When Politico reported that the House Freedom Caucus, an influential group of House conservatives, was considering whether to give its official endorsement to Sen. Rand Paul’s Obamacare Replacement Act (S. 222) I was excited. I’ve always been a fan of Rand Paul. But then we looked at it and discovered that it’s got a lot of problems.
First and foremost, it doesn’t repeal most of Obamacare. Yes, it repeals almost all of the law’s major mandates … the individual and employer mandates to obtain insurance, the guaranteed issue to those with pre-existing conditions, the community rating regulations, the essential health benefits, and various other insurance mandates that work to raise premiums.
Still, the bill doesn’t repeal Obamacare’s new entitlements – the subsides for exchange health insurance and the massive Medicaid expansion to the able-bodied and gainfully-employed, leaving in place nearly $2 trillion in spending over the coming decade. It doesn’t repeal any of the Obamacare taxes used to fund the spending, except those associated with the individual and employer mandates.
It has some similarities to the reconciliation bill that Congress passed, but President Obama vetoed, in 2016. That bill would have repealed the law’s entitlements (after two years), and its tax increases (effective immediately), but not its regulations. Paul’s office might argue that his bill repeals the critical portions of Obamacare not included in last year’s reconciliation bill—the major insurance regulations—while providing a replacement vision to go beyond repeal.
But that position assumes last year’s reconciliation bill will be the starting point for this year’s discussion—and it doesn’t appear to be right now. Politico reported that Republicans were having difficulty figuring out how to square Medicaid reform with Obamacare’s massive Medicaid expansion. Likewise, some Republicans have discussed not repealing the law’s tax hikes. The Paul bill repeals the individual and employer mandates, even though last year’s reconciliation measure also effectively repealed them, but it doesn’t repeal all the other tax hikes and spending increases. Why not? Perhaps it’s because his home state expanded Medicaid to the able-bodied under Obamacare and the leadership there wants to avoid taking a position on whether to keep that expansion.
The Paul bill does provide tax credits for health coverage, but largely of the non-refundable kind, which is an important difference. Paul’s bill provides a $5,000 tax credit to individuals who contribute to Health Savings Accounts (HSAs), but only to the extent such individuals have income tax liability. The Paul bill also includes a refundable tax credit for health insurance premiums, but the refundable portion of the credit only applies up to the limit of an individual’s paid payroll taxes.
Many Republican health reform plans would offer refundable tax credits to individuals in excess of tax liabilities, which represents pure welfare spending—the government issuing “refunds” to people with no net income or payroll tax obligations. By contrast, the Paul bill would ensure that credits only apply to individuals with actual payroll and income tax obligations.
This critically important distinction will likely be lost on many members of the press — not to mention the public. I can see the headlines now. “House Freedom Caucus Endorses Tax Credits.” Having endorsed tax credits once, the pressure on Freedom Caucus members to then go further and endorse the House leadership plan for refundable tax credits will be immense. Put simply, the slippery slope to endorsing a major spending package in the form of refundable tax credits starts with the Paul bill.
While the Paul bill includes no outlay spending—its incentives all come via tax cuts—those incentives are numerous, and costly. The legislation would supplement the current, uncapped exclusion on employer-provided health insurance with a new, uncapped deduction for individual-provided health insurance. It would eliminate contribution limits to HSAs, and introduce a new federal subsidy (via the tax credits) of up to $5,000 for HSA contributions.
Apart from the direct fiscal implications of the tax incentives, economists on all sides of the political spectrum believe that the current uncapped exclusion for employer-provided health insurance encourages over-consumption of health insurance, and thus health care. Instead of reining in this tax incentive as one element of pro-growth tax reform, Paul’s bill goes in the other direction, creating two new uncapped tax incentives for health insurance.
As a medical doctor, Paul has shown little inclination to rein in health care spending. He voted for budget-busting Medicare physician payment legislation in 2015 that raised the deficit by more than $140 billion in its first decade alone, while failing to solve the long-term problems it purported to address. He has also previously proposed budgets that included minimal savings to Medicare, despite long-running deficits within Medicare.
Health care already consumes nearly one-fifth of our economy. With our national debt approaching $20 trillion it doesn’t seem that solution really lies in creating new, uncapped incentives for tax-free spending on health care and health insurance.
While ostensibly promoting market-oriented solutions, the legislation contains several strategic trip-wires that could contaminate any attempt to repeal Obamacare, or enact a conservative alternative.