A Bipartisan “Yes” On A Health Care Tax Credit

health-insurance(A version of this Health Alert was published by RealClearHealth.)

Ready for some good news on health reform? Both the presumptive Democratic candidate for President and the Republican majority in the U.S. House of Representatives agree people should be able to spend more money directly on medical care without insurance companies meddling.

Both sides would be shocked to have their respective health reforms described as sharing any common ground. However, identifying this common ground might be necessary if either side wants to fix the worst aspects of Obamacare.

If Republican politicians in Congress want to give people any relief from the burden of Obamacare, they need to be prepared for the possibility they will have to deal with Hillary Clinton’s White House next year.

Speaker Ryan’s recently released Better Way health reform plan would offer a refundable tax credit for health care, to anyone who does not have employer-based health benefits. This tax credit would increase with age, but be available regardless of income. It would be a fixed-dollar amount for each age bracket. This is superior to Obamacare for at least two reasons.

First, as a fixed-dollar amount, instead of a proportion of premium (as under Obamacare), the tax credit would reduce insurers’ incentives to increase premiums to lay even more health costs on taxpayers (which they appear to have done under Obamacare). If a beneficiary’s premium is lower than the amount of the tax credit, the balance can be spent on out-of-pocket health costs (through a Health Savings Account).

Second, it would reduce the job-killing effect of Obamacare’s tax credit. Notches and cliffs are terms used to describe the effect of large changes in tax rates over small ranges of income. In a study I wrote in 2015, I described Obamacare’s terrible notches and cliffs. A family of four, with two 35-year-old (nonsmoking) parents and two children, earning household income of $31,270, received a tax credit of $8,987 to reduce its Obamacare premium. However, if that family’s income went up by just one dollar, its tax credit would have dropped $319. That is an effective marginal income tax rate of $32,000!

The net effect of the increase in income and the decrease in tax credit would not balance until the household income reached $32,097 (at which point the increase in both income and premium is $359). Few would seek to work more hours if it resulted in no net increase in take-home pay. This perverse effect riddles Obamacare’s tax credits all the way up to the income cut-off. It may be the most important reason for the stagnation of work among hourly employees.

The House Republican plan would get rid of this problem. However, with some massaging, Hillary Clinton’s proposed tax credit would have a similarly beneficial effect. Clinton would offer a tax credit of up to $5,000 per family ($2,500 per individual) for out-of-pocket costs exceeding five percent of income. Like the House Republicans, she offers a fixed-dollar tax credit (although it is a maximum, limited by out-of-pocket costs). Although Clinton’s tax credit would adjust with income, it would adjust at a flat rate of five percent. Effectively, this imposes a flat-rate tax, which would not impose an incentive on recipients to decline more work.

The House Republican tax credit would be instead of Obamacare’s current tax credit. Clinton’s tax credit would be added to Obamacare’s tax credit. Adding more costs should be a non-starter. Plus, she would pay for it by hiking other taxes and imposing price controls on medicines that would likely cause capital to flee the research-based pharmaceutical industry.

Nevertheless, the tax credit is a big conceptual step forward for Hillary Clinton. In March, the Congressional Budget Office estimated subsidies in Obamacare’s exchanges would be $902 billion over the next ten years. However, only 14 percent of this will cut patients’ out-of-pocket costs and even that is processed through insurers, adding administrative costs.

Both House Republicans and Hillary Clinton agree (at least some) of the tax credits subsidizing health care should be spent by patients directly, instead of flowing through insurers. They also agree tax credits should be structured to minimize disincentives to work. House Republicans should never increase Obamacare spending. However, if they could agree with a future President Clinton to restructure the current tax credits so they phase out at a flat rate, and allow patients to use them for out-of-pocket costs as well as premiums, that would be a significantly positive reform to Obamacare.

Comments (30)

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  1. Ron Greiner says:

    How can you twist these 2 proposals into a “Bipartisan YES”?

  2. jimbino says:

    Just imagine that you, a 20-yr-old male, put your monthly Obamacare premium into the S&P 500 for the following 45 years. You will emerge some $5,000,000 richer at age 65, assuming you paid cash for your health care. If you did that for SS and Medicare monthly FICA taxes too, you would have more than $15,000,000 in the bank at age 65.

  3. Lee Benham says:

    Great ideas! Now what will people buy with the tax credits? Obamacare has already destroyed the individual market. As long as the Obamacare mandates of minimum. Coverage exists there will be less and less options and affordability. Give me my tax credit and I’ll buy a $100,000 indemnity product and bank the Differance

  4. Lee Benham says:

    Hillary Clinton’s proposed tax credit would have a similarly beneficial effect. Clinton would offer a tax credit of up to $5,000 per family ($2,500 per individual) for out-of-pocket costs exceeding five percent of income.

    How many families only have 2 individuals? Oh ya I forgot Hillary wants all kids on the Medicaid nipple.

  5. Bart I says:

    Sounds like most people would never see a dime of Hillary’s tax credit. Unless premiums count as out-of-pocket costs, how many of us have costs in excess of five percent of income?

    I gather that everyone has now given up on the idea of individual underwriting. I would rather see a diverse ecosystem of approaches to medical insurance, but shelving underwriting allows for progress in other areas, such as tax credits.

    • Ron Greiner says:

      Bart, you say, “but shelving underwriting allows for progress in other areas, such as tax credits.”

      Correct, GOD would never allow tax credits in a world where there is medical underwriting. So, we better get rid of medical underwriting in life insurance too for extreme progress.

      Bart, those GODLESS Republicans want tax credits and bring back medical underwriting for health insurance. I hope so because I just love cherry picking those healthy people and giving them low low premiums.

      • Bart I says:

        I’m in favor of underwriting as one way of making medical insurance available. But isn’t the purpose of underwriting to get people to pay their own way? If the premiums are “low low” then there’s really no need for taxpayers to chip in, is there?

  6. Bob Hertz says:

    Most ACA plans have an out of pocket limit of around $6500. The proposed Clinton tax credit would help out with $2500 in many circumstances.

    Of course, a person with no savings or no HSA is just as broke with a $4000 debt as with a $6500 debt. But the Democrats get to seem more bountiful.

    Coverage gaps can be a serious matter, though. Yet Medicare has had no out of pocket limit whatsoever for 51 years, and one meets very few seniors with serious medical debt problems. (Long term care is another story.)

    Most middle and upper class seniors have Medigap coverage, and the poorest seniors get help from Medicaid with their out of pocket costs.

    There are not too many gap policies out there for persons under 65. I saw one from United Health that paid $1000 a day for 30 days, and cost about $30 a month.

    But you had to have an ACA policy to buy the supplement.

    And, pre-existing conditions would cause a claim to be denied. My experience with this kind of policy is that (unlike Medigap) there are a lot of declined claims.

  7. Don Levit says:

    Check out the HMA video on national prosperity.com
    Click on HMA and the first box is HMA videos
    Pre existing conditions covered
    Can be bought as a stand alone plan
    Can keep with no age limit
    $140 a month buys $10,000 of paid up coverage after 35 months – more than doubling your contributions (less claims paid)

    • Allan says:

      Don, I decided to take a look and I noted a small monthly fee that never states the dollar amount even in the FAQ. How much is it? How do you manage a person whose out of pocket expenditures is exactly 2 times what they put in monthly?

  8. Don Levit says:

    Great questions
    The maintenance fee varies depending on the contributions
    For the $140 a month contribution it is $40
    For those having twice the expenses this plan will not work if they make claims early on
    They would have to let their account accumulate before doing so
    To benefit from the accumulation one should contribute at least double what their expected expenses are estimated to be

  9. Allan says:

    It appears this plan can only survive if most people never spend what they bank. The plan supposedly doubles the contribution, but in actuality, with the fee, it only adds $100 for every $180 the patient puts in and that addition stops once they reach their max. At that time the plan banks $40 or whatever the fee is without paying out that fee. Except for that rare patient that spends the accumulation as fast as it comes in almost everyone else loses. It seems like a high-interest loan in reverse plus bank charges.

    I can see the advantage of this program only for the employer trying to get his employee to accept high deductibles (with an HSA), but I have seen employers simply guarantee a portion of the high deductible in the first couple of years of the deductible’s existence. That seems to be a less costly method.

  10. Don Levit says:

    You do not understand how the program works
    I suggest you call 713-850-8534 to set up a go to meeting
    I believe in freedom of expression but when opinions are not even close to the facts then we are entering an illegal area

    • Allan says:

      Don, that is what I glean from the site and there is nothing illegal in doing so. The individual pays approximately the amount I mention . They are charged a $40 fee per month no matter what. I see no interest payments to the individual and the $40 is a fee that is paid monthly without any return to the patient so, in essence, they are paying $180 per month, but getting credit for only $140 and when the reach the max they continue to pay $40 from then on without any benefit to the amount they collect in the future.

      If I am wrong correct me unless it is so complicated that a correction is impossible. (I should have written above that $140 provides $140 by the company, but in reality they are paying $180.)

      • Allan says:

        We discuss reducing total costs for healthcare, but a lot of what we do to make it appear less expensive actually increase costs.

  11. Don Levit says:

    I will not discuss publicly why your so called facts are wrong so your conclusion is way off the mark
    If you do not want to set up a go to meeting and get the proper facts and conclusions to the proper facts, that is fine
    If you continue to lie about the product and defame it and my company, you will be dealt with through appropriate legal channels

    • Allan says:

      Don, I am not trying to defame your company. I am trying to understand its mechanism and how it helps reduce costs globally or for the patient. I do this with all aspects of health care including physician performance. There is no defamation when one discusses a program especially when a representative is present to provide any correction he deems necessary. I don’t know why you are making baseless threats especially when an officer of the company (I believe you are one) is present to make corrections. Your concept is not difficult to understand so it should be very easy for you to correct anything I said that you feel is erroneous. In fact, I would like to be corrected if I am in error. Of course, perhaps you feel that what I have said, is for the most part, accurate.

    • Bart I says:

      How is calling someone a liar without proof not defamation?

  12. Don Levit says:

    No Allan you are way off the mark
    There is implicit defamation when you even reach conclusions as to who can benefit from your gross misunderstandings
    Again I will not discuss the nuances of this product publicly
    If you call to set up a go to neeting, I will be happy to discuss with you privately
    The charts and verbage will clearly point out your errors
    I can appreciate your errors, Allan
    Many times it takes two go to meetings to fully understand and appreciate our product
    Any new patented product or service has that initial drawback, primarily because people naturally make assumptions on the old way of perceiving products and services
    If you do not want to have a go to meeting, there should be nothing else for us to comment on, for this particular posting

    • Ron Greiner says:

      Don, you promised to stop selling your product here but here you are again.

      This is not the place to get people to go to your so-called private meetings.

      I remember you saying your product was like a supercharged HSA – whatever that could mean.

  13. Don Levit says:

    When a problem is mentioned on this blog our products can help resolve I will mention it
    I comment on many other topics as well
    As far as selling products is concerned, I am growing weary of your touting yourself as selling the first MSA, as well as your product expertise and superior salesmanship
    The only product selling will be done privately
    I merely mention our products and a few of their benefits

  14. Ron Greiner says:

    Don, these crazy insurance commissioners think you are selling when you start mentioning benefits. Then they want Full and Proper Disclosure.

    As you know tax-free HSAs are not insurance so those laws do not apply. It’s like the cowboy days with HSAs.

    Are you selling an insurance product Don?

  15. Don Levit says:

    According to the NAIC there is not enough initial risk to be considered insurance
    It is simply a funding vehicle
    The products are available nationwide
    They are ERISA and HIPAA compliant and regulated by the Drpartment of Labor

  16. Allan says:

    “No Allan you are way off the mark”

    Don, if I were way off the mark you would surely correct me, but you haven’t. Instead you have questioned the legality of anyone that analyzes what your product offers. We are on a list that does that type of thing so if you don’t like that feature you shouldn’t advertise your product here.

    Does it reduce health care spending? No.
    Does that $40 per month fee for the least expensive plan relieve the patient of $40 in costs? No.
    Does this program meet the expectations you created in your former statements before the product was approved? No.

    “I will not discuss publicly”

    Your lack of transparency is very revealing. It might mean that your public responses would demonstrate that you see the same holes in your product that I see.

  17. Don Levit says:

    No Allan
    It takes much time and effort to explain the product thru conversation on a web site
    It is more efficient for you and me for you to go thru a 30 minute go to meeting
    If you decline that, maybe that just means you would rather be combative than constructive

    • Allan says:

      Don, it should take very little time for you to make things crystal clear. Alternatively your marketing is poor or is false advertising. Things are simple. A person using your services can put in $180 a month for almost 3 years and then $40 per month for an eternity to insure themselves for $5,000 of value in advance repeating the process as money is spent. Alternatively they could put away that $180 for a little more than two years to cover what you are offering and earn interest on the money. Interest and payment of principle on $5,000 @ 8% for about 3.5 years years is about $140, a lot less than $180.

  18. Lee benham says:

    That’s it I m suing all of you for wasting my time reading that thread 👅