How to Replace Obamacare
By James C. Capretta and Robert E. Moffit
National Affairs, Spring 2012
(Following is a distillation of the authors’ 19 page article.)
When the Patient Protection and Affordable Care Act (commonly known as “Obamacare”) was signed into law in the spring of 2010, congressional opponents vowed that the fight was not over.
The “repeal and replace” formulation quickly caught on, but it was not without its critics. That Obamacare should be “repealed” was obvious, given how strenuously conservatives and many independents objected to the new law. But “replace”?
[R]epeal will not be enough, for a simple reason: Although Obamacare would worsen many of the problems with our system of health-care financing, that system clearly does call out for serious reform. After all, a repeal-only approach would leave many of the most grievous flaws in our system of financing health care unaddressed.
WHAT NEEDS FIXING
But for all its considerable strengths, the system suffers from pervasive weaknesses as well. The most serious of these is rapidly rising costs.
Of course, government health-care programs and policies are largely responsible for these rising costs in the first place. To begin, the design of Medicare is terribly flawed: Because the program pays providers of care based on the volume of their services, it creates a massive incentive for inefficiency and overuse. And because Medicare is the biggest payer in most health-care markets in America, that incentive badly distorts the economics of the entire sector. Furthermore, the Medicaid program inflates costs by (among other policies) having states control how the program is run while the federal government pays most of the bills. The result is that neither party has both the incentive and ability to keep costs in check.
The third driver is the tax exclusion for employer-provided insurance: The federal government does not count the amount that employers spend on health insurance for their employees toward workers’ taxable income. This tax exclusion inflates costs by effectively rewarding higher-premium plans and by encouraging employer-purchased insurance, thereby preventing a real consumer market in coverage.
Proponents of Obamacare like to create the impression that there are tens of millions of Americans trapped by their pre-existing conditions, sick and stuck with lousy insurance and no options. In truth, the vast majority of working Americans have good and secure coverage today, including many millions of people with expensive health conditions.
But a small percentage of our large population is still a lot of people. There is no denying that cracks in the system exist, and that many Americans fall through them. This is particularly true of people who need to move from job-based coverage into the individual market. People who leave the work force and need to buy insurance on their own can face sky-high premiums for weak coverage just because they happen to suffer from a health condition over which they often have little control.
Starting in the middle of 2009, the president and his top aides took to calling their plan “insurance reform,” as if the law’s most important elements were simply new rules designed to protect hapless consumers from unscrupulous insurance companies.
This is, of course, a gross mischaracterization of what Obamacare actually does. Among other features, the law implements a massive expansion of taxpayer obligations. It adds two new entitlement programs at an expense of at least $1 trillion over a decade. In that same period, it raises taxes by more than $500 billion. Most egregiously, it puts the federal government in command of the health sector, giving bureaucrats immense new power to decide matters ranging from what services must be covered in every American’s insurance plan to how doctors and hospitals organize themselves and do business.
PILLARS OF REFORM
The first crucial component of any serious reform must be a “defined contribution” approach to the public financing of health care — the essential prerequisite for a functioning marketplace that imposes cost and quality discipline. In most sectors of our economy, the normal dynamics of supply and demand keep costs in check and reward suppliers that find innovative ways to deliver more for less.
Under this approach, health coverage would be provided through competing insurance plans; government’s involvement would come through the provision of a fixed financial contribution toward the purchase of insurance by each beneficiary. That subsidy would not vary based on a person’s insurance plan, giving Americans every incentive to shop for good value in their health coverage and to get the most for their defined-contribution dollars.
In the context of Medicare and Medicaid, meanwhile, the government would similarly provide a fixed (though of course far more generous) level of support, sometimes called “premium support,” that would guarantee insurance coverage to beneficiaries but would allow them to choose among competing options and encourage them to seek out the best value for their money.
The second pillar of reform should be personal responsibility and continuous-coverage protection. Obamacare attempts to address the challenge of covering people with pre-existing conditions with heavy-handed mandates, especially the requirement that all Americans enroll in government-approved insurance plans (the so-called “individual mandate”). A replacement program for Obamacare should come at the problem from the opposite direction, with government forsaking coercion and instead extending a new commitment to the American people: If you stay continuously enrolled in health insurance, with at least catastrophic coverage, you will never again face the prospect of high premiums associated with developing a costly health condition.
Because some workers who leave job-based plans for the individual market could be quite sick, a credible Obamacare replacement plan would also need to include a new approach to covering the high insurance costs for these Americans. Different proposals have offered different mechanisms, but all would move the burden away from the sick patients themselves to a larger and broader pool of people, either through regulation or through a direct government program such as a high-risk pool. For people who have not been continuously insured, these protections generally would not apply.
The third pillar of reform must be a genuine partnership with the states.
To respect federalism and reap its benefits, nothing in an Obamacare replacement agenda should compel state adoption, instead leaving the participation of state governments completely voluntary. Those states that do participate in any federal initiative should be given meaningful control over the most important components of regulation, especially the power to design and operate their own health-insurance markets (within minimal federal standards).
States should be given two tasks: informing consumers of their insurance options, and easing their enrollment into the plans they choose by cooperating with the federal government to facilitate the payment of credits and vouchers directly to private insurers.
Defined-contribution financial support, protection for Americans who remain continuously enrolled in insurance plans, and genuine federalism are the essential overall concepts that must define any serious health-care reform. But policymakers will also need to apply these principles to the transformation of today’s funding and financing mechanisms: the tax exclusion for employer-provided health coverage, and the Medicaid and Medicare systems.
TAX REFORM AND HEALTH REFORM
The fourth pillar of a real reform agenda would therefore address the tax treatment of employer-sponsored plans. Today’s arrangement is somewhat counterintuitive: Because the tax exclusion for health-care premiums is open-ended, workers and employers have an incentive to make health benefits a disproportionately large share of total compensation. And because employers obtain and manage health plans for their workers, there is far too much distance between those who purchase care and those who consume it.
The most plausible way to implement such a change would be to transform today’s tax exclusion for employer-provided insurance into a standard tax credit that would extend to all Americans, regardless of employment status, which they could then use to purchase the private coverage of their choice.
IMPROVING HEALTH CARE FOR THE VULNERABLE
The fifth key component of a genuine health-care reform plan must be an overhaul of Medicaid. Medicaid is actually three separate programs: health insurance for lower-income working-age adults and their children, health and long-term care for the non-elderly with severe disabilities, and long-term care for the frail elderly. For the purposes of replacing Obamacare, the relevant program to change is insurance coverage for working-age adults and children; the other parts will need reform as well, but should be addressed in a separate legislative effort.
In replacing Obamacare, policymakers should move lower-income people out of the limited sphere of Medicaid options and into the same private health-insurance markets in which their fellow citizens purchase coverage.
There is more than one way to accomplish this objective. …existing financing for acute care provided through Medicaid and the State Children’s Health Insurance Program would be transformed into a large pool of funding to be re-allocated to current beneficiaries and other low-income Americans in the form of a federal health-care subsidy (the equivalent of a “refundable tax credit”) for private insurance.
A similar approach would give Medicaid recipients the same federal tax credit that workers would receive in a reformed marketplace for health insurance. The federal government could then convert Medicaid into a per-person allotment to the states, funded through a block grant, that would supplement the base credit for a state’s low-income residents. The federal allotment to the states would be set so that, when combined with the federal support for the base tax credits or vouchers for the Medicaid-eligible population, total federal spending on the Medicaid population in a state would equal the amount that would have been spent under pre-Obamacare Medicaid. After the first year, the federal allotment to the states could be set to grow commensurate with the economy or some other reasonable measure of inflation.
The same move toward market incentives and efficiency should characterize our approach to Medicare reform in the wake of Obamacare’s repeal. The sixth pillar of a replacement plan must therefore be a premium-support reform of Medicare.
Of all the changes that are necessary to bring more cost discipline to health care, moving Medicare toward a defined-contribution structure, and away from today’s open-ended defined-benefit structure, is certainly the most vital. Medicare is the largest payer for services in most markets; the system of hospital and physician care in most communities has been built up around Medicare’s financial incentives.
In lieu of today’s open-ended benefit, a premium-support system would allow new beneficiaries (after the transition) to decide how to use a fixed-dollar contribution provided by Medicare. Each beneficiary would choose from a menu of approved insurance plans. If a beneficiary’s premium for his chosen plan was higher than the Medicare contribution, he would pay the difference out of his own pocket. If he chose a less expensive plan, he would pay lower premiums and keep the savings. This structure would provide a powerful incentive for the program’s participants to find high-value plans that charge low premiums for quality care, and therefore for insurers to offer such plans.
FISCAL RESPONSIBILITY FOR A CHANGE
Finally, as a key criticism of Obamacare is the danger it poses to federal finances, the seventh pillar of a serious health-care reform plan must be the full offset of all new costs through spending cuts.
A HISTORIC OPPORTUNITY
The enactment of Obamacare has created a political opening for a credible alternative to the health-care status quo. But it would be foolish to assume that this opening will last very long; once it has closed, it is not likely to appear again.
Conservatives thus have a rare opportunity to advance their vision of reform. It will entail some controversy and political risk, which cannot be avoided in a policy arena as complex as health care. But the policy and political upsides are well worth the effort. A market-driven alternative can beat Obamacare on every metric that matters. It will be less costly to taxpayers, more flexible in meeting the diverse needs of citizens, less bureaucratic, and consistent with the Constitution and our values.
James C. Capretta is a visiting fellow at the American Enterprise Institute and a fellow at the Ethics and Public Policy Center. Robert E. Moffit is a senior fellow in the Center for Policy Innovation at the Heritage Foundation.
http://www.nationalaffairs.com/publications/detail/how-to-replace-obamacare
Why on earth would a single payer advocate grant so much space on health care reform to prominent conservatives, allowing them to frame the problems in a manner that supports their specific policy recommendations? By better understanding their framing and the flawed policies that flow from that, we can explain to the nation why they are so terribly wrong, and why the policies of a single payer national health program are an imperative.
Everyone agrees that the status quo in our health care system is totally unacceptable. We are spending far more than other nations on a system that falls intolerably short in performance. So how is this framed?
Single payer supporters see the problems as too many individuals without insurance, too many with inadequate insurance, quality deficiencies related to improper allocation of our health care resources, and the tremendous administrative waste inherent in our current financing system. A single payer national health program would correct these defects.
The authors of this article – James Capretta and Robert Moffit – present a framing of the problems from the perspective of their conservative organizations – the American Enterprise Institute and the Heritage Foundation. To them, the primary problem is that excessive government involvement is driving our unacceptably high health care spending, coupled with the problem that we fail to use adequate market forces to control these excesses. They are not totally insensitive to the needs of the uninsured and low-income individuals – needs that can never be met in a totally free market – so they do recommend some government involvement in oversight and in tax policies.
When you step back for perspective, it seems like the differences aren’t so much in the goal of trying to get everyone insured, but more in the process of how we do that. Well, the contrasting approaches – government versus market – do have a significant influence on the outcomes of reform. The conservatives first look at using markets, and then try to make reform comply. The single payer advocates first look at what patients need, and then look for a pathway to get there. Other nations have shown that successful pathways are always laid out by the government and not by unregulated markets. Even when private insurers are used, they travel through a government pathway.
Capretta and Moffit would invoke the principle of defined contribution. Instead of providing a package of health care benefits that patients need, they would provide a set amount of money – the defined contribution – that would leave most of us directly exposed to health care costs on the disproven theory that we could still obtain the care that we need but at a better price because of our shopping acumen in the health care markets. What is proven is that the cost sharing of a defined contribution approach erects financial barriers to appropriate health care, whether through unaffordable insurance premiums, or through unaffordable deductibles, coinsurance and co-payments, or through provider network restrictions, or through the limitation of benefits.
Their proposal supposedly is aimed at increasing the numbers of insured, though independent analyses of similar proposals have shown that their policies would produce little net gain towards this goal. They would use competitive market incentives to lower the price of insurance products which inevitably would result in grossly inadequate products that have been well documented to fail to provide sufficient financial security in the face of medical need. Further, they would leave the choice of whether or not to be insured to individuals themselves and to financially-challenged state governments. After decades of increasing health care costs and flat wages, and now eliminating the tax subsidy of employer-sponsored plans, far too many individuals would decide that they would have no other option than to go without coverage.
Looking closer at the choice that lower-income individuals would have under this proposal, they would be offered subsidies or vouchers which could be used to purchase whatever cheap plans the insurers could create to sell at the low competitive market price set by the subsidy or voucher – coverage that could never provide adequate health care benefits. Capretta and Moffit propose that health care consumers would have the choice of using their own funds to buy-up to a plan that actually provided adequate coverage, but is that really a choice when they are having difficulties simply paying for their food and rent?
In past articles, we have covered extensively the inadequacies of market-priced insurance products for middle-income workers and their families. These products attempt to balance the premiums, which turn out to be too high, with the health care benefits, which turn out to be too spartan. With median household income at $49,000 and the average cost of health care for a worker’s family of four now over $19,000, no amount of free market magic can ever make these numbers compute.
The experience of the past half century has already proven that our supposed markets for private health insurance and for health care itself have been totally ineffective in controlling health care costs, yet Capretta and Moffit are calling for even more of the same flawed market pseudo-incentives. They ignore the fact that administered pricing by public agencies has been effective in other nations and would certainly be so here as well.
Okay, so the conservatives’ solution is to try to protect freedom and markets at the cost of adequate health care for the majority of us, so why should we bother even reading their polemic? Could there be a middle ground somewhere between single payer and market dynamics? Well, that supposed middle ground is the Affordable Care Act, based on an earlier version of the proposal of the Heritage Foundation which the Obama administration presented as a centrist approach to reform. Yet Capretta and Moffit now claim that this model “puts the federal government in command of the health sector” – a concept anathema to the ideologues in their camp.
The reason that we need to understand thoroughly their views is that we have to be able to explain why their approach is intolerably flawed. It would grant free rein to the private insurance industry to wreak even more havoc on our health care, while falling short of achieving the conservatives’ goal of removing the government and its power to tax from the health care equation. As if our financing system were not already bad enough, they would introduce changes that would prevent the system from working adequately for all but the very wealthiest of us.
It would be worth reading and critically interpreting their entire article to better understand the extent to which they would go to control health care spending by making it much less affordable for most of us – in the name of consumer empowerment. There are far too many flawed policies to begin to cover them in today’s comment – policies such as offsetting all costs through spending cuts instead of taxes, and privatizing Medicare through defined contributions for private plans.
Even if today’s breed of conservatives takes over all branches of the government, people power through an informed electorate will be essential in blocking the institution of such harmful health care policies, just as the people were able to prevent George W. Bush from privatizing Social Security. Being informed is key.
On the other hand, if we elect enough political leaders who are truly concerned about the future of health care in America, regardless of political affiliation, then we do have a chance of sorting good policies from bad policies, and enacting the good ones. But we do have to know which are which.