Not a real health care plan

February 17, 1994|By Henry J. Aaron

DAUNTED by the complexities of President Clinton's health care proposal, many members of Congress and business leaders are embracing the alternative offered by Rep. Jim Cooper. They should reconsider.

Although the Tennessee Democrat calls his plan "Clinton lite," it is not merely light but utterly empty on the central goal of the Clinton plan: universal coverage.

The Cooper proposal, for all its relative simplicity, fails even to specify what benefits would be covered, making it impossible to estimate its cost. Worse, it would produce devastating disincentives to work.

In contrast to the Clinton plan, which would require employers to pay 80 percent of workers' insurance premiums, the Cooper plan would ask only that employers make health insurance available to their employees but not require them to pay for it. It fails to specify what constitutes an acceptable insurance plan, leaving this task to a commission that would not meet until the legislation was enacted.

Since no insurance plan, however fairly priced, is of much value to people too poor to pay the premiums, the Cooper plan includes subsidies for low-income households. Insurance would be free to those below the official poverty line; the subsidies would be phased out as income rose to 200 percent of the poverty level.

This means that millions of workers would have no incentive to increase their earnings. Here's why:

The cost of the median health insurance plan now provided by employers is about $5,550 for a family of three. Thus, Mr. Cooper would make available a subsidy worth $5,550 to such a family at or below the official poverty threshold ($11,866 in 1994). By the time income reached twice that level, $23,732, the family would receive no public support in buying health insurance.

Eliminating a benefit worth $5,550 for income from $11,866 to $23,732 is equivalent to a tax of 47 percent. Across this whole income range, such households also see their earned-income tax credit phased out, at a rate of 17.86 cents per dollar of additional earnings.

They pay personal income taxes at a 15 percent rate and Social Security taxes at a 7.65 percent rate. Thus, the total effective tax rate would be nearly 88 percent. Most such families also pay state income taxes, pushing the total tax even higher.

Such taxes are almost confiscatory. It is hard to believe that any member of Congress would knowingly support the creation of a near-poverty trap like the one that would result from the Cooper health proposal.

Since the subsidy structure of the Cooper plan is impractical, the plan can do almost nothing to extend health coverage to those who don't have it now. To reduce the disincentive to work would require one of two solutions, both unacceptable.

The subsidies could be phased out much more gradually. That change would reduce the disincentive to work but would drastically raise the cost of the program.

Or benefits could be sharply reduced for those below the poverty level, meaning that the subsidies could be withdrawn at a slower rate from those just above it without extending subsidies to higher-income households. But reducing the benefits would make the availability of health insurance a cruel tease, something people dearly want but cannot afford.

Why is there a boomlet on behalf of the Cooper bill if elementary analysis shows it to be not really a plan at all -- silent on benefits and devastating to work incentives?

The answer, I think, lies in the size and complexity of the decisions required to achieve universal coverage and to institute cost controls.

The Clinton plan tries to address the myriad issues raised by wholesale reform of one-tenth of the U.S. economy. Having looked at the complexity and size of the task, many people are acting like the judges in the beauty contest who, having seen the first contestant, give the prize to the second, sight unseen.

No other explanation comes to mind for the willingness of usually hardheaded business organizations to embrace a plan that will not bear serious scrutiny.

Rather than advocate conflicting plans that cannot and perhaps should not win approval, supporters of the major competing proposals need to start a serious search for common ground.

Henry J. Aaron is director of economic studies at the Brookings Institution.

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