Tax Analysts Blog

Social Welfare on the Cheap: Why Obamacare Was Built to Fail

Posted on Jan 12, 2017

Republicans still seem intent on repealing and possibly replacing Obamacare. That's no surprise, given the centrality of that promise to GOP politics over the last seven years.

But swift (and probably piecemeal) destruction of the Affordable Care Act is a program fraught with peril -- both for Republican politicians and for millions of Americans currently insured through the individual market. As both liberal and conservative  experts have noted, repeal without immediate replacement seems likely to disrupt insurance markets and leave chaos in its wake.

For Democrats -- who are playing the weakest hand of any major party in living memory -- that avoidable disaster presents an opportunity. Unable to stop ACA repeal, the party is determined to capitalize on it. Saddling Republicans with the blame for insurance market disruptions makes sense politically, and it will probably be an easy task. But the blame game offers cold comfort to current ACA policyholders who seem likely to lose their insurance soon.

And as long as we're parceling out blame, let's be sure to allot some to Democrats. If the ACA disappears -- immediately or in stages, partially or in total, with replacement or without -- Democrats will share in that responsibility. After all, they built Obamacare, and from a political standpoint, they built it to fail.

Problematic Politics

The ACA was always destined to be a heavy political lift. Its vulnerability derives from two distinct phenomena: popular resentment of any sort of insurance mandate -- which runs counter to the durable, libertarian strain of American political culture -- and elite resentment of the taxes used to pay for expanded coverage.

The privatized approach to universal insurance coverage has proven viable in other countries, notably Switzerland and Germany.  But to work, privatized universal health insurance requires a much stronger mandate than that which undergirds Obamacare. Indeed, the creeping failure of the ACA that preceded the GOP victory in November stems from the current mandate's weakness. With many young and healthy Americans opting to pay the penalty rather than purchase insurance, the risk pool for ACA policies has been notably sick -- and expensive to insure.

But of course, a strong mandate is probably impossible in the United States. Even the current weak one has proven deeply unpopular. Framed as a tax, the shared responsibility payment required of the uninsured has been a lightning rod for popular outrage. Indeed, it's probably the source of most of it (along with some lingering resentment of the insurance regulations that rendered some pre-ACA policies obsolete).

Still, the broad unpopularity of the mandate and its tax penalty is only half the story. The other half comes from the rest of the taxes used to pay for the ACA. The law also imposed a "Cadillac" excise tax on high-cost healthcare plans, a 3.8 percent net investment income tax, and a medical device excise tax.

Those other taxes were narrower than the shared responsibility payment, but they were much more onerous for the small groups required to pay them. Medical device manufacturers have been especially vocal  about their new ACA burden, as have labor unions  keen on protecting the high-grade insurance plans cherished by their members. Those constituencies have been highly motivated and extremely active in making their case against the Obamacare taxes.

Perhaps even more important has been the NII tax, a non-trivial tax levied on the sort of high-income, well-connected taxpayers who tend to fund political campaigns (and lobbying efforts).

Taken as a whole, the new taxes were destined from the start to be the Achilles' heel of the ACA. The individual mandate penalty is broad enough and heavy enough to ensure that millions of people will hate the law -- yet neither broad nor heavy enough to ensure viable risk pools. The other tax elements of the ACA ensured that small groups of motivated (and outraged) taxpayers would mount large campaigns to gut the law's financing.

Many ACA taxes can be defended individually on the merits. The mandate penalty is an obvious necessity if privatized universal health insurance is ever going to work. The Cadillac tax is a useful tool for controlling the growth of healthcare costs. The medical device tax is a reasonable contribution from a constituency likely to benefit from broader health coverage. And the NII tax is highly progressive -- not a bad thing, in my estimation (although it probably is a bad thing to use a semi-targeted healthcare tax to increase the overall progressivity of the tax system).

But in combination, those reasonable taxes look a lot less reasonable. Or at least less politically viable. Together, they created, sustained, and energized a durable coalition of motivated opponents to the law.

Partial Repeal

The political toxicity of the Obamacare taxes was obvious before the law was even enacted, with labor unions especially quick to mobilize (medical device manufacturers weren't far behind). The long-term danger to the ACA should have been clear to everyone: Opponents would continue to undermine the law by attacking its funding in piecemeal fashion. As I wrote in 2009 while the law was still being drafted:

Taken as a whole, this scattershot approach to financing healthcare reform is self-defeating. Piecemeal funding makes for piecemeal reform. Each of the proposed revenue raisers has a vocal constituency organized to defeat it. And one by one, they've been picking them apart for weeks.

Four years later, with Obamacare getting less popular by the day, I tried to make the same point again:

Narrow levies -- especially ones that seem to target certain individuals and industries -- leave nascent social programs chronically vulnerable. Opponents can hobble these programs by attacking their funding base. In the case of the ACA, Republicans will probably continue to fail in their ham-fisted attempts to repeal the program all at once. But they could very well succeed in killing it slowly, chipping away at its funding and using the resulting shortfalls to justify cuts in benefits and coverage.

The Republican romp in November's election opened the door to more fundamental attacks on Obamacare, including the possibility of wholesale repeal. But even now, funding seems likely to be the ACA's immediate cause of death. GOP congressional majorities are not big enough to guarantee outright repeal (unless Senate leaders dispense once and for all with the filibuster). But the budget reconciliation process remains a viable means of destruction.

Repeal through reconciliation will not be pretty, assuming that Republican leaders pursue it in piecemeal fashion (leaving regulatory elements of the ACA intact and delaying enactment of a comprehensive replacement). As Joseph Antos and James Capretta of the American Enterprise Institute noted in a recent analysis, the a la carte approach is likely to produce "less secure insurance for many Americans, procrastination by political leaders who will delay taking any proactive steps as long as possible, and ultimately no discernible movement toward a real marketplace for either insurance or medical services."

More to the point, the Committee for a Responsible Federal Budget estimated last week that partial repeal would increase the number of uninsured Americans by 23 million (other estimates are even higher). If you think blowback to the ACA's enactment was bad for Democrats, just wait for the anti-GOP firestorm that follows that sort of disruption.

Reconciliation is a bad path for anyone serious about the "repeal and replace" elements of GOP healthcare promises. At this point, it's hard to tell what party leaders have in mind for those extremely challenging tasks. Talk of tax credits and high-risk pools suggests only the barest outline of a viable plan. But in any case, a comprehensive replacement seems likely to take time -- and perhaps a lot of it.

Road Not Taken

Meanwhile, Democrats are focused on assigning blame for the looming disaster. Indeed, President Obama has urged his party to let Republicans hang themselves with their own unrealistic promises.

It's probably too much to hope that Democrats will do anything more than point fingers and obstruct everything they can. After all, that strategy worked pretty well for Republicans after their own electoral wipeout in 2008.

But for their sake -- if not for the sake of millions of Americans about to lose their insurance coverage -- Democrats should also be looking to the future of healthcare policy. Intransigence can be rewarding in the short term, but as Republicans are now discovering, it's not enough.

When the Democrats get their next bite at the apple -- and they will, despite all the hand-wringing on the left and back-patting on the right -- they will have a chance to avoid past mistakes as they try to build a better healthcare system.

I wouldn't be surprised to see Democrats embrace the unthinkable: single-payer healthcare. In 2009 the party judged that route too radical. But in many key respects, it's less radical and more politically viable than the half measures and compromises that constitute Obamacare. Framed as "Medicare for all," single-payer health insurance comes to the table with ample precedent and a likely reservoir of political goodwill (especially if Republicans make good on their rumblings about reforming Medicare, which might well prove to be their Waterloo).

Perhaps most important, single-payer reform would be universal. In American politics, universal social welfare programs have always been more popular and politically secure than means-tested alternatives. Sure, programs like Medicare and Social Security deliver a lot of benefits to people who don't necessarily need them, but that's the price of viable social welfare in American society.

It may seem ironic, but Americans have traditionally preferred really big government that doesn't play favorites when compared with somewhat smaller government that does. Obamacare offered real benefits to all Americans, including those with employer-sponsored healthcare (such as the assurance that they could buy individual policies if the need arose, despite preexisting conditions). But the ACA's greatest benefits were reserved for the previously uninsured.

In my view, that's good social policy: I think Americans should embrace the responsibility of ensuring that everyone has access to healthcare. But from a political standpoint, that meant Obamacare was always viewed as a non-universal, particularistic sort of program. And that made it vulnerable, especially because the expansion of coverage was paid for (at least in part) by people who had no direct stake in that expansion.

The Next Chapter

When Democrats revisit health policy in a post-Obamacare landscape, I suspect they may return to the sort of broad-brush social welfare policy pioneered by Franklin D. Roosevelt. FDR understood that welfare programs work best when they are biggest.

Roosevelt also demonstrated that the best way to ensure the long-term viability of those programs is to ask people to actually pay for them. For Social Security, that meant a payroll tax. For the next version of Democratic healthcare reform, it may be a VAT. In any case, broad-based programs deserve broad-based taxes.

Liberals will object that rich people are already making out like bandits and that asking them to pay for remedial social welfare programs is only reasonable. But even if we accept the justice of that argument (which many won't), it's a political non-starter.

Liberals should be less focused on making taxes progressive and more focused on making government progressive. In 1935 left-leaning critics were aghast when President Roosevelt decided to finance Social Security with a regressive payroll tax. But as I noted in a 2009 article on Social Security,  FDR understood the politics better than his critics.

Payroll taxes “were never a problem of economics,” Roosevelt explained to one skeptical adviser

They are politics all the way through. We put those payroll contributions there so as to give the contributors a legal, moral, and political right to collect their pensions and their unemployment benefits. With those taxes in there, no damn politician can ever scrap my social security program.

Trading optimal progressivity for long-term political viability was a good deal for liberals in 1936. It will still be a good deal for liberals when they get another chance to enact healthcare reform.

Read Comments (2)

Mike55Jan 18, 2017

Very thoughtful/well done article; good stuff all around!

One random musing: do you think it's possible that part of Obamacare's unpopularity was simply the inherent dislike people had/have for the delivery mechanism? Private health insurance offers a painfully low value proposition and poor user experience here in the U.S. Subsidizing the cost of a low quality product (i.e., the Obamacare delivery method) just doesn't FEEL the same to most people as sending checks in the mail (i.e., the Social Security delivery method).

I get that both delivery methods are objectively equivalent if you assume consumption of healthcare is mandatory (which most people do). But I do think people care about how things subjectively feel -- even cold-hearted tax attorneys like myself are not fully immune to such sentiment -- so it perhaps the use of subsidies was at least part of the problem with Obamacare.

Edmund DantesJan 19, 2017

Although I agree with both the article and Mike's comment, the reason I hate Obamacare is not mentioned.

I hate Obamacare because it was founded on the lie, "If you like your plan, you can keep your plan." I co-own a very small company. Before Obamacare, we had great health insurance, though well short of a Cadillac plan. It was expensive. It carried my family though several major medical situations over the years, so that medical calamity didn't become financial calamity.

Now our insurance is about as expensive, but it is largely worthless. The deductibles have soared, and the drug coverage is really crappy compared to our old plan. Those who have daily medication needs have seen their costs go up by a factor of 10 or more. We are not buying on the exchange, but the policies now available to us are essentially the same. Who wants to pay $12,000 for annual premiums to get a $6,000 deductible plan, so you get no actual benefit until $18,000 is gone? This is simply not reasonable. No wonder so many are opting out--paying a big penalty tax because they can no longer afford to buy something they want, something they used to have.

This is the real reason so many people hate Obamacare. They were lied to, repeatedly, by many different politicians, most notably the President. Now, we do expect to be lied to by politicians, but this was really a whopper. It was yuge.

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