Flaws in the Senate GOP’s Obamacare replacement

Sens. Orrin Hatch of Utah, Richard Burr of North Carolina, and Tom Coburn of Oklahoma have introduced a health-care reform plan — the Patient CARE Act — that some have hailed as the definitive “Republican alternative” to Obamacare.

Unfortunately, their proposal has several flaws that limit its appeal.

First, it includes a tax hike of $1.5 trillion over 10 years, in return for a tax credit. The problem is that very few people will get to take advantage of it. Second, it would significantly increase the marginal income-tax rate many people pay, especially those in their prime earning years. And third, it proposes new regulations to solve the problem of insuring people with preexisting conditions — but the regulations would actually incentivize insurers to design plans that do the opposite: attract healthy people and repel sick ones.

Ever since World War II, when temporary price controls were imposed on wages and salaries, employer-provided health benefits have been excluded from taxable income. This is why most Americans get health insurance from their employers.

The three senators recognize that this has caused serious problems. But they don’t really fix them.

Instead, their proposal would merely reduce the value of the existing tax benefit, excluding 65 percent of the cost of employer-provided health benefits from taxation, while taxing 35 percent. If the proposed law had been in effect last year, a family of four would have seen its taxable income increase about $5,773 last year.

Relying on studies from the Congressional Budget Office, Congress’s Joint Committee on Taxation, and the Center for Health and Economy, a think tank, I estimate that this change would have increased income-tax revenue by about $126 billion last year, money that could have been used to expand insurance coverage to uninsured, low-income citizens.

As a proposed tradeoff for the higher taxes, the Patient CARE Act would offer tax credits. But the tax credits would be available only to households earning less than 300 percent of the federal poverty level who work for firms with 100 or fewer employees. These two conditions would limit the number of eligible beneficiaries to about 30 million.

In 2013, a family with two children and two adults over the age of 50 whose primary breadwinner earned up to $47,000 could have received a tax credit of $8,810 for qualifying health insurance. The $8,810 subsidy would decline in a straight line, falling to zero at $70,000.

In addition to income, subsidies also would be pegged to age — with younger, presumably healthier, people receiving a smaller subsidy than older, presumably less-healthy, people. For a family headed by an individual in the 18-34 age range, the maximum annual subsidy would be $3,400. For a family whose head is between age 35 and 49, the maximum would be $6,610. For a family whose head is between age 50 and 64, the maximum would be $8,810.

When you do the math, what you find is that the proposed subsidy regime would impose extraordinarily high marginal tax rates on many individuals and families, providing disincentives for some families — especially older ones — to earn more.