The Flaws That Will Bring Down Obama’s Health-Care Plan

Ramesh Ponnuru @ Bloomberg:

The debate over President Barack Obama’s health-care law has taken another twist. Now conservatives and libertarians are defending it, while the administration tries to toss part of the legislation out.

The reason for this role reversal is that the drafters of the law outsmarted themselves and handed their opponents a weapon. Now they would like to pretend the law doesn’t say what it does.

Obama’s plan makes tax credits available to people who get health insurance from exchanges set up by state governments. If states don’t establish those exchanges, the federal government will do so for them. The federal exchanges, however, don’t come with tax credits: The law authorizes credits only for people who get insurance from state-established exchanges. And that creates some problems the administration didn’t foresee, and now hopes to wish away.

Legislative debate over the law didn’t go into great detail about these provisions. We can surmise what happened, though. Supporters of the legislation wanted to encourage states to set up the exchanges. So they offered the states a deal: If they did so, they would get to write their own rules, and their citizens would be able to get the tax credit. The states would also gain extra flexibility on Medicaid spending. The law’s supporters also expected the health-care law to become more popular over time.

Taxes and Penalties

That hasn’t happened. Many states are determined in their opposition, and few of them have set up exchanges. If they don’t do so, the tax credits don’t go into effect and the federally established exchanges won’t work: People won’t be able to afford the insurance available on them without the subsidy.

States have another incentive to refrain from setting up exchanges under the health-care law: It protects companies and individuals in the state from tax increases. The law introduces penalties of as much as $3,000 per employee for firms that don’t provide insurance — but only if an employee is getting coverage with the help of a tax credit. No state exchanges means no tax credits and thus no employer penalties. The law also notoriously penalizes many people for not buying insurance. In some cases, being eligible for a tax credit and still not buying insurance subjects you to the penalty. So, again, no state exchange means no tax credit and thus fewer people hit by the penalty.

The administration’s response to the impending failure of its signature legislation — a failure resulting entirely from its flawed design — has been to ignore the inconvenient portion of the law. In May, the Internal Revenue Service decided it would issue tax credits to people who get insurance from exchanges established by the federal government. It has thus exposed firms and individuals to taxes and penalties without any legal authorization. Obviously, that situation sets the stage for lawsuits.

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