Ending the Health Care Standoff the Right Way?

By Larry Kotlikoff and Vikram Mansharamani

Supreme Court demonstration; photo by Kris Connor/Getty ImagesOpponents of the Affordable Care Act protest the Supreme Court’s June 2012 decision upholding the law. Shutting down the government isn’t the right way to ditch the law, Larry Kotlikoff and Vikram Mansharamani argue. Photo courtesy of Kris Connor/Getty Images.

Larry Kotlikoff, who writes our Social Security question-and-answer column every Monday, has also been known to share his political opinions on this page when proposing alternative public policy plans. Most recently, he advocated a form of “generational accounting” to narrow the fiscal gap and save the United States from the fiscal fate of Detroit. He’s the author of “The Healthcare Fix”, and today joins forces with Harvard Kennedy School’s Vikram Mansharamani, author of “Boombustology: Spotting Financial Bubbles Before They Burst,” to explain what’s wrong with President Obama’s health reform law and propose an alternative. After they’ve had their say, Paul Solman responds.

The Chinese media is now reporting the Middle Kingdom’s growing angst over America’s political gridlock and the risk it poses for default on U.S. debt. Explicit default remains remote. But implicit default — paying back our debt in watered-down dollars — grows more likely every day.

Fiscally dysfunctional governments end up making money the old fashioned way — by printing it. And these days, Uncle Sam, with the help of its “independent” central bank and the benign sounding words “quantitative easing,” is printing 30 cents of every dollar he spends.

If our country’s largest creditor, China, should wake up to how much money we’re printing and start dumping its $1.3 trillion portfolio of U.S. Treasuries, politics as usual could have real economic costs.

Our country’s political food fight would be less depressing were its tea partyers able to articulate real problems with their bête noir — the Affordable Care Act. Instead, they simply proclaim this law, which provides health insurance to tens of million Americans, including 8 million children, the end of Western civilization.

What’s in the tea these guys are drinking?

Who knows? But what we do know is that the Affordable Care Act, like our other health care programs — Medicare, Medicaid and employer-based health care — is terribly designed and could do real damage to the economy.

The answer, though, is not killing the health care law and all other government involvement in health insurance and relying on private insurance companies to stop cherry-picking the healthy and telling the rest of us to get lost. The answer and, indeed, the only real way out of today’s political morass and fiscal nightmare, is to fix things from scratch.

Doing so is far easier than it seems. But before going there, let’s consider the true problems with the health care law.

First, low and middle-income earners enrolled in the health exchanges will face an additional 20 to 27 cent tax on every extra dollar they earn. Come again?

Well, the government provides very large subsidies for participating in the health exchanges. But these subsidies are phased out over a very wide range of incomes — from roughly $25,000 to $94,000 for a family of four. And the phase-out involves losing from 20 to 27 cents in your subsidy for every dollar you earn. This extra tax will hit workers who earn more in two ways: a reduced tax credit and an increase in the premiums they are required to pay for their plan.

If you add together all the marginal taxes low and middle-income earners already face (the Federal Insurance Contribution Act (FICA) taxes, federal income taxes, state income taxes and state sales taxes), you find that the Affordable Care Act puts the vast majority of American workers into a roughly 60 percent tax bracket. You don’t have to be a right-wing supply-side nut to realize tax rates this high can affect work decisions.

Second, employers with 50 or more employees have a very large incentive to shut down their health insurance plans, pay the $2,000 fine for not covering their employees and send their employees to the health exchanges where most of them will collect the health insurance subsidies.

A family of four making $35,000 will get a subsidy somewhere north of $8,000. So the employer loses $2,000 and his employee picks up $8,000. That’s a $6,000 difference that can be shared between these two parties. And $6,000 is almost one fifth of the worker’s pay. The Affordable Care Act will, over time, produce a massive elimination of employer-based health care. This is not necessarily a bad thing, but it will happen at an unaffordable cost.

Massachusetts, which has been running a form of the Affordable Care Act for several years, hasn’t seen employers shut down health plans. But it’s much easier for a big company, like IBM, to shut down its health plan nationwide than in just one state. IBM, by the way, was the first company to kill off its defined benefit plan, leading virtually all of corporate America to follow suit.

Third, SMEs (small- and medium-sized employers) face a significant disincentive to hiring more employees — hardly a welcome development in this time of economic malaise and lackluster growth. In particular, businesses with 50 or more employees must provide health insurance or, as we just noted, pay fines of $2,000 per employee. Given that SMEs are among the very few employers that regularly create jobs for the economy, why raise the cost of growth?

We’re not raising this concern out of the blue. According to consulting firm Mercer, one in 10 employers, and one in five in the food service and hospitality sectors, say they will reduce full-time staff and reduce hours as a direct result of the health reform law.

Given these very serious concerns with the Affordable Care Act and the fact that there is no reliable cost containment system in place for Medicare, Medicaid or employer-provided health care (with the costs arising from the tax breaks to employer-paid health insurance), it’s no wonder that health care is driving our country nuts.

The answer is not shuttering government. The answer is an agreement by both parties to redesign the entire health care system from scratch. The Purple Health Plan, which has been endorsed by five Nobel laureates in economics, provides the right template. It scraps President Obama’s health care law, Medicare, Medicaid and employer-based health care. In their place, it provides every American each year with a voucher to buy in full a uniform basic health insurance policy. The size of one’s voucher would be increased to account for the risk of one’s pre-existing conditions, as determined from electronic medical records.

Making all insurers provide an identical policy would turn basic health insurance into a basic commodity (think of apples) and would ensure a highly competitive market. To impose budget discipline, a panel of doctors would decide what is and isn’t covered by the basic plan so that the vouchers, which are set at each person’s expected cost of coverage set by the panel, do not, in total, exceed 10 percent of GDP.

Those who can afford it would buy supplemental plans to cover what’s not included in the basic plan. But 10 percent of GDP can provide excellent basic coverage for the American population. Germany, by comparison, spends 11 percent of GDP on all of its health care.

Calculating data in the Congressional Budget Office’s Alternative Fiscal Scenario reveals that federal health expenditures are now at 10 percent of GDP but will grow to 20 percent. By strictly keeping expenditures at the current level we can
avoid much of the truly horrifying fiscal and financial crisis that will otherwise accompany the baby boomer’s retirement.

Our bottom line? When people go nuts, as the tea party member of Congress are going, there is usually a reason. Rather than continuing with babble battles, it’s time to admit that the health care system we’ve constructed, ACA included, is an unaffordable, inefficient mess. The path ahead is the Purple Health Plan, which, as its name implies, equally mixes the interests of the reds and the blues.

Paul Solman: Larry Kotlikoff and Vikram Mansharamani are much-respected friends of mine, the former a weekly contributor to this page, penning a weekly Social Security Q+A column every Monday; the latter, the protagonist in a Making Sen$e story on the Chinese economy and financial bubbles. But friendship — or esteem, or even gratitude — does not compel accord.

My friends make three stunning assertions: that the U.S. is engaging in “implicit default” by “watering down” the dollar; that China may “wake up” and dump its U.S. IOUs on an unsuspecting bond market; and that “we know the health care law is terribly designed.”

First of all, to call a diminution of the dollar’s value “implicit default” is — how to put this? — extravagant. Were it an accurate description, then virtually every currency in the history of money has “implicitly defaulted.” “Watered-down dollars” are nothing more than dollars experiencing inflation. How about “watered-down pounds” or “watered-down rupee” or “watered-down denarii” — the Roman coins that lost almost all their silver content over the course of the Empire?

It’s true: inflation sometimes spells doom for an economy. But that’s when it’s running in double-digits per month, or per day. What is the inflation rate of the U.S. dollar at the moment? 1.5 percent a year.

Look, markets can be irrational in the short run, as Vikram has chronicled in his book “Boombustology,” but how often are they long-term lunatic? If inflation were a clear and future danger in America today, wouldn’t investors demand to be compensated for it? How could the U.S. government borrow money for 10 years at a rate of 2.64 percent, as it is now? If “implicit default” were in the offing, wouldn’t investors be deathly afraid of getting back their money, a decade from now, in dollars that had depreciated by a lot more than 2.64 percent a year? Would they not, therefore, insist on a much higher interest rate?

As for the threat of drowsy China “waking up” and dumping its trillion-dollars-plus-worth of U.S. bonds, I wouldn’t worry too terribly. To update an old saying, if you borrow a thousand dollars from a creditor, you owe him; but if you borrow a trillion, you own him. Were China to flood the bond market with a noticeable portion of its U.S. debt holdings, U.S. debt would plummet in value. That’s because no one wants to buy bonds paying 2.64 percent a year for 10 years, and not a penny more, when the biggest holder of such bonds is unloading them. To attract buyers of the new bonds the U.S. is regularly obliged to issue because of our deficits, Uncle Sam will be forced to pay a more attractive, which is to say higher, interest rate.

But if the U.S. interest rate rises and the value of the old bonds drops, whom would it cost? The old bondholders, of course, of whom China is the most conspicuous. So China dumping U.S. bonds is not unlike the world’s foremost collector of some artist being suddenly forced to put all the work on the market at once. That’s often called a “fire sale” because of the bargain sale prices that ensue. You only run one if you have to.

The main thrust of the Kotlikoff/Mansharamani argument, though, is that “we know that the Affordable Care Act, like our other health care programs — Medicare, Medicaid and employer-based health care — is terribly designed and could do real damage to the economy.”

Larry and I have had a basic and public disagreement about policy for awhile. It was last about Social Security, but in re-reading what I wrote back then, I think it’s worth reiterating some of what I wrote, only this time with respect to health care.
Like every other piece of complex policy in a complex, highly politicized economy, health care policy has evolved in ways that are often confusing — bedeviling, even. Like the tax code. Like the criminal justice code. Like the Dodd-Frank financial reform act. Ever look at a compliance guide for the Americans with Disabilities Act?

To put it plainly, we’re a nation of laws and rights. They’re constantly changing with changing times, changing mores, changing technology. In the process, they become more fine-tuned, more complicated, more Byzantine even and, as a result, often more infuriating.

There’s this fantasy that laws and policy can be made simple. But tell that to your neighbor when she contests your right-of-way. Tell it to the inmates at Guantanamo or to Julian Assange. Tell it to someone whose baby has been poisoned by lead paint from an unregulated toy made in China. Tell it to the stockholders of a corporation that’s gone bankrupt by making deals it never publicly revealed. Sure, ours can seem like an ‘overly litigious’ society. But is there so much litigation in this country because our laws are so complicated? Might it not be that our laws are so complicated because of all the litigation, all the insistence on our widely heralded competitive advantage, “the rule of law”?

Our economy is increasingly unequal. Yet we are committed to equal health care for all. Or, at least, to health care as equal as we can reasonably make it without trying to prohibit those who are better off from buying better care. That makes for all sorts of complicated cross-subsidizing.

Ours is also a representative democracy is which money increasingly influences who gets to do the representing. That makes for all sorts of effective lobbying by entrenched interest groups like drug and insurance companies and, of course, medical providers like doctors and hospitals, to protect their interests.

I’m sure there’s plenty that’s theoretically problematic with the Affordable Care Act. My strong suspicion is that the same would be true of the Purple Health Plan, or whatever bastardized version of it might conceivably get through the American political process.

Paul Solman explored Massachusett’s health exchange model in last week’s Making Sen$e segment.

This entry is cross-posted on the Rundown — NewsHour’s blog of news and insight.