Ryan Floats Tax Credits, Other Plans as ACA Alternative

They say you’re damned if you do and you’re damned if you don’t. So House Speaker Paul Ryan did, and got damned on both the left and right—and all but ignored by his own party’s presidential candidate—when he unveiled his caucus’s outline for a replacement of the Affordable Care Act.

Which raises the question: How serious can this ACA alternative be? Maybe not very. The centerpiece of Ryan’s proposal—tax credits for everyone who needs to purchase individual policies regardless of income—may not go far enough to prevent people from losing coverage while creating new spending that would benefit high-income earners who can already buy their own health insurance.

Ryan’s plan, the health care component of the Republican’s “A Better Way” agenda, hadn’t even drawn a tweet from Donald Trump, and the conservative House Freedom Caucus hasn’t mentioned it on its Facebook page. The libertarian Cato Institute derided it as a “bipartisan imprimatur to Obamacare’s redistribution of income.” Heritage Action, the lobbying and advocacy arm of the conservative Heritage Foundation, tossed some bouquets, but also called the tax credit idea a “new spending program” without any supporting notions for how it would be paid for. Some on the right have called it “Obamacare Light.”

Framework without details

Critics have assailed Ryan’s outline as lacking details, but that makes sense to Joseph Antos, a scholar in health care and retirement policy at the conservative American Enterprise Institute. “Obviously what we have here is a framework,” Antos says. “Why bother putting it into legislative language? The president’s name is Obama, and he wouldn’t give it a second thought.”

Because the ACA ties tax credits to premiums as well as income, it creates a perverse incentive for the health care industry that Paul Ryan’s plan removes, says Joseph Antos of the American Enterprise Institute.

Ryan’s “Better Way” for health care includes many ideas Republicans have been talking about for years. Besides the tax credits, it would let people buy insurance across state lines, transition Medicaid with a choice of block grants or per-capita payments to states, and cap the writeoff on employer-provided coverage (expect unions to register their discontent if this idea gets legs). It would also raise the age-rating differential for premiums from 3-to-1 under ACA to 5-to-1 (while at the same time providing more generous tax credits to older people) and create high-risk pools. Ryan’s plan would also, in contrast to Clinton’s proposal to let younger people buy into Medicare, gradually increase the Medicare eligibility age—something sure to raise the ire of people lacking coverage or struggling to get it as they approach age 65.

Tax credit complications

Currently, the ACA provides tax credits for individuals and families with annual incomes up to 400% of the federal poverty level (FPL). The credit, which gets smaller as income increases, is adjusted to account for the actual cost of coverage and residency. People with incomes up to 250% of FPL are also eligible for more generous subsidies and cost-sharing reductions.

But if the ACA has taught public policy analysts anything, it’s that tax credits are not a panacea for covering the otherwise uninsured and underinsured. A joint Urban Institute and Robert Wood Johnson Foundation study reported that less than half of the people eligible for tax credits under the ACA actually bought coverage in 2015. Much of that is driven by income, as Matthew Buettgens, a senior research associate at the Urban Institute points out. Under the ACA, as incomes rise, tax credits get smaller, phasing out at 400% of FPL, and that may factor into consumers’ decision to not purchase health insurance. “The take-up rate of people with incomes between 300% and 400% of poverty is extremely low,” Buettgens says, “so it appears that those tax credits are not very attractive to people in that income range.”

The tax credit in the GOP framework would seemingly be simpler, but it probably wouldn’t make much of a dent in the uninsured rate among people with higher incomes because most already have coverage, Buettgens says, while the uninsured rate of people on the lower end of the income scale—those incomes in range of 200% to 400% of FPL—might actually rise if the tax credits aren’t as generous as they are under the ACA.

Then there’s the issue of the amount of the tax credit in the Ryan plan. “The document says it would be enough to purchase the typical pre-ACA nongroup plan, but what does that mean?” Buettgens says. “There were tens of thousands of plans, and in many states there was very little regulation before the ACA; the variation in plan design was tremendous,” he says. It’s probably easier to talk about that number than it is to actually calculate it.

Robert Greenstein, president of the Center on Budget and Policy Priorities, called the GOP tax credit idea “flawed” in a prepared statement. Besides the flat credit and the sketchy proposal to base it on pre-ACA costs, the proposal wouldn’t provide any subsidy or premium price controls beyond high-risk pools for people with pre-existing health conditions, or replace subsidies for people below 250% of FPL, Greenstein said. “All of that almost certainly would leave many fewer people with coverage—and among those with coverage,” more people would have skimpy plans or be underinsured, he said.

However, the existing system for tax credits under the ACA can be problematic too, especially for people in the lower end of the income bracket, as Antos explains. To calculate their tax credits under existing IRS regulations, individuals have to estimate their income for the upcoming year, and then pay back any excess credit they received the following year if they underestimated their earnings. “There is ample opportunity for screw-up,” Antos says.

“What we now have is a complicated system where people are frankly unsure about their incomes oftentimes,” he says. “They have to ask themselves questions like, ‘Am I still going to have a 35-hour-a-week job? How long is it going to last?’ Those are the types of questions that low-income people face all the time. So they have difficulty coming up with a good number, and then the threat of having to pay money back—this is precisely the part of the population that just doesn’t have money laying around.”

Antos points out another problem. Because the ACA ties tax credits to premiums as well as income, it creates what he calls “a perverse” incentive for the health care industry that Ryan’s plan removes. “There’s a logical argument here that if you tie the subsidies to the cost of insurance, you’re sending a very strong economic signal to the health sector that their best strategy is to raise their prices,” he says.

Come next year, Ryan and his Republican colleagues in the House and Senate may find they can’t do much politically no matter who is in the White House.

And he doesn’t expect Republicans to implement health care policies that put health insurance beyond the reach of low-income people who already get subsidies. “You just can’t do that politically,” Antos says.

Come next year, Ryan and his Republican colleagues in the House and Senate may find they can’t do much politically no matter who is in the White House. “The hard part for Republicans is going to be the millions of people who did not have coverage before who now have coverage. How are you going to explain it to them?” former senior Republican Senate policy staffer Bill Hoagland, now with the Bipartisan Policy Center, told Politico. “I think that’s going to be a difficult row to hoe.”

But at least Ryan and the House Republican leadership have laid out that row, as sketchy as it may be.

Photograph of Paul Ryan by Gage Skidmore