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Why Obamacare Is Still With Us

The Josiah Bartlett Center’s Andrew Cline writes in USA Today that to replace Obamacare, Republicans must first agree to make a gradual transition toward a freer market in health care.  (Editor’s note: We did not write the USA Today headline. That was the work of an editor at the paper.)

 

Why Obamacare is still with us

By Andrew Cline 

Republicans in Washington have failed to deliver on a signature campaign promise — to repeal Obamacare — despite controlling the House, Senate and White House. After last week’s flop, the party’s various factions pointed fingers faster than an all-mime production of “Gunfight at the O.K. Corral.” 

The most common accusations — inept management, poor leadership, rogue senators — identify only symptoms of a larger problem. The “root cause,” so to speak, is that the Republican Party does not enjoy the same clarity of purpose on health care that the Democratic Party enjoys. 

On health care, Democrats have two advantages over Republicans. One is a shared purpose: universal coverage achieved through aggressive government intervention. The other is their willingness to achieve that goal incrementally.

Obamacare did not achieve universal coverage. The percentage of uninsured Americans has fallen from 14.6 percent in 2008 to 11.3 percent. But Obamacare moved the country closer to the goal, which brought more strident left-wingers on board. 

Republicans do not share such clarity. There is broad agreement only on the political goal: repealing Obamacare. There is no agreement on the principles, never mind the details, that would guide replacement.

There are two primary reasons for this lack of clarity. One is that the Republican Party does not insist on ideological conformity from coast to coast. Keeping the likes of Sens. Rand Paul and Susan Collins under the tent helps the party win majorities in Congress. But that ideological diversity can make it harder to govern. 

Democrats have a spread, too, but it is narrower. Nearly a third (29 percent) of Republicans say the federal government “has a responsibility to ensure health coverage for all,” while only 14 percent of Democrats say it doesn’t, according to Pew Research data. 

The other reason is that health care does not lend itself to quick “get the government out of the way” fixes. The health care marketplace is thoroughly distorted by government interference (this was true well before Obamacare). These distortions have to be slowly and carefully unwound. Because many of them have grown popular, no majority can be found for quickly abolishing them. 

If there were a quick and easy free-market solution, it would be law by now. But the political reality is that government’s heavy hand will not be removed any time soon — because most voters don’t want it to be. 

Another factor: Medicaid comprised 28 percent of state budgets in 2015, which explains why so many Republican governors pushed back against the last Obamacare repeal bill. (For comparison, elementary and secondary education accounted for 19.5 percent.)

Pew polling shows that only 5 percent of Americans say government shouldn’t be involved in health care. Given the country’s lack of an appetite for a pure free market in health care, Republicans might consider turning to a leader from the past for guidance. Conservative health care analyst Avik Roy reminds Republicans that in his classic 1964 “Time for choosing” speech, Ronald Reagan offered a guidepost, saying “no one in this country should be denied medical care because of a lack of funds.” Taking his lead from Reagan, Roy offers a path forward. 

Roy, who has urged Republicans to bridge their internecine gap, points out that health care is the No. 1 driver of runaway federal spending. With every day that passes under the current system, the country slips into worse financial shape and the country becomes more dependent not just on Washington, but on the bureaucracy itself (see Medicaid). 

Roy offered a plan in 2014 that would cover more people than Obamacare while reducing government interventions and spending. It would replace Obamacare with Swiss-style subsidies for lower-income Americans while transitioning the inefficient government-run Medicaid program toward a more market-oriented system. 

It would be an improvement over the current system, yet it is not even considered because it is not free market enough for most Republicans. Opponents to options such as this one pretend that the alternative is a true free market in health care. It isn’t. There is no appetite for a true free market at the moment. The alternative to a transitional model is the status quo. 

We can either move incrementally toward a freer market, or we can drift toward single payer. Those are the options. If Republicans cannot agree on that, then Obamacare really is here to stay. 

Andrew Cline is interim president of the Josiah Bartlett Center for Public Policy, a free-market think tank in New Hampshire. 

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Pension Reform Resources

With growing funding shortfalls, exacerbated by the recent economic turmoil, many states are taking a hard look at reforming their state pension systems. We here at the Josiah Bartlett Center have been following this trend here in New Hampshire as well as in other states across the country. Below is some of our work done on pensions so far as well other informational resources.

New Hampshire Specific:

A JBC study that explains what an Unfunded Liability is and why it is important

Another JBC report on the current state of the New Hampshire Retirement System and why reform is desperately needed

The current legislation in the New Hampshire Senate, SB229, which would create a defined contribution plan for state employees

The most recent analysis of SB229 done by the NHRS actuary

 

National:

A JBC study on defined contribution (401(k)) models that other states currently have in place

Research done by NCSL on the types of retirement systems used by various states across the US

Further research on the growing problem with unfunded liabilities in state pension systems

A recent US Senate report on the current pension funding crisis as well as a piece from Real Clear Markets on the issue

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Let States Experiment with Healthcare

Charlie Arlinghaus

February 1, 2012

As originally published in the New Hampshire Union Leader

MOST PROPOSALS on health care are part of a highly charged ideological debate. One exception this year, the health care compact, is not a short-term solution but a longer-term project that will allow New Hampshire to benefit by letting other states craft proposals on the right and the left.

A health care compact is a proposal in the Legislature to have New Hampshire join with other states (four have already passed the compact language) to petition the federal government to grant states the authority to take federal health care spending in their state and craft their own program as a replacement for the federal program.

This is not some wacky theory like nullification, but rather states coming together and asking Congress to vote to give states an option. One option would be to stay in whatever system is created by reforms in Medicare and Medicaid.

Another option would be for an individual state to create its own reform. Very few states will undertake their own reforms, but we could all benefit from giving those few states that option.

We know that change is coming to the biggest federal health care programs. Rep. Paul Ryan, the leading conservative on health care issues, and Sen.

Ron Wyden, one of the leading liberals on health care issues, have put forth a compromise proposal. The merits of the proposal don’t matter for this discussion. When the leading liberal and leading conservative on health care both agree that change is coming — amid a half dozen other proposals floating around Washington — we know change is coming.

A health care compact would let states, if Congress agreed, craft their own experiments instead of accept whatever new federal proposal emerges in the next few years. Some states will do things that I support, others will do things that different people support and then we’ll see how each works.

At a hearing on the compact, Rep. Gary Richardson asked me what I actually wanted to see happen. The implication is that I have an end game in mind and want the federal government to let us make that happen in New Hampshire.

What I really want is for New Hampshire to wait. I want us to petition the federal government to give states authority if they choose and then wait and see what other states do. Even though all 50 states would be granted the choice by Congress, only six or eight would exercise that choice, but each of those states would amount to a pilot program — and very different pilot programs that should teach us something.

“Laboratories of democracy” has become one of the most hackneyed phrases in American politics, but Louis Brandeis’ original thought is at the heart of a health care compact.

Brandeis said “one of the happy incidents of the federal system is that a single courageous state may, if its citizens choose, serve as a laboratory; and try novel social and economic experiments without risk to the rest of the country.”

I don’t think New Hampshire is currently up to the task of coming up with useful reform but other states are. Texas would probably try something more market-oriented, Vermont would almost certainly create a single-payer plan and become a teeny version of Canada.

I think Vermont or Oregon or whoever tried single payer would prove it a failure, but it is possible that I’m wrong (unlikely, to be sure, but within the realm of possibility). On the other hand, the New Hampshire way is to watch carefully what other states do and then import the best pieces into our system. Allowing other states to pilot innovative programs, only if they choose to do so, will help us all.

Some will object that nothing in a compact prevents states from doing something stupid.

But that’s just the point. We want to allow states to craft their own pilot programs with as much latitude as possible. They should use their judgment to replace Washington’s. And New Hampshire should watch the results to reap the benefits.

Make no mistake, this is a long-term, cautious project. It won’t go before Congress until many states have joined together to ask. Even then, it will require debate and congressional approval. Even at that point, New Hampshire should let other states lead the way and watch cautiously. But their pilot programs will teach us lessons and teach the federal government lessons. This is a health care proposal that doesn’t presuppose a program or an ideology. It will be a tool for liberals and conservatives alike. The longterm future of health care will demand more than just yes or no answers to the question of the month. We should put other states to work for us.

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Defined Contribution Models in Other States

By Josh Elliott-Traficante

October 2011

With mounting unfunded liabilities in their pension systems, made worse by the recent economic turmoil, many states have begun looking at other retirement benefit options. In recent years, policy makers in a number of states have turned away from the pure pension model, instead opting for plans that are not only fair to the employees but also free the taxpayers from being left with the bill for huge deficits. Given the scale of the pension funding crisis, several reform minded states have instituted a variety of systems to replace their pension systems, which are outlined in the following paper.

Defined contribution systems however, come in a number of varieties and the basics of plans currently used by other states are laid out below:

Pure Defined Contribution System:

A pure defined contribution system functions in the same way as a private sector 401(k) functions. Money is contributed by the employee and generally matched by the employer, up to a certain percentage of the employee’s salary. Under this setup, as the employee gets closer to and passes the age of retirement, the ratio between stocks and bonds in the portfolio declines, reducing risk in exchange for greater stability. Under this set up, all of the risks and rewards of the fund is placed on the employee. There is no governmental liability once the contributions have been added.

States with mandatory defined contribution systems:

Alaska, The District of Columbia, Michigan (state employees), Utah (must choose between defined contribution plan or Hybrid plan)

States with open optional defined contribution systems:

Florida, Montana, Colorado, Ohio (all but Police &Fire), South Carolina (all but Police &Fire), North Dakota (non-classified employees)

Benefits:

–          Potential for employees to realize greater returns

–          No liabilities for the taxpayers

–          Greater portability

Disadvantages:

–          All of the investment risk falls on employees

Member Direction:

In all of the states offering defined contribution plans, the employees have a say in the investment direction. While employees do not get to pick what particular stocks or bonds to buy as they would with a brokerage account, they do pick the fund. Alaska, for example, offers a selection of funds for their employees to choose from ranging from Target Date Funds to Treasury Bond funds and everything in between.[i] Among states that offer DC plans, this is a standard practice.

Variations: In House vs. Contracted Out

When discussing the possible implementation of a defined contribution system the question arises of whether to manage the assets of these plans in house, or let an investment company such as Charles Schwab or ING manage the funds. Both options are currently being exercised in other states. In Alaska’s plan for example, assets are managed by number of firms including Black Rock and T. Rowe Price, while in Utah the assets are managed in house.

Implementations and Important Considerations:

No two states are exactly alike, so what simply taking what one state has done and doing it here in New Hampshire without modification would be unwise. For New Hampshire to switch over to a defined contribution system, changes would be need to be made to Group II (Police and Fire) to ensure equity between the two groups. Currently Group I employees pay into Social Security while working and receive benefits when they retire. It functions similarly to a pension plan in that it provides a regular and guaranteed payment. Group II however, neither pays into, nor receives Social Security (in part this is why they pay higher contribution rates currently.) In order to give Group II retirees the same assurances their Group I counter parts have, there are two potential options, either require Group II members to enroll in Social Security or create a version of a Hybrid Plan, which combines a pension and a 401k scheme that is only open to Group II.

The Hybrid System:

Hybrid System, combines a reduced pension and with a supplemental 401(k) for retirement benefits. The idea, similar to that of social security, is to give retired state employees some sense of stability in their retirement income, while not also burdening the tax payers with large pension liabilities. In the example of a hypothetical Hybrid System, the employee’s and employer’s contribution total 10% of the salary of the employee. This 10% contribution is then divided between a pension fund and a 401(k) fund. Each year the contribution rate for the pension portion is assessed, so as an example for Utah the 2011-2012 year the rate was calculated by actuaries to be 7.59%. The remaining 2.41% was contributed to the 401(k) portion.[ii]

The above model is only one way for a hybrid model to function. For example, under Georgia’s plan, the employee pays 1.25% towards the pension portion and the state contributes a portion set by actuaries (7.42% for 2011-2012 year). The employee contributes mandatory 1% to the 401(k) plan, with the state matching 100% for the first 1% and 50% for the next 4%. In simpler terms, the state’s maximum contribution to the 401(k) portion is 3%[iii]

States with mandatory Hybrid systems: Washington State (Teachers), Georgia

States with open optional Hybrid systems: Ohio, Oregon, Indiana, Washington State (All but Teachers), Michigan (Teachers), Utah (must choose between defined contribution plan or Hybrid plan

Benefits:

–          Investment risk spread between tax payers and employees

–          Combination of potential greater return and stability

–          Portability of 401(k) portion

Disadvantages:

–          Taxpayers still liable for short falls, albeit smaller than normal pension plan

Variations: COLAs

It is important to note that the contribution rates for Utah take into account cost of living increases (COLA) to the pension portions that are based on the Consumer Price Index. COLAs are capped at 2.5% per year. COLAs in the Georgia plan are at the discretion of the retirement board but not specifically built into the plan.

Variations: Institutional vs. Member Direction:

For the 401(k) portion of the hybrid plans, there is states have taken different routes in terms of who dictates the direction of the investments. In states such as Utah, Oregon and Georgia, for example, all of the investment direction is done in house by the respective retirement systems. In contrast, Ohio’s system allows for employees to choose between different in house managed funds.[iv]

Variations: Parallel Hybrid vs. Stacked Hybrid[v]

Parallel Hybrid:

This is the type of hybrid plan now in effect for the all of the states mentioned above. The employee receives a split DC/DB plan at all income levels. Though pensions would be smaller in comparison to a pure defined benefit plan, there is no cap.

Stacked Hybrid:[vi]

This type of plan, proposed by the Center for Retirement Research at Boston College, flips the parallel hybrid plan on its side. Rather than a split plan at all income levels, an employee is given a pension, based on a capped salary, for the sake of argument, $45,000. For those who make less than this amount, they and the employer only make contributions for a pension. For those who make more, say $60,000, the employees and employers would make contributions to the pension portion on the first $45,000, while any contributions made on salary over that amount would be placed into a 401(k).

Implementations and Important Considerations:

In the case of the stacked hybrid plan, suggested as an alternative to the parallel plan, what the cap is on the pension can vary. The proponents of the plan at the Center for Retirement Studies at Boston College proposed having the cap set at the average salary for the resident of the state, which is then indexed to inflation going forward.[vii] This cap could be set at any level, average state salary, median state salary, or just a round number, like 45,000, which is then indexed in some way to the growth of inflation so as to retain its intended value.

The contribution rates and ratios between the 401(k) and pension portion of the hybrid plans expounded on in this paper should not be taken as specific policy suggestions; they have been merely used to illustrate how other states administer similar systems. I am not, nor do I purport myself to be an actuary so I do not know, nor would I venture a guess as to what contribution rates would work for New Hampshire for the system to remain solvent.

Ohio Option:

Offering the greatest variety of choices to their public employees is Ohio. Under the Ohio Public Employee Retirement System (OPERS) employees are given the option of joining a traditional defined benefit plan, a hybrid plan, or a defined contribution plan.

Plan details:

Pension

Multiplier: 2.2% x Final Three Years Average Salary x Years of Service

If the years of service is 30 or over, the multiplier is 2.5%

Employee Rate: 10-11.1%

Hybrid

Multiplier: 1.1% x Final Three Years Average Salary x Years of Service

If the years of service is 30 or over, the multiplier is 1.25%

Employee Rate: 10-11.1%

Member Directed

Rates: Employee 10%, Employer 14%: Normal Cost 8.73%, Health 4.5%, Mitigation, .77%

Note: Plan stipulates that if Pension System needs financial shoring up, employer assessments on Member Directed Plan employees may be required. This mitigation rate is set at .77%

Conclusion:

There has been a slow, but gradual shift in the past twenty years to move state retirement benefits plans from pensions to 401(k)s or hybrid plans in an effort to either eliminate the future liabilities of the state or to at least share the financial risk between the state and the employees.

While there will be no silver bullet to fix the current short falls of the system, establishing a plan that does not leave the taxpayers on the hook will ensure the future fiscal health of the state.

[i] http://doa.alaska.gov/drb/dcrp/financial/dcrp-investment-options.html

[ii] https://www.urs.org/pdf/AnnualReport/2010/annualReport.pdf

[iii] http://www.ers.ga.gov/plans/ers/formspubs/GA%20ERS%206-30-2009%20Valuation%20Report%20Final.pdf

[iv] https://www.opers.org/members/combined/index.shtml

[v] Image taken from “A Role for Defined Contribution Plans in the Public Sector” released by the Center for Retirement Research at Boston College.

[vi] http://crr.bc.edu/briefs/a_role_for_defined_contribution_plans_in_the_public_sector.html

[vii] http://crr.bc.edu/briefs/a_role_for_defined_contribution_plans_in_the_public_sector.html

 

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