A friend who is a Democrat and a donor recently told me that the Biden team’s fundraising pitch to him was all about the Affordable Care Act (ACA). But the pitch was not that the ACA was a magnificent creation that must be protected. Rather, the story was that Joe Biden regrets the veer to the left that the ACA became because the political backlash made the Obama administration a lame-duck administration by the first midterm. Despite the extreme proposals on his website, my Wall Street friend was reassured that he needn’t worry Biden would actually pursue those radical policies. He doesn’t want to be an early lame duck again.
While that theme is consistent with the backtracking that Biden has been doing with his energy policy, his health-care proposal doubles down on the ACA, moving it very far to the left, and Biden himself has emphasized his main policies with admirable consistency. As one handicaps the policies that are likely to become law should the former vice president win, health care moves very close to the top of the list. The major reason why is Biden’s embrace of a public option for health insurance.
When the ACA was being legislated in 2009, the biggest point of contention among Democrats was the public option. The House plan included a public option, which would have created a government-run insurance program that those without insurance could purchase. The Senate, plan, even with a supermajority before the death of Teddy Kennedy, did not include a public option. It did not because moderates in the Senate worried that the public option could quickly turn into the only option. Governments, unlike private firms, can regularly run deficits, so a clever strategy to socialize medicine would be to allow private insurance, but to offer a better government-run policy at a loss to taxpayers, at which point everybody would shift to the public option. This link is not a farfetched conspiracy theory. President Obama himself once said that he was a proponent of a single-payer health-care system because when he drives “through Toronto, it doesn’t look like a bunch of Maoists.”
I have yet to see a Mao suit at a Bernie Sanders rally, but the public option would likely rapidly lead to a single-payer system if it is attractive relative to private insurance. If it does, the carnage in the U.S. health-care sector would be significant.
First, private health insurance currently is provided tax-free by the employer. When an employer pays you a wage, he deducts it, but you pay tax on it. When an employer pays for your health insurance, he deducts it, and you don’t pay tax on it. So, turning cash compensation to health insurance encourages work. With a public option as envisioned by Biden, you would no longer get your employer-provided health insurance. Instead, the employer would presumably give you the money that used to pay for health insurance in cash, cash that would be taxed as ordinary income. After paying that tax, you will have to buy health insurance, the cost of which Biden caps at 8.5 percent of your income. So, the health-insurance tax raises marginal tax rates, and discourages work.
If the public option is attractive and takes over the health-insurance market, then the government will set the price for everything in that space, and presumably start to nickel and dime health-care providers. Almost all global health-care innovation starts in the U.S., so setting profits to zero here would have a major impact on the willingness of entrepreneurs to invest in risky new drugs. If you develop a cure for cancer, but have to negotiate its price with AOC, you probably will not come out ahead.
It is also possible that the public option will be terrible and find few takers. The government, after all, is terrible at just about everything other than being terrible. In that case, the rest of the Biden health agenda will be important. Biden also proposes generous premium tax credits for those who buy private insurance, expands eligibility for these by eliminating their income ceiling, and allows persons age 60 to 64 to buy into Medicare.
In my recent study coauthored with Casey Mulligan, Tim Fitzgerald, and Cody Kallen, we estimate the impact of these provisions on labor supply and find that it is significant. The basic idea is that if you give people a big subsidy, but then reduce the subsidy as their income rises, then their marginal tax rate goes up by the amount recaptured. If an extra dollar of income reduces your subsidy by 10 cents, then the dollar is only worth 90 cents to you, the same as if you paid an extra 10 percent tax on that dollar.
Cranking through the math, we found that the Biden plan would increase the effective tax on labor income by 2.4 percentage points, a smaller increase than the public option would entail, but a significant increase for most Americans nonetheless.
Alarmists are worried that perhaps the ACA would profoundly change the American health-care system. If the Biden plan expands it, the result will still have warts. If the public option is part of the legislation, however, then the path to socialism for a quarter of the U.S. economy will be freshly paved with good intentions.