US Politics Special: A Guide to the Conservative Plan for Health Care Provision

The third installment in our series on the US economy and key debates in American politics this year:

It has certainly been an interesting few days for the future of health care provision in the United States. First, the individual mandate –-- the financial cornerstone of President Obama's policy to reform health care --- was declared unconstitutional. Then the Senate defeated, along party lines in a 51-47 vote, a Republican amendment to a federal aviation reform bill that would have repealed the Patient Protection and Affordable Care Act (PPACA), signed into law in March 2009.

The latest ruling in the courts evened the score at 2-2 for the constitutionality of PPACA. It has raised serious questions about the limits of federal government authority under its enumerated powers to regulate interstate commerce, but this is a legal story that has only just concluded its introductory statements. Although the Supreme Court has the option to order a hearing on the law this year, effectively bypassing the next round of deliberations in the mid-level courts, experts on the Court are predicting they will allow the process to run its full course and take up the case sometime in 2012. That makes for an intruiging election campaign that year. Already the Tea Party are targeting Democrats who, despite reservations with the Act, voted on Wednesday to retain.

The Democrat refrain on the floor of the Senate during the debate was a variation on the theme of Senator Barbara A. Mikulski's (D-Md) challenge to opponents of PPACA: “Republican Party … if you want to repeal, then let's go replace. I want to hear their ideas for a replacement."

A surprising taunt, considering that Rep. Paul Ryan's (D-Wisc) "Roadmap" has detailed the conservative ideas for an alternative future for healthcare in the United States. But it should be remembered that the Roadmap", while popular with the currently energised right wing of Republicans, is not official GOP policy. Ryan's proposals are, to say the least, controversial, and Sen. Mikulski's remarks were more than likely aimed at drawing out Republicans in support of measures which Democrats could then attack in what is turning into an ever-intensifying struggle over healthcare.

Rep. Ryan's basic premise is that the United States' fiscal crisis is so dire that far- reaching reform of entitlement programs must be implemented now: to delay would be disastrous for the next generation of Americans (see Monday's anlaysis). He received support from an unusual corner on Tuesday when Sen. Kent Conrad (D-ND), chairman of the Senate Budget Committee, repeated calls for a summit of leading politicians from both parties in Congress and the President to come up with a long-term plan to reduce the deficit.

In a stark warning to those who are arguing that Social Security is not in trouble or that growth in the economy in the future will eventually cover federal government spending, Sen. Conrad insisted that every part of the budget needs to be appraised and that cuts in the 16% of spending that is not entitlement- or defence-related are insufficient. As he noted in his conclusion, “Some of us are going to have to help the American people understand the unfortunate reality here. And the unfortunate reality is I believe all those things are going to have to be touched, and the sooner we do it the better, because the less draconian the solutions will be later on.”

The suggestions in Rep. Ryan's Roadmap will be on the table if and when a summit as envisioned by Sen. Conrad takes place. Democrats are going to have to allow Republicans to implement some of their proposals if a compromise on the deficit is to be reached.

And it is vital here to remember that Republicans dispute Democrats' contentions that their health care program will cut the deficit. Rep. Ryan's suggestions for health care are likely to be far too bitter a pill for self-respecting Democrats to consider adopting. So, if you are looking to place a bet, tax reform would the favourite option for how the Republican "young gun" would replace APPCA.

Government spending on health care for citizens is primarily conducted through Medicaid and Medicare. Central to the Roadmap's recommendations for reducing the costs of those two government funded programs is a reduction in the price of premiums paid by taxpayers. Ryan believes that his healthcare framework will make the market more competitive; this will then provide the foundation for a leaner and cheaper Medicare and Medicaid both leaner and cheaper without, Ryan stresses, compromising on the range of services offered to recipients.

Ryan's plan to make the market for health insurance more competitive is to eliminate the individual income tax exclusion for employee-sponsored health programs, replacing it with a tax credit that the individual can use to pay for a plan of their choice. Here is the current position:

Consider a worker in the 15 percent bracket who also (in effect) pays a combined (employer and employee) payroll tax of 15.3 percent. If his insurance premium is $1,000, his taxes fall by $303, that is, 30.3 percent (15 percent + 15.3 percent) of $1,000.

The Tax Policy Center explains that this “effective tax subsidy is a major reason why most Americans have health insurance coverage through either their own employer or that of a family member". This third-party arrangement --- the employer intervenes in the relationship between the customer and the insurance provider --- has distorted the market, Ryan contends. The customer is “insulated” from appreciating the true cost of the care they receive. They pay their premium for coverage, and then treatment is "free". It is a situation that has led to the “overuse of healthcare services.” The outcome is the nation spends at least twice as much as any other on health care.

Under Ryan's employer-provided group scheme, individuals will receive a tax credit (Ryan never mentions the politically toxic term "voucher") of $2,300, and a joint-filer or family $5,700. Each person then shops around and find the plan that best suits them. For any plan that costs more than the tax credit, the individual pays the difference; if the plan costs less, the money is put into a Health Savings Account which pays for treatment that has a deductible for any special treatment, e.g., for a broken leg.

Ryan asserts that competition for those millions of $2,300 tax credits will lead to insurers cutting their prices to attract customers. Insurers will then put pressure on the medical services providers to cut their prices. Hospitals then eliminate as much waste from their overall operations as possible, and the cost of health care plummets.

I am sure I am not alone in imagining the beginnings of a two-tier system of health care provision in this proposal. The use of the term "overuse of health care services" in the Road Map raises worries. However, Rep. Ryan tries to address concerns that the lower paid will suffer under his system. He insists that every American will receive coverage equivalent to that provided for members of Congress under the Federal Employee Health Program (FEHP), even mandating that all plans offered by insurers must meet those standards.

Ryan also tries to meet the concerns with the set-up of the tax credit. It refundable, which means that even Americans who do not have a tax liability will get it. It is advanceable, enabling customers to pay their health insurance up-front at the beginning of the year. The credit is also assignable: with the money paid straight to the government-approved insurer with the balance either refunded or billed straight to the customer.

For Ryan the idea has the benefit of being portable. Employees are no longer tied to a particular job, or job search, because of worries about affording health insurance. And for those who prefer to participate in their employer scheme, companies will continue to receive the deduction against their business expenses. Rep. Ryan also intends to expand the options for small businesses by creating Association Help Plans. Under these AHPs, a company with a few employees would join similar sized businesses –-- thus becoming a mega-company in negotiations with insurers –-- in a federally regulated national scheme to offer coverage to employees.

The Roadmap also calls for interstate-purchasing: customers can buy any plan they deem best from any company in the United States. Likewise it encourages insurers to expand their markets by attracting customers from any State. Insurers must, be registered with each State-Based Health Exchange, and offer annual open enrolment periods when they are prohibited from discriminating against those with pre-existing conditions. States will also be responsible for High Risk Pools, helping low-income individuals with direct assistance with their premium payments and assisting, through cost-sharing, those with high costs resulting from a medical condition by cost-sharing.

Last year, income tax exclusions for employee-provided schemes cost $155 billion. Ryan's tax credit scheme --- unless my maths is incorrect --- means that only 70 million Americans need to claim it, and it will cost more than current arragements. Not a way then to cut the deficit. However, it does increase competition in the market for health insurance, which Rep. Ryan believes will lower the prices of premiums, and medical treatment in general.

And that will be the argument to bear in mind in our next feature: a look at Medicare and Medicaid.