Austin Frakt on the Mandate - Reihan Salam



Thursday, March 25, 2010

Austin Frakt on the Mandate   [Reihan Salam]

Austin Frakt suggests that the mandate will prove more effective than critics anticipate, drawing in part on the Massachusetts experience. 

And finally, nobody has explained why we should ignore the experience in Massachusettswhere guaranteed issue exists and near-universal coverage has been achieved even with low penalties.  Maybe the six month exclusion of coverage for pre-existing conditions in Massachusetts is enough. That could be replicated nationally, though simply raising the penalty would eliminate the adverse selection problem Kling and Caplan point to. Either way, it is conceptually a small tweak to the system. Such a tweak may not be necessary, but if it is at least the structure is in place that can accommodate it. None of this is good reason to condemn that structure.

But how low are the penalties? My reading is that the penalties are considerably more onerous in Massachusetts than under the new federal legislation.  The argument advanced by critics of the mandate is that raising the penalty is not so simple. It is indeed a conceptually small tweak, as Frakt suggests, yet many other conceptually small tweaks are not likely to pass muster on political grounds. 

In a related post, Frakt describes some of Mark Pauly's proposed reforms of the reform legislation. Pauly is one of the health policy scholars I admire most, and his contributions are very insightful. In an article co-authored by Bradley Herring, he proposes a tweak to the tax treatment of employer-provided insurance.

The article outlines a number of the horizontal equity problems, and then offers a possible solution:

Ideally, the subsidy for private insurance should depend explicitly on total family income. Such a program would be described as one in which workers (not employers) pay for coverage, but the employer might arrange for group insurance and collect wage-related taxes and premiums. The current inequitable tax subsidy would be replaced, and the concept of a penalty for companies not offering coverage would be abandoned. The proposed subsidy would instead be inversely related to income, and people would receive the same size subsidy for the same coverage regardless of whether they obtained their insurance through an exchange or their employer. For people with employment-arranged insurance, the premium's value would become taxable income, but the additional tax cost borne by workers would be offset by a progressive income-relatedsubsidy toward the premium, administered as a tax credit either directly to employees or indirectly through employers and exchanges.

If such a system seems too radical, however, two relatively modest changes could be made to the legislation under consideration: we could widen the scope of subsidies for low-income Americans in order to improve horizontal equity, making more low-wage workers eligible for the same subsidy regardless of where they work; and we could cap the tax exclusion for employment-based insurance, perhaps for policies with high actuarial value, for higher-income workers, or both. The resulting tax revenue could be used to help fund the more equitable low-income subsidies. These steps would at least begin to move us in the direction of improved equity.

This approach doesn't address the problem posed by implicit marginal tax rates, but it certainly addresses the horizontal equity problem. 

Imagine if we had just embraced the much cleaner Bush or McCain proposals earlier on, when we still had the chance to avoid these kludgy, opaque compromises. That possibility was foreclosed by political demagoguery. 



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