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Why repealing Obamacare’s individual mandate is so crucial for tax reform

Senate Republicans slipped the repeal of a key Affordable Care Act provision into their tax bill on Tuesday, adding a provision that would allow them to declare a victory on health care while gaining more than $300 billion to offset the cost of tax reform.

The individual mandate is one of the most unpopular parts of the ACA — a requirement that people either buy health insurance or pay a penalty. About 6.5 million taxpayers paid a fine in 2016, according to a January letter sent by IRS commissioner John Koskinen.

On one hand, repealing the mandate would be a way for Republicans to claim they are keeping their promise on unraveling President Obama’s signature health care law. But dragging a major health care provision into the tax bill provides a major second benefit: giving politicians more wriggle room on their tax plan.

The tax plan can only add $1.5 trillion to the deficit over the next decade, and Republicans are already bumping up against that limit. So if they want to make more changes, they’ll likely need more money. Repealing the mandate frees up about $338 billion over a decade according to according to an analysis by the nonpartisan Congressional Budget Office.

At first glance, getting rid of the penalty might appear to make tax reform harder, since the government would lose a source of income — penalty payments by uninsured people that were projected to add up to $43 billion over a decade, according to CBO. But a repeal will bring big savings because government spending on subsidies to help people afford coverage would plummet: 13 million fewer people would have health insurance in 2027.

The number of people without insurance would increase for two reasons. Some healthy people who are buying health insurance today because of the penalty would stop buying it. But that would have ripple effects: as fewer of those healthy people signed up for insurance, premiums would increase to pay for the health care costs of a sicker group of people. Those rising premiums, in turn, would price more healthy people out of the market, creating a vicious cycle.

The net effect is that the government will spend far less on subsidies.

Adding the repeal of the individual mandate into the tax bill puts Republicans in an odd position. Some Republicans have argued that the individual mandate isn’t actually effective at persuading people to buy insurance. Conservative Avik Roy wrote that “the CBO’s exaggerated coverage estimates flow from its faith in the individual mandate’s magical powers,” arguing that it has a “minimal” effect on American’s decisions to buy health insurance.

But at the same time, Republicans are depending on those estimates of massive savings in government spending on health care to pay for tax reform.

“I think it’s sort of ironic that the only way you get lots of savings for tax reform is that the mandate is very effective at getting people into the market,” said Craig Garthwaite, associate professor of strategy at Northwestern’s Kellogg School of Management. “They are struggling for pay-fors and this is a big one. But the pay-for they’re fighting for isn’t one they believe works.”

The major political risk is that lumping the repeal of the mandate in with tax reform could endanger the passage of the bill, riling up a new set of critics.

The move to include the provision in the tax bill was immediately opposed by major health industry groups, including the main lobbies for health insurers, hospitals and physicians. The influential groups warned in a letter to politicians that the move would drive premiums up and leave more Americans uninsured.

“It seems strange to create an even greater set of enemies for yourself,” Garthwaite said.

Read More:

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Why CVS Health would want to buy Aetna

Trump’s pick to lower drug prices is a former pharma executive who raised them

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