Michael Dorf: Why Obamacare Repeal Has Run Into the Sand

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Doctor Ivan Mendoza, left, an associate medical director for the Jackson Medical Group’s cardiology practice, with his 78-year-old patient, Felipe Finale, at Miami’s Jackson South Community Hospital, where he speaks about successfully implanting the world's smallest pacemaker into Finale’s heart on September 8. Michael Dorf writes that despite GOP agreement on the broad outlines of the terrible replacement plan for the ACA, Republicans remain divided on a key issue: how to disguise the meager subsidies they do plan to provide as something other than subsidies. Joe Raedle/Getty

This article first appeared on the Dorf on Law site.

Republicans in Congress are apparently divided over how to replace the Affordable Care Act (ACA), but they appear united on two crucial points about its repeal.

First, they want to reduce subsidies for the purchase of health care so that they can cut taxes for the businesses and individuals whose taxes were increased in order to finance those subsidies. (A useful summary of the tax elements of the ACA can be found here.)

Second, Republicans want to repeal the individual mandate for people who do not obtain health insurance through their employer or one of the government programs (chiefly Medicare, Medicaid, or Veterans Affairs) to purchase health insurance via the ACA-created exchanges or the largely unregulated market that will likely replace the exchanges.

Both alone and in combination, these core commitments of the "repeal" aspect of "repeal and replace" will make health insurance substantially less affordable and comprehensive.

To balance the tax cuts with spending cuts, Congress will make less money available for subsidies, which will mean fewer people will be able to purchase health insurance at all, and the people who are able to purchase health insurance will receive inferior coverage with high deductibles, low caps and so forth.

For his part, President "nobody knew health care could be so complicated" Trump, who has not exactly been focused like a laser beam on the details of repeal and replace, has suggested that subsidies would not be lowered by the tax cuts because his low-tax and deregulatory policies will have such an enormously stimulating impact on the economy that tax revenue will remain constant or even increase despite the lower rates.

Almost nobody on Capitol Hill takes that claim seriously, however, and if you do, I have a Laffer curve–shaped bridge I would be happy to sell you.

The other GOP article of faith seems calculated to destroy the individual health insurance market. Recall that the individual mandate is the lynchpin of that system under the ACA, because without it, insufficient numbers of young and healthy people will sign up for health insurance.

Why not? Because the most popular element of Obamacare (which many Republicans themselves claim they want to retain) forbids insurers from screening out likely high-cost enrollees based on preexisting medical conditions.

Retaining that prohibition without the individual mandate enables the young and healthy to go uninsured unless and until they need health care—at which point they can simply sign up. And that in turn starves the insurers of adequate funds to cover costs. Hence, the individual market following repeal would likely look much like it did before the ACA: very expensive and inadequate coverage, in some places supplemented by grossly underfunded "high-risk pools."

Thus, the "repeal" half of repeal and replace would more or less return the U.S. health insurance individual marketplace to the status quo prior to the ACA. Combined with likely GOP cuts to and/or block-granting of funds for the ACA's Medicaid expansion, that would mean millions of Americans would lose the health insurance they gained under the ACA.

Related: Michael Dorf : Trump's Toxic Mix of Incompetence and Malevolence

But wait! We haven't even talked about the "replace" half. Would the replacement do better? The short answer is, "How much are you paying me for that Laffer curve–shaped bridge?" The longer answer is that a debate is shaping up within the GOP over how regressive to make the distribution of the grossly inadequate replacement plan. Still, as with the key parts of "repeal," there seems to be pretty broad agreement about the basics of "replace."

States that already administer Medicaid would be given still greater flexibility by Congress converting various funding streams with strings attached into block grants.

In principle, that would not be disastrous, but because, as noted above, one key aim of the GOP plan is to reduce taxes, substantially fewer dollars would end up going to the states under the block grants, and in many states, Republican- elected officials might divert block-granted funds that do end up making it into the state treasury from the poor and working poor who presently receive Medicaid to programs that benefit more powerful constituencies.

Meanwhile, people who are currently eligible to purchase health insurance on the ACA exchanges would be given a cash subsidy instead. In some variants of the "replace" plans that have been discussed, these extra funds would be used to purchase health care directly through medical savings accounts. In other variants, the funds would be used to purchase health insurance from a further deregulated market.

As with Medicaid, this sounds plausible in principle, but two practical considerations doom the plans. First, given the tax cuts, the subsidies will surely be too small for most of the relevant people to purchase adequate health care or health insurance.

Second, although consumer choice in competitive markets is, in most contexts, an excellent way of delivering goods and services, health care and health insurance are different due to the highly asymmetric information between sellers (whether health care providers or insurance companies) and buyers. Thus, no matter how the subsidies in the ACA replacement legislation are distributed, they will result in less widespread and inferior health care.

Despite GOP agreement on the broad outlines of the terrible replacement plan for the ACA, Republicans remain divided on a key issue: how to disguise the meager subsidies they do plan to provide as something other than subsidies. Given Republican orthodoxy about the evils of government spending, all of the plans under discussion rely on the pretense that there is a difference between giving someone a certain amount of money and cutting his or her taxes by the same amount of money. There is no economic difference with respect to any particular individual, of course, but the three leading approaches have different distributional consequences.

The least awful plan—apparently supported by a majority of Republicans in Congress—would give eligible people "refundable tax credits." What is that?

If the term is unfamiliar, it can be usefully illustrated by contrasting it with a nonrefundable tax credit. Suppose that after filling out her tax return, a taxpayer owes the government $5,000. A nonrefundable tax credit of $2,000 would simply mean that she pays $3,000 instead. This is obviously no different in economic terms from her paying the $5,000 and receiving the $2,000 back as a check.

There can be good reasons for using a tax credit instead of a subsidy to provide the money: It eliminates an unnecessary transaction and can smooth out the availability of the money. There can also be a not-so-good reason: A tax credit can be described to the gullible public as a "tax cut" rather than as "spending.”

Unlike a nonrefundable tax credit, which goes to anyone who would otherwise have tax liability in excess of the amount of the credit, a refundable tax credit goes to people who do not have enough (or any) tax liability against which it is offset.

For example, a refundable tax credit of $2,000 to a person who would otherwise have tax liability of $1,000 means that instead of paying $1,000 to the government, the taxpayer receives a check for $1,000. A refundable tax credit of $2,000 to someone who already has no tax liability results in a check to that person in the amount of $2,000.

If one thought subsidies to taxpayers were a good way to address some social problem, refundable tax credits could be a sensible way of delivering the subsidies. Because people with lower income generally have greater need, one might want to decrease the size of the credit based on income, but at least from what has thus far been discussed, it appears that the refundable tax credits under consideration by Republicans in Congress are age-based rather than income-based. Just as a flat tax is not progressive, a non-means-tested refundable tax credit is also not progressive. But at least it isn't regressive.

That's more than can be said for the other two options under consideration. Apparently some of the hard-core conservatives in Congress oppose refundable tax credits because they are an "entitlement program." That's true, but if so, then the preferred options of these conservatives are also entitlement programs—just regressive ones.

It has been reported that some of the far-right conservatives in Congress who oppose refundable tax credits might accept nonrefundable tax credits. An illustration reveals why this would be inadequate as well as regressive.

In states that participated in the Medicaid expansion of the ACA, a single adult can earn up to 138 percent of the poverty line and be eligible for Medicaid. In 2017, the poverty line for such a person is annual income of $12,060. 138 percent of that is $16, 643.

Let's suppose that Jim earns $17,000 annually and is thus not eligible for expanded Medicaid. Under the current tax law, Jim would owe 10 percent income tax on the first $9,275 of taxable income. Assuming Jim doesn't itemize his deductions, with $17,000 in gross income, his taxable income would be $6,650. (That's the $17,000 minus a personal exemption of $4,050 and a standard deduction of 6,300.)

So Jim has a federal income-tax liability of $665. If Jim can only receive a nonrefundable tax credit but not a refundable tax credit, it means that the maximum subsidy for which Jim would be eligible to purchase health care or health insurance is $665. That's less than one-third of the price of the cheapest, lowest-coverage plan available. And that's for someone at the top of the Medicaid expansion.

For people in states without Medicaid expansion (or if the "repeal" portion of repeal and replace rolls back Medicaid expansion), the maximum available subsidy from an ordinary tax credit will be close to or at zero.

Some economic libertarians in Congress would prefer an even more regressive approach. Thus, members of the House's Freedom Caucus—the brave patriots and macroeconomic geniuses who brought us the debt-ceiling crisis of the Obama years—back a plan that would replace Obamacare with a $5,000 deduction for the purchase of health insurance.

Very low earners would derive no value whatsoever from that provision because they don't need more deductions against their nonexistent taxable income. Meanwhile, the more one makes, the more valuable the deduction, since the progressivity of the income tax code's tax brackets translates into regressively for tax deductions.

So there you have it. The "replace" part of repeal and replace will be grossly inadequate and backward in its distributions. The only real question is how grossly inadequate and backward it will be. And to be clear, this is mainstream Republican cruelty. It is what the GOP would have done even with a normal Republican president.

Michael C. Dorf is the Robert S. Stevens professor of law at Cornell University. He blogs at dorfonlaw.org.