Rubio’s Health Plan Is a Fresh Breeze

As the starting gate loads for the large field of 2016 presidential candidates in the Republican party, there has not been much differentiation thus far in what the leading contenders have said about health policy. New ideas are risky, and it’s usually far easier to recycle the well-rehearsed denunciations of Obamacare along with a few platitudes about the centrality of the doctor-patient relationship. 

However, Senator Marco Rubio (R-FL) showed fresh thinking in a short three-part plan for the post-ObamaCare era he released on Monday. After checking off the usual items for better policy options (federally supported high-risk pools, Medicare premium support, expanded consumer-centered products, and insurance purchasing across state lines), the Florida senator advanced two particularly thoughtful reforms. 

 Rubio endorsed “per-capita” funding caps for a more decentralized Medicaid system, rather than the more typical rhetorical bow to broad, across-the-board block-grant delegation of funding and related coverage decisions to state governments. This might signal a greater emphasis on empowering Medicaid beneficiaries more directly, rather than simply making budget-saving cuts easier for state and federal officials. It could also facilitate accommodating the different needs of distinct categories of Medicaid enrollees (e.g., the low-income disabled, elderly, children, and working-age parents). As always, filling in the details and parameters of the distinct categories and the cap levels remains more complicated. 

 More promising was the Rubio plan’s nuanced, long-term approach to reform of taxpayer subsidies for private health insurance coverage. Although Rubio starts with the well-worn device of an advanceable, refundable tax credit for Americans to purchase health insurance, he would make it available to all Americans, not just those without access to employer-sponsored coverage. Senator Rubio also showed he is looking beyond the next couple of years and planning for a more balanced evolution of insurance subsidies toward a level playing field that eventually treats all purchasers similarly: 

By combining a clear and principled long-term goal with a practical approach to its implementation, Senator Rubio moves well beyond the blinkered approaches of other conservative health reform proposals that fail to see over the immediate horizon and gravitate instead to carving out new tax subsidies for individual insurance market consumers while preserving most, if not all, of the current tax exclusion for employer-sponsored group insurance (and never the twain shall meet?). Redeeming the rhetoric of consumer empowerment and personal choice in health care ultimately requires tax policy that treats all health insurance purchasers similarly, regardless of how and where they decide to buy coverage. Nevertheless, doing so too quickly would trigger counterproductive disruptions in the current insurance and compensation arrangements on which tens of millions of working Americans and their employers rely.   

However, putting more transitional flesh on the bare bones of the Rubio plan probably means moving in either one of two directions. Tax-credit subsidies for health insurance usually are structured initially in terms of fixed-dollar amounts. Although that feature makes them simpler to explain to voters and easier to calculate for budgetary purposes, they also become prone to criticism about their inflexibility, unfairness, and inadequacy. Different types of insurance purchasers still face different levels of insurance costs and present different degrees of financial need. Inevitably, what might begin as a clear and simple tax-credit approach to reform of tax policy for health insurance gravitates toward a series of partial adjustments for income levels, family sizes, and age bands. Trying to harmonize this side of health policy reform to converge with related changes in the tax exclusion for employer-sponsored insurance offers only prolonged administrative headaches and political nightmares.

A different path to making the tax treatment of health care as neutral as possible regarding how one chooses to purchase health care might involve moving toward a fixed-percentage tax credit, which would eventually provide the same level of tax code “discount” for health-insurance-premium costs for anyone purchasing coverage — whether as individuals or through group-purchasing arrangements. This would effectively subsidize low-income Americans more, and high-income ones less, compared with the current tax exclusion for workers who receive job-based coverage. It also would allow tax subsidies to adjust in proportion to the actual premium costs that insured individuals face. 

An accompanying cap on the maximum amount of premiums per household from which tax subsidies are based may well be necessary, too. But we should justify it as a way to reduce the distorted incentives currently created by the unlimited tax exclusion (until the ACA’s Cadillac tax kicks in during 2018), rather than as a revenue-generating mechanism to finance expanded health-insurance subsidies for low-income individuals or others not benefitting from the employer-based tax exclusion. Roughly equivalent adjustments in marginal rates for federal income taxes can offset any potential net hikes in federal income taxes for upper-income workers or those who have more costly insurance plans. The fiscal need to finance the additional funding still missing for this type of fixed-percentage tax credit for new beneficiaries, plus further assistance to lower-income or special needs populations, should be addressed through other federal spending reductions, or after a broader review of overall tax and budget policy.

Senator Rubio is off to a promising start in offering a more distinctive and thoughtful brand of health policy reform. We will need to know more about where and how he plans to pick up speed and finish the job.

Tom Miller is a resident fellow at the American Enterprise Institute.

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