What does the Heritage Foundation have to say about saving Healthcare:Study released May 10, 2011 (Part 2)

Obamacare’s Impact on Doctors


“Saving the American Dream: The Heritage Plan to Fix the Debt, Cut Spending, and Restore Prosperity,” Heritage Foundation, May 10, 2011 by  Stuart Butler, Ph.D. , Alison Acosta Fraser and William Beachis one of the finest papers I have ever read. Over the next few days I will post portions of this paper, but I will start off with the section on Healthcare.

The Details

A New Health Tax Credit. The Heritage plan ends the existing tax
exclusion for employee compensation in the form of employer-sponsored health
insurance. This means that the value of employer-paid health insurance premiums
is included in the employee’s total taxable compensation. Today’s system
excludes this compensation from income and payroll taxes, effectively giving
upper-income workers in high-tax brackets a large tax benefit.

In return for ending this tax break, the plan introduces a new uniform,
nonrefundable federal tax credit to assist families in their purchase of health
insurance. Employers and employees could decide whether to have the employer
continue to buy coverage or to cash out the existing coverage in the form of
higher cash income. Either way, the tax break for coverage would change from an
exclusion to a credit.

The net value of the credit is $2,000 for an individual and $3,500 for a
couple or family. Under the Heritage plan, this credit can be used either to
offset the cost of coverage offered through the workplace or to buy insurance
outside the workplace. For most middle-income working families, the value of the
credit is similar to the tax relief that they receive for health insurance
today. For upper-income households, the new credit is typically less and is
reduced as income rises. The phaseout begins at $50,000 for an individual and
$100,000 for a family. The credit is fully phased out at $90,000 for an
individual and $170,000 for a family.

Health Care Credits and Subsidies

The credit is advanceable, assignable, and available on a prorated basis.
This means that the credit is available when premiums are due, enabling families
to claim the credit for premiums already paid before the end of the tax year. An
assignable credit allows a family to assign their tax credit to a health plan in
return for a dollar-for-dollar lower premium, eliminating the need to claim it
on their own tax forms.

It is important to note that health care benefits are a form of worker
compensation directed by the employer and are not “paid for” in any charitable
sense by the employers. Therefore, in the labor market, employers would likely
adapt to the tax reform either by increasing the wages for their employees
instead of offering health insurance or by continuing to offer coverage to their
employees. Either way, we know from research that the employee’s overall
compensation should stay the same in most cases.

There is no mandate on individuals to obtain insurance, but if they did not
obtain coverage, they would have to forgo the credit or assistance for
insurance. Importantly, the Heritage plan envisions much wider use by employers
of auto-enrollment mechanisms in the future, with employees automatically
enrolled in a plan as the default option. Research suggests that such an
auto-enrollment approach, combined with tax incentives or subsidies, is likely
to result in high rates of enrollment under the credit system.

Assistance for Lower-Income Working Families. Financial assistance for
purchasing insurance, equivalent to the tax credit, is made available to
households with no tax liability and prorated to those households with a tax
liability less than the value of the available credit. This money can be used
only for purchasing health insurance and typically would be sent directly to the
chosen plan in return for a dollar-for-dollar reduction in the premium to the
family. This is like the way the government’s contribution to a federal
employee’s FEHBP reduces the employee’s premium.

Thus, if a family’s tax liability is less than the value of the credit, the
family receives assistance partly in the form of a credit (up to its tax
liability) with the rest in the form of direct assistance for insurance. If this
family’s income rises in subsequent years, the amount it receives as assistance
is phased out and the credit amount is phased in, maintaining the same full
credit/assistance amount throughout the income change. In contrast to the
current patchwork health care model, the Heritage plan streamlines federal
assistance to ensure that no families fall through the cracks.

For very-low-income families with children earning less than 200 percent of
the federal poverty level (FPL), the Heritage plan provides an additional
federal subsidy worth $5,500. The full additional subsidy would be available to
families up to 133 percent of the FPL and would gradually phase out between 133
percent and 200 percent of FPL. This enhanced subsidy is intended for the
traditional, “mandatory” Medicaid populations—the groups that states are
required by federal law to include in Medicaid—and the eligibility phaseout is
designed to minimize work disincentives, unlike current law, in which Medicaid
has a very sharp eligibility cutoff. In 2011, a family of three with an income
below $37,000 would meet this threshold. Again, this is paid for with
reductions in federal spending. Of course, states may provide additional
assistance to low-income families and individuals.

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