Tag: premium support

Cato Maintains Opposition to IRS Lawlessness in Obamacare-Subsidies Case

To encourage the purchase of health insurance, the Affordable Care Act added a number of deductions, exemptions, and penalties to the federal tax code. As might be expected from a 2,700-page law, these new tax laws have the potential to interact in unforeseen and counterintuitive ways.

As first discovered by Michael Cannon and Jonathan Adler, one of these new tax provisions, when combined with state decision-making and IRS rule-making, has given Obamacare yet another legal problem. The legislation’s Section 1311 provides a generous tax credit for anyone who buys insurance from an insurance exchange “established by the State”—as an incentive for states to create the exchanges—but only 16 states have opted to do so. In the other states, the federal government established its own exchanges, as another section of the ACA specifies. But where § 1311 only explicitly authorized a tax credit for people who buy insurance from a state exchange, the IRS issued a rule interpreting § 1311 as also applying to purchases from federal exchanges.

This creative interpretation most obviously hurts employers, who are fined for every employee who receives such a tax credit/subsidy to buy an exchange plan when their employer fails to comply with the mandate to provide health insurance. But it also hurts some individuals, such as David Klemencic, a lead plaintiff in one of the lawsuits challenging the IRS’s tax-credit rule. Klemencic lives in a state, West Virginia, that never established an exchange, and for various reasons he doesn’t want to buy any of the insurance options available to him. Because buying insurance would cost him more than 8% of his income, he should be immune from Obamacare’s tax on the decision not to buy insurance.  After the IRS expanded § 1311 to subsidize people in states with federal exchanges, however, Klemencic could’ve bought health insurance for an amount low enough to again subject him to the tax for not buying insurance. Klemencic and his fellow plaintiffs argue that they face these costs only because the IRS exceeded the scope of its powers by extending a tax credit not authorized by Congress.

The district court rejected that argument, ruling that, under the highly deferential test courts apply to actions by administrative agencies, the IRS only had to show that its interpretation of § 1311 was reasonable—which the court was satisfied it had. On appeal, a panel of the U.S. Court of Appeals for the D.C. Circuit held that the plain language of the ACA precluded the federal government from subsidizing the premiums of insurance policies obtained through federally established exchanges. Later that same day, the Fourth Circuit in King v. Burwell took the opposite position on the same question—from which ruling there is now a cert petition pending in the Supreme Court.

This circuit split did not last long, however, as the D.C. Circuit decided to vacate the panel opinion and rehear Halbig en banc (meaning all the court’s judges, not just a three-judge panel). Federal appellate rules say that such review “is not favored” and the D.C. Circuit has a particularly high bar, on average taking only one case per year en banc. Judge Harry Edwards, who dissented in the Halbig panel ruling, has taken great pains to reduce the number of en banc hearings. Even before he served as the D.C. Circuit’s chief judge, Edwards wrote in Bartlett v. Bowen (1987) that “the institutional cost of rehearing cases en banc is extraordinary” and that it “substantially delays the case being reheard, often with no clear principle emanating from the en banc court.” Nevertheless, the court took this step, vindicating President Obama’s strategy of packing the underworked D.C. Circuit after the Senate eliminated the filibuster for judicial nominees.

Cato and the Pacific Research Institute have filed a brief continuing our support for the plaintiffs on their appeal. While it is manifestly the province of the judiciary to say “what the law is,” where the law’s text leaves no question as to its meaning—as is the case here with the phrase “established by the State”—it’s neither right nor proper for a court to replace the laws passed by Congress with those of its own invention, or the invention of civil servants.

If Congress wants to extend the tax credit beyond the terms of the ACA, it can do so by passing new legislation. The only reason for executive-branch officials not to go back to Congress for clarification, and instead legislate by fiat, is to bypass the democratic process, thereby undermining constitutional separation of powers.

This case ultimately isn’t about money, the wisdom of individual health care decision-making, or even political opposition to Obamacare. It’s about who gets to create the laws we live by: the democratically elected members of Congress, or the bureaucrats charged with no more than executing the laws that Congress passes and the president signs.

The en banc D.C. Circuit will hear argument in Halbig v. Burwell on December 17.

‘The Dangerous Gym Membership’?

Here’s a poor, unsuccessful letter I sent to the editor of the Washington Post:

The dangerous gym membership” [Jan. 12] claims that in Medicare Advantage, “advertising a plan as the go-to health insurance source for marathoners could lure in a healthier subscriber base, disrupting the rest of the market place in the process.” Oh?

Does it disrupt the market for sneakers when running shops advertise themselves to marathoners? Since when does giving consumers something they want disrupt the market? That’s why markets exist.

What’s disrupting the market for seniors’ health insurance is government—in this case, Congress’ counter-productive attempt to cross-subsidize the sick via price controls that forbid carriers to consider each applicant’s risk when offering and pricing health insurance.

Let the Market Cut Medicare?

The center-right consensus is that in order to balance the budget and improve health care, Congress needs to overhaul Medicare using some form of voucher or premium support.  Whereas the current program offers an essentially unlimited subsidy for medical care, under these options Congress would give each enrollee a fixed subsidy with which they could purchase private health insurance.  But how should Congress determine the size of these fixed subsidies?

The House GOP approved a budget under which Congress would pick the amount.  Beginning in 2022, all new enrollees would receive a voucher.  The average voucher amount would be equal to the average amount Medicare currently spends per enrollee in 2011, adjusted for overall inflation.  Congress would adjust the actual voucher amount for each enrollee based on health status and income, so some enrollees would receive larger and some would receive smaller vouchers.  But since the average voucher would grow at the rate of inflation (i.e., about 2.5 percentage points slower than per-enrollee Medicare spending currently grows), this approach would reduce Medicare spending over time.

A drawback of this approach is that opponents can (and do) demagogue it, claiming that the vouchers would be insufficient and seniors would die for lack of medical care.  This demagoguery ignores two important factors.

First, as Peter Orszag and President Obama themselves loved reminding us during the ObamaCare debate, there is lots of wasteful spending in the Medicare program.  Orszag frequently cites the Dartmouth Atlas, which estimates that one third of Medicare spending is pure waste.  Since the amount of the House GOP’s vouchers would be based on per-enrollee Medicare spending, they would essentially give Medicare enrollees 50 percent more money than they would need to purchase all the beneficial medical care that Medicare currently provides.  The vast amount of wasteful Medicare spending is a disgrace.  But when converting to a voucher system it’s an absolute boon, because it provides a huge margin of safety.  It means that enrollees could reduce their medical consumption by one third without harming their health.

Second, the anti-reform demagogues presume that vouchers would do absolutely nothing to make health care more efficient.  Vouchers would make the nation’s 50 million heaviest consumers of medical care cost-conscious in a way they have never been before.  Like an old man trying to send back soup at a deli, they will force providers to cut costs and thereby make their vouchers go farther.

It is because of this second factor that Yuval Levin proposes a different way of setting the voucher amount(s).  Levin proposes to use a competitive-bidding process.  Under this approach, everyone in Medicare would receive a voucher equal to the second-lowest bid that health plans submit to provide a standard package of benefits.  Enrollees could then apply their voucher to any private plan or even a government-run plan.  Under this approach, enrollees would still be cost-conscious: if the health insurance policies they choose cost more than the voucher amount, they would have to make up the difference; if the policies cost less, they would keep the savings.  Levin argues that this cost-consciousness would also lead enrollees to put pressure on providers to cut costs, and therefore the amount of the second-lowest bid would automatically grow at a slower rate than per-enrollee spending under the current Medicare program.  ”In such a system,” Levin writes, “the premium-support benefit would grow exactly as quickly as required to provide a comprehensive insurance benefit, since the growth rate would be determined by a market process rather than a preset formula. ” Voila!  The competitive forces of the market would cut Medicare spending.

The best evidence that competitive bidding will reduce Medicare spending is that the durable medical equipment manufacturers have fought efforts to impose it on them.  So while I’m not hostile to the idea, I don’t think it’s an improvement over the House GOP plan.

First, Levin calls competitive-bidding “the Confident Market Solution” because he is confident that markets will reduce the cost of health care.  I’m confident of that too.  But I’m also confident that rent-seeking will be present in Medicare, no matter what reforms Congress enacts.  I am far less confident that markets will reduce costs faster than rent-seeking will increase them.  My sense is that politicians will be much more likely to hold the line on rent-seeking if they actually draw one.

Second, House Budget Committee chairman Paul Ryan (R-WI) crafted a House budget that proposed to reduce the growth of Medicare spending using hard, score-able numbers.  Hundreds of House members likewise stuck their necks out by voting for it.  The Confident Market Solution essentially undercuts those folks by telling them they should not have done something so bold and courageous.  Levin is no doubt correct that a competitive-bidding process that doesn’t specifically commit Congress to reducing Medicare spending growth is more politically feasible than a voucher plan that does.  When politicians choose the more politically perilous option, however, reformers should tell the world why that was the right thing to do.

Third, Levin would include a public option in the competitive-bidding system.  I am also confident that the government would heavily subsidize that health plan until it drove private insurers (and any hope of cost-cutting innovations) out of the market.

I’ve discussed what I think is a better approach to Medicare reform here and here.