Republican and Democratic Approaches to Health Reform: Is There a Dime’s Worth of Difference?

After the outcome of another election or two, Republicans might well have the chance to repeal and replace the Affordable Care Act (ObamaCare). What would they replace it with?

Dylan Matthews at the Wonk Blog the other day said there has been only one serious health reform proposal on the GOP side of the aisle in recent years. It’s called the Patients’ Choice Act, sponsored by Sen. Tom Coburn (R-Okla.) and Rep. Paul Ryan (R-Wisc.). This is essentially the health reform plan John McCain endorsed in 2008 ― the one that the Obama campaign spent millions of dollars attacking during the election. Matthews admits there “are real differences” between the two approaches. But he adds, “They aren’t huge ones.” He offers a chart that implies the differences are merely differences of degree, not of kind.


There are basically three criteria by which to judge a public policy: efficiency, equity and liberty. To what degree does the policy allow us to achieve a social objective at minimum cost? (Efficiency) To what degree does the policy treat people fairly? (Equity) And to what degree does it leave individuals free to make their own decisions? (Liberty)

With respect to efficiency, there are three things you need to know about our health care system:

  1. Virtually every serious problem we have stems from one and only one source: unwise government policies that create perverse incentives. When we act on those incentives, we do things that make costs higher, quality lower and access more difficult than would otherwise have been the case.
  2. The majority of those problems stem from one unwise policy in particular: the way the federal government subsidizes private health insurance.
  3. In judging reform proposals, therefore, the most important question is: To what degree does the reform remove the perverse incentives of the current system and replace them with better ones?

On these issues, I see the Republican and Democratic approaches as different as night and day.

Let’s call the whole thing off.


Consider what the current system of subsidies is all about:

  • People who obtain insurance through an employer are able to buy insurance with pre-tax dollars, whereas people who purchase insurance on their own are basically forced to purchase it with after-tax dollars. For a middle-income family, having to buy individual coverage almost doubles the after-tax cost of the insurance. This encourages people on their own to remain uninsured and to seek insurance through an employer if a family member happens to get sick.
  • Group insurance, however, is not portable. So the kind of insurance the government encourages all of us to have is the kind of insurance that does not travel with us from job to job and in and out of the labor market. This, in turn, virtually guarantees problems with pre-existing conditions and lack of continuity of care.
  • Further, the subsidy for employer-provided coverage is open-ended. This means people can always lower their taxes by buying more insurance. As a result, most Americans are over-insured ― leaving patients with perverse incentives to over-consume care and providers with perverse incentives to maximize against payment formulas. This is the principle reason why health spending is growing faster than our incomes in this country and elsewhere around the world.
  • Also, until recently the subsidy for employer-purchased insurance applied only to third-party insurance and not to self-insurance (say, through a Health Savings Account). This encouraged everyone to (wastefully) rely on third parties to pay every medical bill. This, in turn, destroyed price competition and quality competition and effectively suppressed normal market forces throughout the health care system. Although we now allow tax-advantaged self-insurance, the conditions are highly restrictive.

What does the Affordable Care Act do about all this? It leaves every single one of those perverse incentives in place and adds new ones! What does the Republican approach do? It eliminates every one of them by offering a fixed sum, refundable tax credit for the purchase of private health insurance. Every individual and every family would get the same amount of help from government, regardless of where the insurance is purchased ― at the office, in an exchange or in the marketplace.

People would no longer be encouraged to buy employer-specific, non-portable coverage. Because the subsidy is a fixed sum, it would apply only to the core insurance we want everybody to have. Any additional insurance would be purchased with after-tax dollars. People would be discouraged from buying an additional dollar of insurance unless it was more valuable than a dollar spent on other goods and services.

The Patients’ Choice Act also gives people greater flexibility in combining health care savings with third-party insurance.

With respect to equity, the current system of subsidies is arbitrary and unfair. It penalizes people who must purchase insurance on their own and it gives the greatest tax relief to those who least need it. A family earning $100,000, for example, gets six times the tax subsidy as a family earning $25,000.

What does the Affordable Care Act do about all of this? It leaves the current inequities in place and layers on a whole set of new ones. A family of four at, say, 138% of the poverty level will be able to enter Medicaid and obtain coverage worth about $8,000 a year for free. Families that earn one dollar more will be able to go into a health insurance exchange and obtain, say, a $16,000 insurance plan in return for a premium of about $900 out of their own pockets. Yet, employees of the Hilton Hotel, earning similar incomes, get no new help from government and the tax relief they get from the current income tax system is less than $2,500.

By contrast, the Republican approach does not force families into Medicaid, and it gives everyone who buys private insurance the same help under the tax law.

With respect to liberty, the Republican approach is a defined contribution approach. People are given a sum of money to buy health insurance. They may add funds of their own to this amount. Suppliers of insurance will then be allowed to compete in the private marketplace to see what they can offer for premiums people can afford.

[Note: I would set the tax credit today at $2,500 for an adult and $8,000 for a family of four, which is roughly the CBO’s estimate of the cost of new enrollees in Medicaid, and I would allow people to buy into Medicaid if they choose. I would also allow people to leave Medicaid, claim the credit and buy private insurance. I hope this will be a feature of the next iteration of Republican health reform.]

By contrast, ObamaCare takes a defined-benefit approach. The government intends to tell all of us what insurance we must have, whether it is affordable or not. Further, the ObamaCare approach double penalizes people who choose not to insure: failure to claim the credit means they will pay higher taxes and there is a penalty imposed on top of that.

Are these not “huge differences”? If I could summarize them in one sentence, it would be this: The Republican approach is focused on getting rid of perverse incentives and treating everyone equitably, while the Democratic approach leaves the current system’s perverse incentives and inequities in place and adds new ones.

Here are a few more ways in which Coburn and Ryan differ from the Affordable Care Act.

Tax Fairness. Under the Republican approach, every individual and every family will get the same help from government:

  • Regardless of whether they work less than 30 hours a week or more;
  • Whether their workplace has fewer than 50 employees or more; and
  • Whether they are in a union or not.

Fair Treatment of Employers, Employees and Retirees. Unlike the Affordable Care Act, the Republican approach:

  • Would not encourage employers to avoid hiring new workers;
  • Would not encourage employers to drop health coverage for current employees or for their retirees;
  • Would not penalize employees and their employers if they work full time rather than part time;
  • Would not favor small over large business or vice versa;
  • Would not favor non-union over union firms or vice versa; and
  • Would not encourage outsourcing or labor saving technologies or in other ways discourage economic recovery.

No Mandate. No one would be forced to buy health insurance. People who turn down the tax credit and elect to be uninsured would have a higher tax bill, however. For families that pay income taxes, failure to insure would result in $2,500 in higher taxes for individuals and $8,000 for a family of four. They could either use these funds to buy health insurance or give them to Uncle Sam.

Universal Coverage. The Affordable Care Act is expected to leave 30 million people uninsured and the actual number is probably much greater than that. By contrast, under the Republican approach it’s hard to imagine anyone remaining uninsured. The reason: every adult can have at least $2,500 of health insurance for free. Every family of four can have $8,000 of insurance for free. Insurance at this premium may consist of very narrow networks and perhaps pay provider fees only a bit better than Medicaid. Still, it’s free. I’m sure some will turn down the offer anyway, however. I wish Republicans would deal with that eventuality by sending unclaimed tax credits to safety net institutions in the communities where the uninsured live. This would guarantee a form of universal coverage for everyone.

Minimum Bureaucracy. The Patients’ Choice Act is only 56 pages long. One suspects that the regulations needed to implement it would fall well short of the 20,000 pages needed to implement ObamaCare. Because the tax credits are the same for everyone, there would be no need for an exchange to verify income or establish that an applicant had not been offered affordable coverage by an employer or link electronically to five or six different government agencies. Uwe Reinhardt has written about the highly complex assignments the ObamaCare exchanges must carry out. So have I. By contrast, EHealth (a private online exchange that has allowed more than 3 million people to obtain health insurance) could handle the entire process under the Republican plan without spending millions of dollars on new technology ― as the Obama administration is doing.

Postscript: Matthews also compares ObamaCare to a Nixon plan, a Chaffee plan (and he might well have thrown in RomneyCare to boot) and here he has a point about similarity. Once you toss managed competition and managed care and perverse incentives headed in every direction into the public policy mix, all the health plans begin to look increasingly like each other, just as they look increasingly like the DMV.

Postscript #2: How can we pay for the Republican plan, especially given our frequent criticism of ObamaCare’s unsustainable cuts in Medicare and our dislike of ObamaCare’s taxes on capital? I believe it can be done with money already in the system (that is, with no new taxes) even after restoring some Medicare spending and reversing the taxes on investment income. I’ll expand on that in a future Alert.

Comments (30)

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  1. Tate says:

    “Virtually every serious problem we have stems from one and only one source: unwise government policies that create perverse incentives”

    -Bingo. People react to incentives. We shouldn’t be surprised when they do either.

  2. Ken says:

    Excellent analysis.

  3. Buster says:

    The core beliefs of Republicans and Democrats are much different at the extremes. Republicans believe that health care markets work; and government should not be involved in markets because competition is more efficient than bureaucracy. Democrats believe health care markets do not work; and people (especially poor, old people) can not navigate the complexities of health care.

    These two viewpoints are odd considering how Democrats and Republicans allowed health care to evolve over that past 60 years. Currently, wealthy people get a huge subsidy for health care. Employed people get a subsidy. Old people and poor people get second-rate health care for nearly free.

    Wouldn’t it make more sense to allow those capable of navigating the system to get care in the free market (i.e. employed and rich people), and give a subsidy to old and poor people?

    • JD says:

      Interesting point. I guess that goes to show you that compromise often makes things worse.

  4. Sammy says:

    “unwise government policies that create perverse incentives”

    Many times this is true but it’s not a rule or an absolute truth. Government in the end is a direct reflection of society. Let’s take a look at our society as a whole first. As far as the partisan differences, we could use more compromising in Washington.

    • JD says:

      There is a place for government, but way too often that quote is true.

      Like I said earlier, I think compromise is often to blame for the poor systems we have. That isn’t to say that compromise is bad, but we shouldn’t be instituting piecemeal policies out of different ideas that were intended to be whole. Building a car with pieces from different makes and models will turn a finely tuned machine into a hunk of metal.

      • Sammy says:

        You are ideologically inclined to think that’s overwhelming truth. But take a close look at history and you’ll find out things would be quite worse without structured government. The new century debate is until what extent is government necessary and in what roles. That’s already disregarding whether or not government is always at fault. And a lack of compromise is most definitely bad, there is too much evidence of it and I have to disagree with you on that.

        • Sammy says:

          And I think your car analogy is completely irrelevant with policy.

        • JD says:

          I completely agree. Although I think that we choose the wrong places for government and the wrong compromises more often than not.

  5. John Goodman says:

    Buster: Interesting observation.

  6. Tate says:

    R’s and D’s aren’t always that different.. example RomneyCare & Obamacare.

  7. Chaz says:

    Why is there no discussion about the problem of pre-existing condition limitations? What is the Republican/Goodman stand on that? Is it a problem that needs correcting?

    • Dewaine says:

      What do you mean? Are you saying that we should force insurance companies to accept anybody regardless of condition?

      • Chaz says:

        Not necessarily. I’m not sure I said that or even hinted that.

        I’d hate to ask you to put words into Mr. Goodman’s mouth but is that the reason that he does not mention PECs is that he doesn’t want to force insurers to cover them? Is that the Republican view too?

        • Dewaine says:

          Sorry, I was just trying to clarify what you were asking.

          If insurers had to cover PEC’s then nobody would buy insurance until they needed it. All insurers would go out of business because they are spending money on everybody that is sick, but not receiving any from those who are well. When the government controls Health Care we have the same problem, but we instead rack up debt.

          • Chaz says:

            Yes, adverse selection is a problem if PECs are eliminated. That is why the ACA has the individual mandate.

            I’m still not sure what Mr. Goodman’s solution is for the problem (if he considers it a problem) of individuals (including children) who cannot obtain insurance because they have a PEC, usually through no fault of their own.

            • Dewaine says:

              I understand the problem, but I don’t know what you expect as far as a public solution goes. Money matters, if you indiscriminately take it away from somebody and give it to a kid with a PEC you are harming the original party (possibly even to the point of death or serious injury).

              My solution would be to let people have more flexibility over how they’re tax dollars are spent, I would suspect that people with a PEC would receive more ample amounts without the fraud and abuse that so naturally follows bureaucracy.

  8. James says:

    It is hard to understand how anything in healthcare can be more inefficient than private health insurance. The first thing a for-profit health insurer does with an insurance premium, regardless of who pays it, is to take 15-20% off the top for administrative expenses and profit, before spending one dime on actual patient care. So……help me understand how a family that gets an $8,000 tax credit can afford commercial insurance with an annual premium of $15,000+. And help me understand how this satisfies the criteria of liberty, when such health insurance places restrictions on the providers that the family can use without paying an additional amount out-of-pocket.

  9. Cabaret says:

    This is a great piece!

    However, how will the PCA will change the before-tax dollar subsidy for insurance through the employer?

  10. Paul Oneill says:

    $2,500 and $8,000 of insurance for “FREE”. That is great let’s make sure everyone gets it…FREE. That is really a good deal…

  11. John Goodman says:

    I want people to be able to insure against getting a pre-existing condition. The concept is explained here:

    We talk about how to transition to such a system in our Handbook on State Health Care Reform:

    • Val says:

      Why not a negative incentive for not buying insurance by age 30? Certainly, Medicare people know that unless they buy into Medicare by age 65, it becomes 10% more expensive per year thereafter.

  12. Wanda J. Jones says:

    John and Friends:

    Seems to me that there is a real need here for a logic chain, starting with a hierarchy of goals, a collection of optional solutions, with pros and cons of each one. Every step that “sounds good” will have unintended consequences. For example, eliminating tax-exemption for health insurance plans covered by employers will stimulate cuts in employer contribution to health insurance.

    We need an outline that goes from “first questions” down to optional ones. Seems to me the first question is 1) should everyone be covered, all the time? and the should should be “How can that be assured, given the variety of economic, cultural and personal characteristics of social groups?

    But then, we need a meta-question: How feasible and functional is it to give broad policy and management control to central government, seeing what we have seen of their weak, corrupt and ignorant treatment of healthcare?

    The Republican program, though sound, is essentially rational, not emotional. We have a lot of people in the US who don’t want logic, won’t respond to rational exhortations, and believe that “it wasn’t my fault that I got sick, so I shouldn’t have to pay for anything.”

    Frankly, we don’t need more politicians back-rooming to a bill. We need some informed, competent people to work their way through the outline approach, above. Maybe this is the sin of hubris–believing that an intellectuaizing approach will be a) better than the present one, and b) that enough people would see its value and support it.

    Seems to me we have to have an approach that starts with the worst need–the low income people with pre-existing conditions, who can’t get a policy for love nor money. This calls for both a coverage solution and a delivery of services solution. Let’s start with subsidizing more county hospitals with an open door policy. Do we actually think we can continue to avoid finding actual, workable solutions for healthcare delivery?

    John–My husband just came across one of your excellent papers–“Healthcare in a Free Society. Rebutting the Myths of National Health Insurance. For CATO. January 27, 2005. Everyone who reads John now should look this up–his data is so compelling. Needs to be re-issued.

    Cheers to all–

    Wanda J. Jones, MPH, President
    New Century Heatlhcare Institute
    San Francisco

  13. bob hertz says:

    Wanda is correct that we must look for solutions that do not nessarily involve insurance. You might say more health care, less insurance.

    However her suggestion of county hospitals might be a little dated. The counties and cities that did have quasi public hospitals got very tired of funding them with property taxes. Many of these hospitals were sold off to private chains, of which Rick Scott’s company was but one.

    There is nothing wrong with the concept of public hospitals for the uninsured. But some states today have literally no public hospitals left. And the huge Western states like Montana might have a public hospital in Billings, but how useful is that if you break your leg 500 miles away.

    The uninsured will need to use private hospitals I am afraid. A good first step would be to put $20 billion or so of federal dollars into funding EMTALA. Should have been done decades ago.

    Bob Hertz, The Health Care Crusade

  14. Val says:

    Those on Medicare (government health care for seniors) should likewise have to right to buy their own insurance. People on Medicare are only allowed to see government doctors if they want any insurance help. There is no “Medicare insurance” help if they go private.

  15. Don Taylor says:

    Biggest problem with all conservative notions of health reform is finding Republicans willing to vote for them.

  16. Lee Kurisko says:

    The Republican plan is far too sensible so it won’t even be a consideration.

  17. Beverly Gossage says:

    I agree with John, but everyone wants to bring up the PEC as to why the private marketplace is a poor choice for insurance due to risk rating.

    Let’s talk about 2 pre-existing conditions scenerarios that I see played out as I write policies.
    Imagine a child born with a high risk condition.

    1)The parent is on a group plan. The child can be added within 30 days at standard rates and eligible for all benefits regardless of the PEC. At renewal the rates for the group can be increased substantially depending on the impending risk due to the child’s claims and the size of the group. If the parent loses his job or goes off the plan, or the child ages out of the plan, she (the child) could receive a rate up or exclusion rider or be denied coverage completely in the private marketplace. The parent’s option is to go on COBRA/state continuance or try to find another job that offers coverage within 90 days to avoid pre-ex exclusions.

    Some call this unfair and blame the private marketplace, but I submit that we should blame the employer-sponsored health insurance model for without it, the only way one would have that is if he/she chose not to purchase insurance while healthy or was in poverty.

    Here is the second scenario
    2)The parent had his own policy, the child can be added within 30 days at standard rates and eligible for all benefits regardless of the PEC. At renewal the rate for the family cannot be based on the child’s personal claims, so any rate increase is due to the average risk and experience of the entire pool for all policyholders with that plan through that carrier in the state. If the parent loses his job, the family’s coverage is not affected. No one loses coverage as long as the premium is paid. When the child is an adult, the parent can slide the child off their plan and put her on her own policy (as long as the policy is the same one that the parent currently has)at standard rates with guaranteed acceptance. This builds a ladder of insured with fewer gaps in coverage.

    • Chaz says:

      How does the “market” cause the result of “any rate increase is due to the average risk and experience of the entire pool for all policyholders with that plan through that carrier in the state” and “put her on her own policy (as long as the policy is the same one that the parent currently has) at standard rates with guaranteed acceptance”?

      Isn’t it government regulations that require guaranteed issue and guaranteed renewability?

  18. Beverly Gossage says:

    Clarification: Some call this unfair and blame the private marketplace, but I submit that we should blame the employer-sponsored health insurance model for without it, the only way one would have a pre-existing condition concern is if he/she chose not to purchase insurance while healthy or was in poverty.