David R. Henderson  

Henderson on Goodman on Obamacare

Our bizarre system of taxing c... Nobility Defined...
If you think that the Patient Protection and Affordable Care Act (ACA, also known as Obamacare) is bad because of its expense, the distortions it causes in the labor market, its failure to provide people what they really want, and its highly unequal treatment of people in similar situations, wait until you read John C. Goodman's A Better Choice: Healthcare Solutions for America. You will likely conclude that the ACA is even worse than you thought.

That's the bad news. The good news is that Goodman, a health economist and senior fellow with the Independent Institute, proposes reforms that would do more for the uninsured than the ACA does, and at lower cost, and also would make things better for the currently insured. And it would do all that while avoiding mandates, creating more real competition among insurers, and making the health care sector more responsive to consumers. Not all of his proposals are problem-free, but many of them are a step in the right direction.

These are the opening two paragraphs in my review of John C. Goodman's A Better Choice: Healthcare Solutions for America. My review was published in the Fall 2015 issue of Regulation.

One of the Goodman stories I relate is how some employers he knew managed to whittle down the number of employees they legally needed to cover with health insurance, out of a pool of 1,750 employees whose weekly work hours made them eligible, to 58.

I do raise, though, a major problem with the centerpiece of Goodman's replacement proposal. I write:

Because Goodman believes in choice, he would have no mandates requiring employers to provide insurance or people to get insurance. But if that were the case, why would low-income people get insurance? Most of them would do so, he argues, because of a large tax credit they would receive in order to buy it. He would make the tax credit $2,500 per adult and $1,500 per child. A family with two parents and two children, therefore, would get a tax credit of $8,000 toward health insurance. Even a family with a federal tax liability of less than $8,000 would get the whole tax credit. The euphemism that Goodman and others use for such a credit, which can exceed one's prior tax liability, is that it is "refundable." With no mandates requiring specific coverages (e.g., required maternity coverage for families that are going to have no more children), a family could get a lot of health insurance with that $8,000.

How would Goodman have the feds fund it? He would end the tax-free treatment of employer-provided health insurance. Doing so, he estimates, would raise $300 billion a year. He would also end the ACA subsidies that he estimates to be $200 billion a year. In addition, he would end government spending on indigent care at all levels of government.

I don't think that quite gets him there, though. Nowhere in the book could I find an estimate of the cost of tax credits to about 310 million people. But the math is not difficult. With about 240 million adults, the cost of the tax credit for adults would be $600 billion. With about 70 million U.S. residents under age 18, the cost of the tax credit for children would be about $105 billion. That roughly $700 billion total would then require substantial cuts in other government spending. Goodman could get there, without other cuts in government spending, by making the tax credit $2,000 per adult and $1,000 per child, making the overall cost $550 billion. But then, of course, that family of four would get a tax credit of "only" $6,000 toward health insurance.

COMMENTS (10 to date)
R Richard Schweitzer writes:

IF we begin with the distinction between a healthcare contract and an insurance policy, we can see the basic schism in the rationale of many suggested "remedies."

We have now moved to "cost-sharing" under healthcare (which differs from risk spreading under insurance)There is, of course, still some risk spreading.

Although more people may now be covered (have contracts)[?] the contracts (with increased deductibles) now provide less to everyone overall. The frequencies of costs are greater than the frequencies of risks, administrative expenses increase. If an example is desired, obtain an actuarially based premium for a "policy" to cover the deductible.

Regulatorally prescribed Healthcare contracts and "insurance" are not the instruments for funding and administering costs. Further complexities in taxation won't cure the cost distribution problem either.

JLV writes:

Its probably worth doing some back of the envelope math on this, but it may very well be that Goodman's plan would have a larger redistributive effect (in a Kakwani sense).

Not that this changes the probability that Goodman's plan will be enacted (zero, almost surely). Think about potential worlds in which there might be 218 votes in the House, 60 in the Senate and a President favorable to Goodman's plan. Is Goodman's plan even on the agenda in these potential worlds? My prior is that this wouldn't even get out of committee.

Hence this is a meaningless, but no doubt interesting, exercise.

Shayne Cook writes:

R. Richard Schweitzer's comment above seems to summarize Davids critique of Goodman's proposed remedy - "Further complexities in taxation won't cure the cost distribution problem either." Quite true.

I would quickly add though, regards U.S. healthcare and healthcare financing, cost distribution is not the problem. Healthcare and healthcare financing cost magnitude is the problem.

"Healthcare" cost currently drains just under 18% of U.S. GDP/National Income and is growing at a rate about 3 times the rate of GDP growth. And that exceptionally high cost appears to be "buying" what could only be described as "also-ran" healthcare quality and outcomes, relative to other OECD nations. It's difficult to see how mere "jiggering" the "who pays" relationships is going to improve anything. Proposing a simplistic "shift of costs" from ostensibly "poor" Americans, onto equally "poor" U.S. Federal and State Governments - which already have to borrow daily just to cover current obligations - is not a "remedy".

Ultimately, the entire U.S. economy, and every single constituent of the U.S. economy pays - again, currently 18% of (national) income, and growing at a rate about 3 time the rate of growth of (national) income.

I wouldn't call John Goodman's book a total loss though. As David notes toward the end of his review of Goodman's book,

"[Goodman] also points out that in two areas of health care where patients spend largely their own money—cosmetic surgery and laser eye surgery—prices are falling and/or quality is improving." [emphasis mine]

So it seems there is verifiable evidence that the only real mechanism for achieving both better healthcare outcomes WITH lower healthcare costs, is to at least incrementally/marginally (but steadily) re-think and replace/remove the "third-party-payer" system of healthcare finance.

Brian Blase writes:


I have not yet read John's book, but I think you need to recalculate your numbers. First, I doubt John is suggesting that we end Medicare, so the nearly 50 million people above 65 should probably not be included in your calculation.

Second, of the estimated $200 billion in ACA funding, about half is on exchange subsidies about half is on Medicaid expansion. But, the federal government was already paying about $300 billion a year on Medicaid before the expansion. You might want to exclude long-term care expenses for the disabled and elderly from the portion of Medicaid funding that would be available, but there is clearly a lot of existing annual Medicaid funding that could be replaced with tax credits.

R Richard Schweitzer writes:

@ Shayne Cook:

Why then are not the "cost magnitudes" of housing, food, energy, transportation, etc., the problem rather than the routes of "cost distribution?"

If we prescribed the housing, diets, usages of forms of energy (on the drawing boards), etc., in the same fashion as healthcare costs (as if everything were a "public good"), what would the results look like - something like healthcare costs?

Shayne Cook writes:

R Richard Schweitzer:

To answer your first question, because the "cost magnitudes" (absolute or relative) of housing, food, energy, etc. are currently NOT statutorily burdened and increased by mandatory and multiplicative layers of administrative and transaction costs that the "third-party payer" system inflicts on the U.S. economy.

In response to your second question, if the Government compelled the constituents of the U.S. economy to purchase housing, food, energy primarily or solely via a "third-party" payer system, rather than directly for myself/ourselves, then Yes, the results would look like healthcare costs.

Edogg writes:

David, out of curiosity, would you keep the medicare spending cuts of the affordable care act?

From your review near the end, "He (Goodman) points out that most insured people would pay their own dollars for health insurance that is priced higher than the tax credit--and most insurance likely would be." This is also true of the ACA tax credits, isn't it?

About helping those with pre-existing conditions who get locked out of individual insurance or have to pay dearly for it, I've read various right leaning health wonks argue that the federal government should just heavily subsidize (estimated at about $20 billion/year) state "high-risk pools". (Which is a very unfortunate name, since you very much do not want to "pool" with people who are all high-risk.)

One important clarification about the "Value of Medicaid" paper you mention is that they estimate 60 cents of every dollar of Medicaid spending goes to replacing "implicit insurance" that the recipients previously had such as uncompensated care from hospitals. So it's not that the recipients value the health services at 20-40 % of the cost. David didn't say otherwise, but someone could get that impression.

Anyway, I always enjoy your reviews. Thanks for sharing.

ThomasH writes:

I doubt that any supporter of ACA doubts that it could be improved and could have been improved with Republican input such as eliminating the tax subsidy to employer-transacted health insurance and using the savings for higher subsidies to insurance purchased individually, which could probably have eliminated the individual mandate.

I do not believe there is a lot of interest by Republicans in actually improving ACA instead of just criticizing it. I'd love for this Congress to pass "reforms that would do more for the uninsured than the ACA does, and at lower cost, and also would make things better for the currently insured. And it would do all that while avoiding mandates, creating more real competition among insurers, and making the health care sector more responsive to consumers" and prove me wrong.

Jeff writes:

Yet another discussion of the dysfunctional health care market that ignores the supply side.

Ask yourself why medical tourism exists. Thousands of highly qualified medical providers in Thailand, Europe, Costa Rica, India, Israel, Brazil, Mexico, etc. provide health care at a fraction of the costs here. But they can't move and set up shop here.

All of the health care plans we see discussed every day are about containing costs by changing incentives of consumers, but there's nothing at all about increasing the number of providers. Have we all forgotten what happens to any market when you restrict supply?

You might expect that libertarians would be especially attuned to the injustice of not allowing people to practice their profession, but that seems not to be the case. I don't understand it.

AS writes:

I'm sure Goodman has a plan that will lead to more social welfare and Pareto efficiency than the status quo (an easy standard to beat, by the way), but it will never adopted because of entrenched special interests that benefit from the status quo.

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