A GOP Plan B to Fix "Reform"

I understand that conservatives will work to repeal the health bill. But we should also understand that there has to be a Plan B, particularly given the difficulties involved in repealing any legislation of this size and significance.

David Frum has written a column for CNN.com outlining how he thinks the right should work to reform the reform.

(1) Frum zeroes in on the problem posed by the marginal taxes, implicit and explicit, embedded in the proposal. Greg Mankiw has written persuasively on this subject for a long time. I couldn't agree more that we need to work on the revenue sources. Trimming if not eliminating the tax exclusion strikes me as the best way to go.

Suffice it to say, I'm skeptical as to the wisdom of using carbon tax revenues to pay for health coverage, not least because, as Northwestern University sociologist Monica Prasad has argued, this will likely undermine the efficacy of the carbon tax as an environmental tool. Then there is the fact that a carbon tax has many other downsides, as Jim Manzi has argued. But this is a side issue.

(2) Frum then argues that Republicans should stop defending employer-based health coverage. I certainly think that conservatives should stop doing so, and the new health legislation makes this easier: because of the horizontal equity problem it introduces - the fact that working and middle class households receive far more generous subsidies on the exchanges than through the traditional employer-based system - I assume that the employer-based system will unravel, not least because the system of employer penalties is both weak, confusing, and a ripe target for repeal. Indeed, Frum seems to call for accelerating this process in (4), when he writes:

style="padding-left: 30px;">Uninsured employees have now through the exchanges been provided an easy and even subsidized way to buy their own coverage. There is no justification for the small-business fine: Republicans should press for repeal.

The trouble, of course, is that this would mean that the cost of premium subsidies will prove far higher than the CBO's analysis suggests. And that in turn means that we'll need more tax revenues.

(3) Frum offers another idea I strongly endorse, and I can imagine a bipartisan coalition developing around it over time:

We should call for reducing regulation of the policies sold inside the health care exchanges. The Democrats' plans require every policy sold within the exchanges to meet certain strict conditions.

American workers will lose the option of buying more basic but cheaper plans. It will be as if the only cable packages available were those that include all the premium channels. No bargains in that case. Republicans should press for more scope for insurers to cut prices if they think they can offer an attractive product that way.

This, however, means that we'll need a better reinsurance mechanism, a subject to which we'll return. 

I would add something else: the sliding scale subsidies will likely prove extremely difficult to administer, leaving aside the problem posed by the implicit marginal tax rates. As far as urgent problems go, I'd place that high on the list. 

Basically, I think that conservatives don't fully appreciate that we're now in a genuinely new terrain. There are some decent scenarios for how this might play out - Ross Douthat outlined one of them in his blog yesterday:

Put all this together, and you've got a scenario where the current bill eventually leads to private catastrophic insurance for young and old alike, with public subsidies but without government control and with a spending curve that bends upward only slowly. In other words, a world that partisans of free markets and limited government should welcome.

He then goes on to say that this happy scenario isn't very plausible. But we can certainly make it more likely by pressing for reforms of the reform.

By Reihan Salam:
Reprinted with permission from National Review Online