine these reforms with reforms unrelated to King v. Burwell or even Obamacare itself, in order to increase the likelihood of wining the president’s signature.

Small, Significant Steps to Real Reform. Other, bigger reforms will be called for in the years to come. However, there is no point in provoking Obamacare supporters by emphasizing such reforms in the wake of a King v. Burwell decision. Each of the reforms described in the six categories defined in this paper stands independently. If only one of the reforms is enacted, it would be a small but significant step toward real reform later. And it is reasonable to expect that the president and Obamacare supporters could accept a legislative package that contains all six reform buckets as a comprehensive and responsible answer to King v. Burwell.

Incentives and Work

Notches and cliffs are terms used to describe the effect of large changes in tax rates over small income ranges. Obamacare’s notches and cliffs are best illustrated using the Kaiser Family Foundation’s Health Insurance Marketplace Calculator.2

Problem: Disincentives to Work. For a family of four, with two 35-year old (nonsmoking) parents and two children,100 percent of the Federal Poverty Level (FPL) is an annual household income of $23,850, which is the lowest income range to claim Obamacare tax credits that reduce premiums. Their household income at 133 percent of the FPL would be $31,720. For households within this income range, their Obamacare premiums cannot exceed 2.01 percent of their incomes (see Table I). The Kaiser Family Foundation estimates the gross premium for the second least expensive Silver plan for this family would be $9,625.

If the household income were $23,850, the family’s maximum annual premium would be $479 (2.01 percent of $23,850), so they would benefit from a tax credit of $9,146 ($9,625 minus $479) paid to their health insurer. If the family’s income rose to $31,720, their maximum annual premium would be $638, so their tax credit would go down to $8,987. The household income has increased $7,870, and the family’s tax credit has dropped $159. Effectively, the household has experienced an income tax rate of 2.01 percent ($159 divided by $7,870).

This rate is consistent along the entire range of income between 100 percent and 133 percent of the FPL. However, when household income increases by one dollar from $31,720 to $31,721, the household is liable to pay 3.02 percent of household income ($958) for the same plan. For an increase of one dollar of income, the household net premium increases by $320 (from $638 to $958), resulting in a net loss of $319 and an effective marginal income tax of 32,000 percent!

The net effect of the income increase and the premium increase does not balance until the household income reaches $32,097 (at which point the increase in both income and premiums is $359).

However, few would seek to work more hours if they see no net increase in take-home pay. Even a 10 percent income increase (from $31,720 to $34,892) results in a marginal income tax rate of 62 percent (an increase in premiums of $1,965 divided by an income increase of $3,172). A 15 percent income increase results in a marginal income tax rate of 18 percent ($878 increase in premiums divided by a $4,758 increase in income). At that tax rate, it is reasonable to conclude the extra work might be worth the effort. However, it is not that easy for people in this income range to increase their hours 15 percent. This perverse effect riddles the design of Obamacare’s tax credits all the way up to 400 percent of FPL (see Table I) and it may be the most important reason why work among hourly employees has stagnated.3

Some Obamacare supporters dismiss the argument that the high proportion of part-time workers not working at full capacity is a problem by arguing that the effect is attributable to “voluntary” part-time work. However, the extremely high marginal income tax cliffs and notches in Obamacare explain why people are “voluntarily” working fewer hours than otherwise.4

Solution: Flat-rate, Means-tested Tax Credits. TheNCPA has long championed a refundable health tax credit for every American. However, this is a fundamental reform well beyond the opportunity available with King v. Burwell.

It is reasonable to assume, however, that the president could consider reforming the design of Obamacare’s tax credits to minimize the disincentive to work. This could be achieved by reducing a fixed share of the tax credit for every dollar increase in income (which would effectively be a flat rate of income tax).

This flat rate reform can be illustrated simply using households within each decile bounding the range within which tax credits are currently paid [see Table II]. The $23,850 household receives a tax credit of $9,654, which is actually $508 more than it receives under Obamacare. Five of the 10 households appear slightly worse off than under Obamacare [see Column F]. However, even the worst off household pays only about $34 more a month and has an annual income of $71,551,which most would consider middle class.

The tax credit phases out at a rate of 13.49 percent. That is, every $100 increase in household income would result in a decrease of $13.49 in tax credit. There are no “notches” or “cliffs.” It is a straight line. Each household listed as an example in Table II has an income $7,950 higher than the household before it, and each experiences a reduction in tax credits of $1,073 under the flat rate reform.Relative to Obamacare, everybody wins because nobody has an incentive to limit his working hours because of a reduction in take-home pay.

Further, this flat rate reform also satisfies a budget constraint [see Table III].To illustrate, suppose there are 100 households of this size, 20 of which earn $23,850, 20 earn $31,800 and so forth [see Column B].5 The total amount spent on tax credits for these households is $713,325 under both Obamacare and the flat rate reform [see Columns C and D]. Moving from this illustration to the real world, the actual flat rate at which the tax credit would phase out for Obamacare’s approximately 10 million beneficiaries depends on detailed data on the income distribution of households actually receiving tax credits, which is not yet available.6 The budget constraint illustrated here does not reduce spending versus the status quo. However, if this reform were included with others described in this proposal, spending could be reduced.

This flat rate reform should be acceptable to both Republicans and Democrats, both of whom endorse means testing Medicare Part B and Part D premiums.7 This flat rate reform alone would result in minor changes to Obamacare’s cash flows with significantly positive effects on beneficiaries’ incentives to work.

Subsidies to Insurers

Although Obamacare plans have high deductibles and many Obamacare plans are eligible for Health Savings Accounts, they are not “consumer driven” as properly defined.8 Obamacare’s plans are regulated by “metallic” tiers: A Bronze plan must pay for 60 percent of beneficiaries’ expected medical expenses over year. For Silver, Gold, and Platinum, the proportions are 70 percent, 80 percent and 90 percent, respectively.

These bands have a small amount of flexibility, but not much. A Bronze plan can cover 58 percent to 60 percent of medical expenses, a Silver plan 68 percent to 72 percent, and so forth. However, any plan outside these very narrow bands is illegal. Suppose a person would prefer to pay directly for one-fourth of his expected medical expenses and buy insurance for three-fourths. Obamacare forbids such an arrangement.9 Scholars have recently estimated minimum actuarial values increase the cost of the least expensive plans 8 percent.10

Problem: Obamacare Benefits Go to Health Insurers, Not People.Further, there is compelling evidence health insurers are designing plans with benefits that adhere to the regulations but seek to enroll the healthy and shun the sick, and that this feature is worse in 2015 than 2014. For example, drugs for HIV, cancer and multiple sclerosis are almost always on the most expensive tier of plans’ formularies, demanding 40 percent co-pays.11

Even organizations that strongly support Obamacare have recognized its beneficiaries struggle to pay for care under these conditions. Families USA reports that:

“Lower- to middle-income adults who were insured for the full year were significantly more likely than those with higher incomes to forgo needed care because they could not afford it: Nearly one-third (32.3 percent) of lower- to middle-income adults didn’t get needed medical care (excluding dental care) because they could not afford it.”12

The Commonwealth Fund characterizes a household as “underinsured” if it spends at least 10 percent of household income on health care (or five percent for poor households, or if its deductible is at least 5 percent). Whether or not one thinks this is a meaningful measurement, Obamacare has not reduced it. The percentage of adults with individual policies who were underinsured rose from 17 percent in 2003 to 45 percent in 2012, and then declined slightly to 37 percent in 2014. “The decline in 2014 was not statistically significant.”13

These problems persist because every penny of the billions of dollars taxpayers are paying to underwrite Obamacare goes to health insurers. Not one penny goes to the beneficiaries themselves, so they can decide which health goods and services to pay for directly and how much to pay in health insurance premiums.

As well as the tax credits discussed above (which are used only to discount premiums), the federal government reduces out-of-pocket costs for Obamacare beneficiaries whose household incomes are below 250 percent of the FPL. However, just like the tax credits, the cost sharing subsidies are paid to health insurers, who apply them to beneficiaries’ out-of-pocket spending. Beneficiaries are effectively prevented from exercising true consumer choice by making their own decisions about value for money.

Solution: Give Benefits to Patients, Not Health Insurers. For fiscal year 2015, premium tax credits will be about $19 billion and cost-sharing subsidies about $2.5 billion.14 The ratio of cost-sharing subsidies to tax credits should remain approximately constant going forward, although Obamacare spending overall increases significantly in 2016 and future years.

Whatever amount Congress budgets for subsidies in response to King v. Burwell, these two accounts should be merged into one, and allocated directly to households. Each household should make its own decision about how much to spend directly on medical goods and services, and how much to spend on premium for health insurance.

Obamacare Exchanges

King v. Burwell came about because of disputed understandings of state versus federal exchanges. However, government exchanges themselves are unnecessary bureaucracies that add no value to consumers’ shopping for their own health plans. There is no more need for the Department of Health and Human Services to run a health insurance exchange than there is for the Department of Motor Vehicles to run an auto insurance exchange or the Department of Housing and Urban Development to run a homeowners’ insurance exchange.

Problem: Exchanges Are Expensive and Unnecessary Bureaucracies. Despite most exchanges operating better in 2015 than in 2014, customer service is still poor, and exchanges are not educating consumers about the consequences of their choices, according to a recent survey by Wharton Business School:

“….when users were provided with non-standardized plans sorted by price, an overwhelming 60% relied on a simple rule of thumb for making their selection: choose the plan with the lowest monthly premium. This emphasis on premium cost defeats the entire purpose of the exchanges.

“The portals also came up short in helping consumers understand what they were purchasing. Research has shown that health insurance consumers have only a limited understanding of technical aspects of how health insurance works.…only 14% of consumers were able to correctly answer four multiple-choice questions about the most important terms in health care: deductibles, copays, premiums and maximum out of pocket costs.”15

In the event of a decision against Burwell, states will have to establish their own exchanges to keep tax credits flowing, unless Congress changes the law. However, current state-based exchanges are failing:

“Nearly half of the 17 insurance marketplaces set up by the states and the District under President Obama’s health law are struggling financially, presenting state officials with an unexpected and serious challenge five years after the passage of the landmark Affordable Care Act.

“Many of the online exchanges are wrestling with surging costs, especially for balky technology and expensive customer call centers — and tepid enrollment numbers. To ease the fiscal distress, officials are considering raising fees on insurers, sharing costs with other states and pressing state lawmakers for cash infusions.”16

Most recently, Hawaii has decided to shut down its exchange by September 30, after receiving over $200 million in federal funding to set up and operate it for less than two years. It will have to spend another $30 million to migrate to the federal exchange.17

The federal government granted $5 billion to states through October 14, 2014, to help them set up exchanges.18 Only a minority of states set them up. As of this year, federal money is no longer available to maintain these exchanges. States will have to find operating funds somewhere else, and many have chosen to tax Obamacare beneficiaries with surcharges on their premiums. However, identifying stable funding sources for the millions of dollars it takes to operate an exchange every year has proven politically challenging in most state legislatures.19

For states using the federal exchange, the federal government now levies a 3.5 percent “user fee” on insurers to fund healthcare.gov’s rapidly growing operating costs — rising from $1.4 billion in 2014 to $1.8 billion this year. Last January, the Office of the Inspector General of the U.S Department of Health and Human Services issued the latest in a series of reports examining contracting for the federal exchange, concluding that the administration “chose contract types that placed the risk of cost increases solely on the Government.”20

Solution: Get Government Out of the Exchange Business. We know the state and federal governments can walk away from these exchanges and private brokers, like eHealthInsurance.com or Getinsured.com, will do the job at no cost to taxpayers.

They did it in the individual market for health insurance before Obamacare, and they continue to do it for Medicare Advantage plans. Indeed, while Obamacare exchanges have devoured eHealth’s private individual health insurance brokerage business, its Medicare Advantage business is doing well, increasing 46 percent last year.21

Indeed, Obamacare exchanges are so bad that venture capitalists are funding new private exchanges to fill the gap — with no operating costs to taxpayers: 22

“Looking to provide health insurance to the 53 million Americans who don’t get benefits from their employers, Stride Health has raised $13 million in new funding.

“For the freelancers and independent contractors who make up one third of the U.S. labor force, Stride offers a hassle-free alternative to Healthcare.gov.

“After you enter your own data, including age, gender, location, and illness history, Stride’s forecasting model evaluates how much care you’ll use throughout the year, prices it on every health plan, and couples it with the coverage price to show you the total cost of each plan.”

Unfortunately, Stride Health and other brokers — whether online, on the phone or in person, still have to direct people to the government exchanges, because that is the only way for them to benefit from tax credits.

This constraint should be abolished, so that beneficiaries apply for tax credits from the IRS, as we do for other personal income tax credits. This reform is independent of both the individual amount of any tax credit and the appropriated budget allocated for tax credits overall.

Reforming Obamacare Mandates

HealthPocket, an online insurance broker, measured the increase in premiums for every age group in 2014 versus the pre-Obamacare individual market, and concluded they increased by double digits for every age group [see Figure I].23

Problem: Obamacare Mandates Drive Up Costs. What is remarkable is the increase in rates for 63-year olds: 37.5 percent for women and 22.7 percent for men [see Figure II]. Obamacare forbids accurate pricing by age. The difference in rates between young adults and older ones can be no greater than three to one. This means rates must rise for younger people, because the actuarial consensus is that average health spending for 63-year olds is five times spending for 22-year olds.24

Another issue is the difference in premiums for men versus women. Obamacare supporters advocated outlawing “discrimination” against women, and forcing insurers to charge the same rate for both sexes. Premiums for women of child-bearing age were higher in the past, primarily due to the costs of childbirth. However, this changes after child-bearing age:  middle-aged men have higher costs.25 Thus, Obamacare caused a higher increase in premiums for older women than older men [see Figure II].

The Government Accountability Office confirms that forbidding accurate pricing of health-insurance by age imposes higher premiums on young people.26 Before Obamacare, some states imposed limits on age rating even tighter than Obamacare, while others states did not forbid accurate premium pricing by age. For a 30-year old, non-smoking male, monthly premiums in the three most expensive states were $2,564 (Massachusetts), $2,232 (New Jersey) and $1,986 (New York). For the same man, premiums in the three least expensive states were $349 (Nebraska) and $363 (Georgia and Texas).

The difference was not driven solely by forbidding insurers from charging accurate premiums to young people. Nevertheless, forcing an average 30-year old man to pay the extra $2,215 monthly ($26,580 per year) to bear the burden of his elders’ higher health spending is unfair. The State of New York forced health insurers to charge the same premium to all adults. Massachusetts and New Jersey allowed insurers to blend age with other factors such that the most expensive premiums are double the least expensive.

Obamacare imposes three-to-one age bands nationwide. But the actuarial consensus is that the average 62-year old incurs five times the medical costs of the average 22-year old.27 The Heritage Foundation concluded that Obamacare’s age rating restrictions increase premiums for younger adults by about a third.28

Obamacare also imposes mandatory benefits, called essential benefits, to an unprecedented degree. These essential benefits fall into 10 categories, such as ambulatory services and pediatric services.29 The Heritage Foundation concludes that benefit mandates increase premiums by an average of 9 percent.30

Solution: Remove Obamacare Mandates, Especially Age Bands. Although we do not know the correlation between age and income in the exchanges themselves, we know that younger households earn less than older ones. For example, in 2011, the median income for households with a head of household aged 15 to 24 years was about $25,000.31 People ages 18 through 24 comprise 11 percent of 2015 Obamacare exchange enrollees.32 These individuals are surely almost entirely subsidized by Obamacare’s tax credits.

Take an example from the administration itself:

“For example, the amount that a 27-year-old woman with an income of $25,000 (218 percent of the FPL) would pay for the second-lowest cost silver plan is capped at $145 per month. If she lived in Jackson, Mississippi, the premiums for the second-lowest cost silver plan available would cost her $336 per month before tax credits. Therefore, the amount of the premium tax credit would be $191 per month—the difference between specified contribution to the benchmark plan and the actual cost of the benchmark plan. Her use of the tax credit would not be restricted to the second-lowest cost silver plan. She could apply the $191 per month tax credit toward any plan of her choosing in any metal level. By applying her tax credit to the lowest-cost bronze plan in Jackson, which is priced at $199 per month, she could obtain Marketplace coverage for just $8 per month after tax credits.”33

If the age rating restrictions were lifted, the premium for the second-lowest cost silver plan could easily be expected to drop to $270, a reduction of $66. The tax credit would drop by the same amount, $66, which amounts to a one-third drop from $191. Aggregated over the entire Obamacare population, this would dramatically reduce Obamacare’s claim on taxpayers.

Individual and Employer Mandates

The employer mandate, which penalizes employers of at least 50 full-time employees (defined as working at least 30 hours a week) that do not offer health benefits, is so unpopular the administration has already delayed it one year. The problem with the mandate is that it causes employers who do not offer benefits to cut back workers’ hours and refrain from hiring more workers, lest they trigger the mandate.

Several large firms announced reduced hours for part-time workers (Land’s End, Regal Entertainment, Wendy’s and SeaWorld). In a different response, Trader Joe’s and Target stopped providing coverage to part-time workers (those typically working fewer than 30 hours per week), believing most would be better off with subsidized coverage in Obamacare exchanges.34 Smaller firms, which the media do not follow closely, are surely behaving similarly.

In August 2014, the Federal Reserve Bank of New York surveyed employers in that state, specifically about the effects of Obamacare:

  • Twenty percent expected to increase the proportion of part-time workers, versus only 5 percent who expect to go the other way.
  • About 22 percent planned to cut wages and benefits, versus only 6 percent who planned to increase them.
  • With respect to benefits, 68 percent (two-thirds) of business leaders planned to cut the range of services covered or size and breadth of their provider networks.35
  • The Federal Reserve Bank of Philadelphia released similar results for the Mid-Atlantic states. Because of Obamacare:
  • 18.2 percent of employers reported they cut workers, versus 3.0 percent who hired more;
  • 18.2 percent reported the proportion of part-time workers was higher, versus 1.5 percent who lowered the proportion of part-timers;
  • 41.2 percent reported the range of medical coverage is lower, versus 2.9 percent who increased coverage; and
  • 26.5 percent reported the size and breadth of their provider network was smaller, versus zero percent who broadened their network.36

Casey Mulligan, University of Chicago economist, concludes 3.6 million to 6.9 million workers will effectively have their work hours taxed 100 percent or more as a consequence of the employer mandate.37

The Urban Institute, otherwise a supporter of Obamacare, opposes the employer mandate. Urban Institute researchers estimate repeal would have a very small effect on coverage (reducing the total number of Americans covered from 251.1 million to 250.9 million) and reduce revenues by $4 billion in 2016, but remove labor market disincentives that are hurting employment.38

Given the administration’s previously demonstrated willingness to relieve the burden of this mandate, an overall repeal would be a reasonable goal in the wake of King v. Burwell.

The Individual Mandate. A victory for Kingwould make Obamacare policies in most of the country “unaffordable” and thereby relieve 11.1 million people of the extremely unpopular mandate.39 Any legislative response that re-imposes the mandate would be political kryptonite for this Congress.

However, the most popular provision of the law is the prohibition against health insurers taking pre-existing conditions into account when setting premiums or scheduling benefits. Obamacare supporters insist the two features go hand in glove. Because the law forces health insurers to accept any applicants without taking pre-existing conditions into consideration, it must be coupled with an individual mandate.

If not coupled with a penalty (or fine or tax) for not having health insurance, people would simply wait until they get sick or injured and then buy health insurance. This leads to a so-called death spiral as health insurers increase their premiums in response to individuals’ behavior. The theory is impeccable, but it does not hold up in a system run by politicians.

In 2012, the Congressional Budget Office (CBO) estimated 6 million people would pay fines amounting to $9 billion for not complying with the individual mandate in 2016. In 2014, the CBO reduced its estimates to 4 million people and $6 billion.40 The mandate is shriveling away because it is politically painful for the administration, which is bending over backward not to impose penalties. As Joseph Antos and Michael Strain of the American Enterprise observed:

“…. the law counts on most of the scofflaws turning themselves in. If you do not have insurance and think you owe the tax, then you will be asked to check a box to that effect on your tax return. If you choose to ignore the mandate, you might also choose not to check the box. But even those who do confess that they do not have insurance may not be liable for the new tax. Illegal aliens, Native Americans, prisoners, those who are without insurance for less than 3 months, those who do not have to file an income tax return, anyone who faces a hardship or cannot find affordable coverage, and others are all exempt.”41

In fact, government handouts, not penalties, are driving Obamacare enrollment: Over four of five Obamacare enrollees benefit from tax credits that artificially reduce premiums.42 To be sure, some people would drop Obamacare without an individual mandate. Some 62 percent of 2015’s new Obamacare enrollees said they got insured because “someone told me I would have to pay a penalty if I don’t get coverage.”43 However, it is easy to overestimate this factor.

Supporters of the individual mandate point to a 2012 analysis by the Urban Institute, which estimated Obamacare without the individual mandate would insure 14 to 16 million fewer than with a mandate.44 However, this analysis is outdated because it anticipated 15.3 million people in Obamacare exchanges (of which 55 percent would receive tax credits) and a reduction of 5.8 million in employer-based plans. Actual Obamacare enrollment is about 10 million people, of which 85 percent are receiving tax credits.45 By comparison, the number of people with employer-based benefits increased 8 million from September 2013 to February 2015.46

Further, relief from the individual mandate, with no other changes to Obamacare as currently executed, has significant social benefits. One argument in favor of compulsory insurance is that the uninsured impose costs on society by presenting at emergency rooms, provoking a crisis of so-called uncompensated care. This argument is unsubstantiated.

According to the Urban Institute’s analysis, removing the individual mandate would increase spending on uncompensated care (for newly uninsured individuals) by $20 to $23 billion in one year. However, spending by government, employers and individuals would drop $69 to $82 billion. The benefits of repealing the individual mandate would be at least three times greater than the cost. This is corroborated by the CBO, which estimated repealing the individual mandate would reduce deficits $464 billion in the 10 years through 2024.47

Increasing the Chances of Success after King v. Burwell

As Congress develops an Obamacare reform in the wake of a King v. Burwell decision, it will benefit from a shrinking cost estimate for Obamacare. The CBO’s latest budget baseline, published in March 2015, estimates the gross cost of Obamacare’s various private insurance subsidies and Medicaid spending for the years 2016 through 2025 will be $1.7 trillion. This is $286 billion less than it had estimated in January 2015.48

Even more impressive are the reductions in the cost of Obamacare from the CBO’s original 2010 score.49 The two estimates overlap for the seven years, 2015 through 2021. The original estimate was that Obamacare’s gross cost would be $1.4 trillion over the period, and the net cost $1 trillion. These have shrunk to $992 billion and $751 billion, respectively, for reductions of 28 percent and 29 percent.

When the CBO issues a new baseline, it updates its estimate of Obamacare’s insurance provisions. What it does not explicitly do is update its estimate of revenues from the host of other taxes in the Affordable Care Act. Further, previous estimates have not used so-called “dynamic scoring,” which Congress has now directed the CBO to use. Dynamic scoring takes into account changes in consumer behavior that result from reducing taxes. The incoming director of the CBO has stated that dynamic scoring will reduce the cost of repealing Obamacare (or, presumably, any pieces of Obamacare).50

Gathering Allies to Build a Bridge Out of Obamacare. These developments indicate a bill responding to King v. Burwell could invite the CBO to reconsider Obamacare comprehensively, which could help efforts to repeal some of Obamacare’s taxes, including:

  • the medical device excise tax,
  • the health insurance tax,
  • the Cadillac tax on employer-sponsored plans, and
  • the “medicine cabinet” tax on over-the-counter drugs.

All these taxes are harmful, but their path to repeal is narrow and difficult because the interests advocating them with the most energy (for example, the medical device industry) are unwilling to propose cuts to Obamacare spending in exchange for tax relief. Thus, none of these taxes have been repealed. Indeed, repealing any or all of these taxes on their own, as the House of Representatives is considering, does not contribute to building a bridge out of Obamacare.

Bundling these tax cuts with limited patient-centered reforms, as described above, in a comprehensive, fiscally responsible, revenue neutral bill could induce corporate allies, who have been fully invested in Obamacare’s success, to embrace — or at least tolerate — patient-centered reforms in the wake of a King victory.

Repealing the Independent Payment Advisory Board. Congress is also considering repealing the Independent Payment Advisory Board (IPAB). Bundling this into a bill responding to a King victory would greatly increase its chance of success. The IPAB is a board of 15 experts nominated by the president and confirmed by the Senate. These 15 have the power to cut Medicare by whatever means they see fit, if spending is projected to grow beyond a fixed rate of growth

The IPAB’s first report was due January 15, 2014, but it was not issued. The president has not nominated even one of IPAB’s 15 members, despite having over five years to do so. This demonstrates he recognizes how politically poisonous IPAB is. Although IPAB has nothing to do directly with King v. Burwell, repealing it in a bill responding to the lawsuit automatically gives that bill greater public acceptance.

President Obama Has Proposed Patient-centered Reforms, Too. Over the years, President Obama has also proposed a few patient-centered and taxpayer-friendly reforms that Congress has not taken up. King v. Burwell gives both parties an opportunity to rectify this, with a legislative response that adds Medicare and Medicaid savings to Obamacare reform, leading to a very positive score by the CBO.

Medicare bad debt. The president’s budget proposes $31 billion in savings over 10 years by reducing Medicare’s coverage of bad debts owed hospitals and other facilities.51 Currently, the federal government pays 65 percent of facilities’ bad debts. As far back as 2011, President Obama proposed reducing this to 30 percent. Doing so would not only reduce the burden on taxpayers, it would also force hospitals to be more transparent with respect to communicating prices and payment obligations to Medicare beneficiaries.

Medigap plans. The president also proposes to increase deductibles for new Medicare beneficiaries, instituting a home-health deductible and adding a surcharge to Part B premiums for beneficiaries who buy Medigap (Medicare supplemental) plans. In his budget, these save $8.5 billion over 10 years.52 The problem with Medigap plans is that they fill in beneficiaries’ deductibles and copays, making them insensitive to the total cost of the Medicare services they consume. Discouraging beneficiaries from buying such plans will make them more cost conscious. Although a version of this was included in the Medicare Access and CHIP Reauthorization Act enacted in April 2015, it does not take effect until 2020. An earlier start would save taxpayers’ money faster.

Medicare Part D exclusive pharmacies. The president has proposed allowing Medicare Part D drug plans to use more tools to reduce the abuse of prescription drugs by opioid addicts in Medicare Part D.53 This would reduce fraud, as described in a previously published NCPA proposal.54

Medicaid provider taxes. In his February 2012 budget, President Obama proposed reforms to Medicaid provider taxes. “Provider taxes” are tricks used by hospitals and states to increase their dependence on federal Medicaid money. Hospitals agree to submit to a special “tax” by the state. However, this tax flows into the state Medicaid program, which uses it to get more federal dollars. Therefore, every dollar the hospital is “taxed” actually increases its revenue by more than the tax! If this abuse had been stopped when President Obama proposed his reforms, the savings would have been $22 billion over 10 years.55

Site-neutral payments. This refers to paying the same fee for a procedure, whether done in an ambulatory clinic or hospital. Currently, hospitals are overpaid. For example, a level II echocardiogram costs Medicare $453 in a hospital outpatient facility versus $189 in a freestanding physician office.56   A site-neutral payment rule would pay $189 to all facilities. President Obama’s budget proposes to phase this in starting in 2017, and estimates savings of $29.5 billion over 10 years as a result. 57

Conclusion

King v. Burwell creates an opportunity for Congress to enact small but significant reforms to Obamacare. If enacted fully, these reforms will:

  • Reduce Obamacare incentives for workers to limit their hours and earnings.
  • Give beneficiaries more control of the dollars spent on their health care.
  • Free beneficiaries and taxpayers from the unnecessary and expensive Obamacare exchanges.
  • Reduce health insurance costs and increase the number of choices availabe.
  • Free employers to add hours and hire more workers without fear of being penalized.
  • Reduce the cost to taxpayers of Obamacare, Medicare and Medicaid.

Even if the Supreme Court rules in favor the government and Health and Human Services Secretary Sylvia Mathews Burwell, these reforms would solve some of the problems created by the Affordable Care Act, while helping fulfill the goals of increasing health insurance coverage and reducing costs to consumers, employers and taxpayers.

 

 

Notes

1.  Conor Ryan, “Updated King v. Burwell Impact: Who Loses Subsidies?” Weekly Checkup, American Action Forum, June 4, 2015.

2.  Kaiser Family Foundation, “Health Insurance Marketplace Calculator.” Available at http://kff.org/interactive/subsidy-calculator/.

3.  For a very detailed technical discussion of the effects of all of Obamacare’s labor killing marginal income tax “cliffs” and “notches,” see Casey Mulligan, Side Effects: The Economic Consequences of the Health Reform (Flossmoor, Ill.: JMJ Economics, 2014).

4.  John R. Graham, “Obamacare and Employment,” NCPA Health Policy Blog, National Center for Policy Analysis, September 8, 2014. Available at: http://healthblog.ncpathinktank.org/obamacare-and-employment/.

5.  This is the same model household introduced above: Two 35-year old nonsmoking parents and two children. The distribution is estimated from the distribution of actual Obamacare enrolment by household income in “Health Insurance Marketplaces 2015 Open Enrollment Period: March Enrollment Report,” ASPE Issue Brief, U.S. Department of Health & Human Services, March 10, 2015, page 14.

6.  It is not possible to model a complete distribution of current Obamacare beneficiaries’ household size and income with publicly available data. The administration has released some data on age and income distribution, but not household composition.

7.  Medicare Part B and D means testing imposes “notches” or “cliffs” similar to those under Obamacare; however, it is more important to remove them from Obamacare, because the affected population is earning wages, rather than pension income, and can reduce its work effort in response.

8.  Paul Howard and Yevgeniy Feyman, “Health Savings Accounts Under the Affordable Care Act,” Medical Progress Report No. 18, Manhattan Institute for Policy Research, October 2014.

9.  Robert Graboyes (video), “Why Your Health Plan Was Cancelled: Health Insurance and the Affordable Care Act,” Mercatus Center, September 22, 2014. Available at http://mercatus.org/video/why-your-plan-was-cancelled-health-insurance-and-affordable-care-act.

10.  Edmund F. Haislmaier and Drew Gonshorowski, “Responding to King v. Burwell: Congress’s First Step Should be to Remove Costly Mandate’s Driving Up Premiums,” Issue Brief No. 4400, Heritage Foundation, May 4, 2015.

11.  John R. Graham, “Obamacare Health Plans Shun the Sick More in 2015 than 2014,” NCPA Health Policy Blog, National Center for Policy Analysis. Available at http://healthblog.ncpathinktank.org/obamacare-health-plans-shun-the-sick-more-in-2015-than-2014/.

12.  “Non-Group Health Insurance: Many Insured Americans with High Out-of-Pocket Costs Forgo Needed Health Care, “Families USA, May 2015, page 14.

13.  Sara R. Collins et al., “The Problem of Underinsurance and How Rising Deductibles Will Make It Worse: Findings from the Commonwealth Fund Biennial Health Insurance Survey, 2014,” Commonwealth Fund, May 2015, page 3.

14.  Author’s estimate using data and estimates from “Insurance Coverage Provisions of the Affordable Care Act— CBO’s March 2015 Baseline,” Congressional Budget Office, March 9, 2015, Table 1; Richard S. Foster, “Estimated Financial Effects of the ‘Patient Protection and Affordable Care Act,’ as amended,” Centers for Medicare & Medicaid Services, Office of the Actuary, April 22, 2010, Table 1; Matthew Buettgens and Caitlin Carroll, “Eliminating the Individual Mandate: Effects on Premiums, Coverage, and Uncompensated Care,” Urban Institute, January 2012, page 5; and Angela Boothe and Brittany La Couture, “The ACA’s Risk Spreading Mechanisms: A Primer on Reinsurance, Risk Corridors, and Risk Adjustment,” American Action Forum, January 9, 2015.

15.  Daniel Polsky and Heather Howard, “What Window Shopping the Health Insurance Exchanges in Year Two Revealed About the State of the Consumer Experience,” Issue Brief, Vo. 3, No. 1, February 2015, pages 1-6.

16.  Lena H. Sun and Niraj Chokshi, “Almost half of Obamacare exchanges face financial struggles in the future,” Washington Post, May 1, 2015.

17.  Kristen Consillio, “Ige administration plans to use federal exchange for Obamacare,” Honolulu Star Advertiser, May 13, 2015.

18.  Annie L. Mach and C Stephen Redhead, “Federal Funding for Health Insurance Exchanges,” Congressional Research Service, October 29, 2014, page 2.

19.  Paul Demko, “States struggle to fund Obamacare exchanges in 2015,” Modern Healthcare, June 14, 2014.

20.  Daniel R. Levinson, “Federal Marketplace: Inadequacies in Contract Planning and Procurement,”  OEI-03-14-00230, U.S. Department of Health & Human Services, Office of the Inspector General, January 2015, page 10.

21.  John R. Graham, “eHealth, Inc.: Obamacare’s Biggest Winner Becomes Its Biggest Victim,” Forbes, March 18, 2015.

22.  Christine Magee, “Stride Health Raises $13M To Be The HR Platform For Freelancers,” TechCrunch, May 2, 2015.

23.  “Without Subsidies Women & Men, Old & Young Average Higher Monthly Premiums With Obamacare,” HealthPocket, InfoStat, October 29, 2014.

24.  John R. Graham, “Government Accountability Office Confirms Health Insurance Rating Rules Hike Premiums for Young People,” NCPA Health Policy Blog, National Center for Policy Analysis, August 6, 2013.

25.  “How Will Premiums Change Under the ACA?” American Academy of Actuaries, Issue Brief, May 2013, page 3.

26.  “The Range of Base Premiums in the Individual Market by State in January 2013,” Government Accountability Office, July 23, 2013.

27.  “Rate Regulation,” National Association of Insurance Commissioners & the Center for Insurance Policy and Research, undated. Available at http://www.naic.org/documents/topics_health_insurance_rate_regulation_brief.pdf.

28.  Edmund F. Haislmaier and Drew Gonshorowski, “Responding to King v.; Burwell: Congress’s First Step Should be to Remove Costly Mandate’s Driving Up Premiums,” Issue Brief No. 4400, Heritage Foundation, May 4, 2015.

29.  Justin Giovannelli et al., “Implementing the Affordable Care Act: Revisiting the ACA’s Essential Health Benefits Requirements,” Commonwealth Fund, October 2014.

30.  Edmund F. Haislmaier and Drew Gonshorowski, “Responding to King v.; Burwell: Congress’s First Step Should be to Remove Costly Mandate’s Driving Up Premiums,” Issue Brief No. 4400, Heritage Foundation, May 4, 2015.

31.  Author’s calculations from “Current Population Survey 2012 Annual Social and Economic Supplement,” U.S. Census Bureau, 2012, table HNC-02.

32.  “Health Insurance Marketplaces 2015 Open Enrollment Period: March Enrollment Report,” U.S. Department of Health & Human Services, ASPE Issue Brief, March 10, 2015, page 23.

33.  Health Insurance Marketplaces 2015 Open Enrollment Period: March Enrollment Report,” U.S. Department of Health & Human Services, ASPE Issue Brief, March 10, 2015, page 4.

34.  Linda J. Blumberg, John Holahan and Matthew Buettgens, “Why Not Just Eliminate the Employer Mandate,” Urban Institute, May 2014, page 2.

35.  “Empire State Manufacturing Survey/Business Leaders Survey: Supplemental Survey Report,” Federal Reserve Bank of New York, August 2014.

36.  “Business Outlook Survey,” Federal Reserve Bank of Philadelphia, August 2014.

37.  Casey Mulligan, Side Effects: The Economic Consequences of the Health Reform (Flossmoor, IL: JMJ Economics, 2014).

38.  Linda J. Blumberg, John Holahan and Matthew Buettgens, “Why Not Just Eliminate the Employer Mandate,” Urban Institute, May 2014, page 4.

39.  Brittany La Couture and Douglas Holtz-Eakin, “TaKing Stock: The Potential Impact of King v. Burwell,” American Action Forum, May 13, 2015.

40.  “Payments of Penalties for Being Uninsured Under the Affordable Care Act: 2014 Update,” Congressional Budget Office, June 2014.

41.  Joseph Antos and Michael R. Strain, “Health Care’s New Rules: If You Don’t Buy Insurance, Will You Really Pay the Tax?” The Health Care Blog, July 27, 2012. Available at http://thehealthcareblog.com/blog/2012/07/27/health-cares-new-rules-if-you-dont-buy-insurance-will-you-really-pay-the-tax/.

42.  “March 31 Effectuated Enrollment Snapshot,” Centers for Medicare & Medicaid Services, June 2, 2015.

43.  “2015 OEP: Insight into consumer behavior,” McKinsey & Company, March 2015, page 7.

44.  Matthew Buettgens and Caitlin Carroll, “Eliminating the Individual Mandate: Effects on Premiums, Coverage, and Uncompensated Care,” Urban Institute, January 12, 2012.

45.  “March 31 Effectuated Enrollment Snapshot,” Centers for Medicare & Medicaid Services, June 2, 2015.

46.  John R. Graham, “Economic Growth Improved Health Coverage More Than Obamacare Did,” NCPA Health Policy Blog, National Center for Policy Analysis, May 11, 2015. Available at http://healthblog.ncpathinktank.org/economic-growth-improved-health-coverage-more-than-obamacare-did/.

47.  “Estimate of the Budgetary Effects of S. 40, the American Liberty Restoration Act, as introduced on January 22, 2013,” Congressional Budget Office, March 21, 2014.

48.  “Insurance Coverage Provisions of the Affordable Care Act— CBO’s March 2015 Baseline,” Congressional Budget Office, March 9, 2015.

49.  Douglas W. Elmendorf, “CBO’s Analysis of the Major Health Care Legislation Enacted in March 2010,” testimony before the Subcommittee on Health, U.S. House of Representatives Committee on Energy and Commerce, March 30, 2011.

50.  John Wilkerson, “CBO Says Dynamic Scoring Would Lower the Cost of Repeal,” Inside Healthcare Policy, June 3, 2015.

51.  “Fiscal Year 2016: Budget of the U.S. Government,” Office of Management and Budget, February 2, 2015, page 107.

52.  Ibid.

53.  Ibid.

54.  Devon M. Herrick, “Medicare Drug Plans Need the Tools to Fight Prescription Drug Fraud,” Policy Report No. 359, National Center for Policy Analysis, October 29, 2014.

55.  Fiscal Year 2013: Budget of the U.S. Government,” Office of Management and Budget, February 13, 2013, page 36.

56. “Report to the Congress: Medicare Payment Policy,” Medicare Payment Advisory Commission, March 2014, page 53.

57. “FY 2016 Budget in Brief,” U.S. Department of Health & Human Services, 2015, page 65.