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. States could
continue to allow insurers to charge higher premiums to these individuals based
on their respective health risks. There would thus be a very strong incentive
for all Americans to remain continuously covered. (At the time of enactment, it
would make sense to give those Americans who were not in continuous coverage the
opportunity to come into the new system without penalty and to secure this new
protection.)
This approach would achieve the goal of providing realistic and
affordable options for people with pre-existing conditions, but without imposing
the misguided, overbearing, and counter-productive architecture of Obamacare —
and in a way that encourages a competitive insurance market and an innovative
health sector rather than undermining them.
The third pillar of reform must be a genuine
partnership with the states. Under Obamacare, states are treated as mere
functionaries in a new centrally planned and federally managed system. The law
gives state officials a take-it-or-leave-it choice: They can implement and
administer the new policies under Obamacare — such as state-level insurance
exchanges — to the letter, without any deviation or adjustment, incurring the
extra costs of these new programs along the way. Or state governments can refuse
this managerial responsibility and instead have the federal government come in
and operate the exchanges and other new components of the law on the states'
behalf. But in neither case are the states afforded any independence or
flexibility, any room to adapt the requirements imposed by Obamacare to the
particular circumstances of their populations, or to innovate to achieve greater
quality or efficiency.
A replacement plan must be true to the
Constitution and reflect a genuine federalist philosophy. Any program to address
the problems in American health care will entail some degree of national policy,
but it can still leave ample room for state initiative and encourage state-level
solutions. There is good reason to allow such discretion: States vary
significantly in their demographics, their economic profiles, their
infrastructure, their levels of employment and poverty, their Medicaid
enrollments, and their numbers of uninsured. There is wide disparity among
states in the costs of uncompensated care, the scope of employment-based health
insurance, and the condition of individual health-insurance markets. States
differ markedly in the range of their health-care problems and in their
capacities to cope with them.
Moreover, states can be powerful engines of policy
innovation and experimentation in health-care reform, insurance-market reform,
and tort and medical-malpractice reform, as well as in the financing and
delivery of care in safety-net programs. In recent decades, a number of states
have attempted their own solutions to our health-care financing crisis. But
because that financing crisis is driven by deformed federal policies, all that
these states have been able to do is try to mitigate the effects of Washington's
mistakes. A reform that addressed those mistakes directly at the national level
could then free the states to address the problems of health-care financing in
the ways that best suit their needs.
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).
Such deference to state authority would mean allowing states to retain full
control over matters like what coverage to require in health insurance and how
to facilitate consumer enrollment in qualified plans. Crucially, no Obamacare
replacement program should include a federal requirement that states set up
health-insurance exchanges that could later become instruments of excessive
regulatory control. Rather, 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. How states perform
these critical tasks should be left entirely up to them.
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
key decisions in American health care thus rest not with patients and doctors,
but rather with employers, managed-care executives, and government officials — a
structure that has prevented the emergence of a properly functioning
marketplace. Individuals and families rarely have a property right in their
health-insurance policies and rarely control the terms and conditions of
coverage (as they do with auto, life, or home owner's insurance). Health
insurance is rarely portable in any real sense of the term, as workers cannot
remain enrolled in the same insurance plans when they switch jobs.
Federal tax policy is at the root of these market
malfunctions, and has caused a host of related problems. These include higher
health-care costs, the absence of continuous and secure coverage, a lack of
transparency in health-care financing, discrimination against lower-income
workers and favoritism toward higher-income workers, and a playing field tilted
decidedly in favor of group health insurance and against individually purchased
coverage. Among economists, including some of President Obama's advisors, there
is an overwhelming consensus that reform of health-insurance markets must begin
with a major change in the federal tax treatment of health insurance.
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. As to how such a consumer-controlled federal tax credit would be
designed, policymakers have a variety of options from which to choose. For
instance, in its 2011 "Saving the American Dream" plan, the Heritage Foundation
proposed replacing today's unlimited tax break with a new, non-refundable tax
credit that would be phased out for the wealthiest citizens. Another approach
would be to limit the credit to some pre-determined level of insurance coverage.
Because the credit amount would not be increased for workers selecting more
expensive insurance plans, those choosing such plans would pay the difference
while those opting for plans with lower premiums would not be penalized (with a
diminished tax benefit) for economizing.
One such proposal was offered during the 2008
presidential campaign by Senator John McCain, who suggested a universal program
of refundable tax credits that would be payable to all households. In 2007,
President George W. Bush proposed replacing today's tax treatment of insurance
with a universal deduction for health-insurance premiums that would be available
to people in employer-sponsored plans, as well as to those in the individual
market. In both cases, the value of these credits and deductions would increase
over time by some measure of inflation — ensuring that they would keep pace with
fluctuations in the cost of living, while also ensuring that government's costs
would remain predictable and manageable.
In all of these formulations, the essential
common element is a move toward consumer control. Individuals would become
active, cost-conscious consumers looking for value in the health-care
marketplace. This shift would, in turn, create tremendous incentives for those
delivering medical services to find better and less expensive ways of caring for
patients and keeping them well.
For the purposes of implementing tax-based
health-care reform, it would make sense to bifurcate the market for
employer-based coverage into small and large employers. For smaller employers
(for instance, those with fewer than 200 employees), there is reason to move
quickly to change the tax treatment of job-based insurance: Many small
businesses do not even offer coverage today, so a reform that substituted tax
credits for today's tax preference would immediately help millions of working
Americans get better coverage than they now have. Indeed, the availability of a
credit or deduction would likely reduce the number of uninsured Americans by a
significant measure. Consumers wouldn't want to leave the credit money on the
table, and insurers would be eager to provide them with ways to spend it.
Insurance companies would thus have every reason to design minimal plans
(including, at the very least, catastrophic coverage) with prices roughly equal
to the amount of the credit or deduction, and consumers who might otherwise not
buy coverage would have every reason to purchase those plans. Moreover, the
insurance marketplace for small-business workers tends to be volatile, with
workers passing in and out of coverage frequently as they change jobs or leave
the work force. Moving toward a tax-credit system would give these workers the
chance to sign up for insurance that they would own and keep, even as their life
circumstances changed.
On the other hand, many tens of millions of Americans
are now signed up with good and stable large-employer plans. Although these
workers see a need for reform, they do not want to lose the coverage they have
today. For both political and practical reasons, it would make sense to leave
these people where they are, in their large-employer plans, as the reforms in
the other parts of the marketplace are implemented and refined. The advantages
of these changes — including the expansion of personal and portable health
insurance, lower-cost health coverage, and higher take-home pay — would, over
time, become evident to workers in large-employer plans. The key, however, is
that the decision to change coverage would rest not with government but with
workers and employers, who would be under no obligation to change the terms of
employees' benefit plans. The only modification that should be pursued
immediately is the placement of an upper limit on the amount of employer-paid
premiums eligible for the existing federal tax break; this would level the
playing field somewhat between the existing tax benefit and the new tax credit.
Under this proposal, premiums paid by employers above the upper limit would be
counted as taxable compensation to workers. This would give both employers and
employees a stronger incentive than they have today to move toward low-premium,
high-value plans.
An important additional detail of such a reform plan
would apply to people who are eligible for a federal tax credit (or perhaps a
Medicaid voucher) and yet still do not sign up for coverage. For these people,
one option would be to establish an automatic-enrollment program in which states
assign people on a random basis to a series of state-approved private plans. The
insurers offering these default options would be allowed to adjust the up-front
deductibles as necessary to ensure that the premiums for the insurance plans do
not exceed the credits enrollees are eligible to receive. The aim would be to
make sure that people who are placed in an insurance plan by default pay no
additional premiums out of their own pockets. Those automatically enrolled could
switch out of their default plans into other insurance plans at any time
(subject to state rules governing enrollment periods); if they had moral or
other reasons for not carrying insurance coverage, they would be free to drop
out of insurance enrollment altogether.
Such a default enrollment program could be an
important feature of a credible replacement plan, allowing millions of Americans
to leave the ranks of the uninsured and to secure continuous-coverage protection
without the coercion of Obamacare's mandates. This flexibility would likely be a
very attractive selling point for a consensus replacement proposal.
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.
Medicaid coverage for
working-age adults and children has its roots in welfare. Starting in 1965,
women with low incomes, along with their dependent children, were given cash
support through a federal-state program (known as Aid to Families with Dependent
Children until 1996, and then transformed into the Temporary Assistance for
Needy Families program), and provided with medical coverage through Medicaid.
Over the years, Medicaid has been modified many times by federal and state
statutes, but the program still retains its welfare-based characteristics. Most
troubling among these is the program's tendency to discourage recipients from
securing better-paying jobs, since Medicaid coverage is not integrated with our
employment-based system of insurance. For instance, if a woman on Medicaid were
to accept a higher-paying job, she might lose her Medicaid insurance without
being offered insurance through her place of employment. The result could
therefore be a net reduction in her overall financial well-being.
Furthermore, because Medicaid pays exceedingly low
fees to care providers, the program does not always offer high-quality coverage.
Not surprisingly, as states have pushed physician-reimbursement levels well
below the actual costs of caring for Medicaid patients, many doctors have
responded by severely restricting the number of Medicaid patients they will see.
The result for people on Medicaid is often a lack of accessible quality health
care, precisely what the program is supposed to provide.
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. This change would afford these patients greater access to doctors and
specialists, and would reduce the disincentive to higher-paying work.
There is more than one way to accomplish this
objective. In the Heritage Foundation proposal noted above, for instance,
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. If they wished, state
governments could provide their own support on top of this federal aid. Benefits
under such a plan would be means-tested, with the lowest-income Americans
receiving the most generous level of assistance and subsidies being gradually
reduced for those with higher incomes as they became eligible for federal tax
credits for coverage. (Because the credit in the Heritage plan is
non-refundable, people would not be eligible for it until they earned enough to
pay federal income taxes.)
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.
States would not be required to reform Medicaid in this manner; if they did,
though, they would have far greater freedom to run the program according to
their own priorities instead of in response to federal dictates.
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.
It is hard to overstate the importance of such a
reform to the larger goals of controlling costs and improving quality and access
to coverage. 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.
Today, the program's dominant
fee-for-service structure provides all the wrong incentives. All of the various
suppliers of medical services for Medicare patients — the diagnostic labs, the
physicians, the hospitals, the outpatient clinics, the nursing homes, and many
others — can bill the program separately whenever they render a service to a
patient. Absent Medicare's incentives, they might well consolidate and
coordinate to reduce overhead and streamline care, providing higher-quality
services at lower cost. Thanks to Medicare, however, these organizations can
sustain themselves financially without having to affiliate with any of the other
service providers. The result is extreme fragmentation and lack of coordination,
which permeates the entire health-care system to the detriment of patient
care.
As long as Medicare continues to operate as it does
today, the way doctors and hospitals are organized will not change and will, in
most markets, remain excessively costly and inefficient. This will soon prove
disastrous for the federal budget: The first wave of the huge Baby Boom
generation, 77 million strong, is beginning to retire. Between 2010 and 2030,
Medicare's enrollment is projected to increase from 47 million to more than 80
million beneficiaries, while the ratio of workers to beneficiaries will decline
from 3.7-to-1 today to 2.4-to-1 in 2030.
Obamacare's "solution" for Medicare
will exacerbate the problem, not solve it. The law claims to yield $575 billion
in savings over ten years through Medicare payment cuts, but those cuts won't
bring more efficiency to the program. They are simply across-the-board price
controls that will shift costs off of the federal balance sheets and onto
non-Medicare patients (whose costs would rise to make up the difference), while
also driving willing suppliers out of the marketplace. Moreover, Obamacare has
imposed, for the first time in Medicare's history, a hard cap on the growth of
Medicare spending, tying it to the rate of inflation and subsequently to growth
in the general economy. This would, in effect, amount to a global budget for
Medicare, analogous in some ways to the tough budgetary caps characteristic of
single-payer health programs. To make matters worse, this cap would be enforced
in accordance with the decisions of a new Independent Payment Advisory Board — a
group of 15 appointed experts whose decisions would be automatically implemented
unless Congress actively rejected them.
It is worth noting that, under the statute, the
IPAB's authority is confined to selective Medicare payment reductions (that is,
to reducing the fees paid per service in an otherwise unreformed system), and
would not extend to any changes in benefit design, beneficiary payment, or the
structure of the program itself. Thus there is no prospect that the IPAB will
implement reforms capable of making Medicare more efficient. The board can
enforce the hard cap on Medicare spending only in the same way budget cuts have
always been imposed by Congress in Medicare: through price controls that
exacerbate the inefficiencies in how health care is delivered to patients.
The alternative to this disastrous, top-down,
micromanaged approach is to convert Medicare into a premium-support program.
While such a reform should try to capture the bulk of the huge Baby Boom
generation, it should also be carefully phased in, applying only to future
enrollees. A transition to a new premium-support model should exempt from the
changes people who are currently in the Medicare program and those very close to
retiring. (For instance, the plan offered by Republican congressman Paul Ryan
and Democratic senator Ron Wyden would start with Americans who are 55 today,
and so will enter the program in ten years.)
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.
With cost-conscious consumers looking for the
best value for their money, cost-cutting innovations would be rewarded, not
punished as they are today. Physicians and hospitals would have strong financial
incentives to re-organize themselves to increase productivity and efficiency in
order to capture a larger share of what would become a highly competitive
marketplace. This is the only way to slow the growth of health-care costs
without harming the quality of care.
While Medicare reform is absolutely essential to
restraining cost escalation and to improving the affordability of health care
for all Americans, it need not be enacted in the same legislation as an
Obamacare replacement program. This is true especially because a replacement
program would be focused primarily on providing an alternative vision of
insurance coverage for working-age Americans, not retirees. Still, the reform of
Medicare suggested here is entirely consistent with, and in fact reinforces, the
rest of the reforms proposed above. It is up to the sponsors of replacement
legislation to decide whether moving one or two pieces of health-care
legislation through Congress at a time would be more likely to result in
enactment.
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.
If past experience is any guide, Obamacare's new
entitlement and massive expansions of Medicaid could cost several times more
than the official estimate (about $1 trillion over a decade). Moreover,
Obamacare's sponsors resorted to a series of gimmicks and budgetary sleights of
hand to make it seem as if the legislation would actually improve, rather than
worsen, the long-term budget outlook. But while repealing Obamacare would avert
these costs, a credible replacement program would certainly entail some expenses
of its own. These would result especially from the subsidization of coverage —
whether through the tax credit for the purchase of private insurance, the
additional support for many lower-wage workers, or the support for Americans who
enter the insurance pool with pre-existing conditions.
To be sure, some of the new costs from a replacement
program would be offset by the savings reaped from other components of the
reform package. For example, placing an upper limit on the tax break for
employer-paid premiums in the large-employer market would generate substantial
revenue, partially offsetting the cost of extending credits to Americans in the
small-business and individual marketplaces. The reforms of Medicaid, too, would
help, ensuring that future federal costs would grow at a more moderate pace than
is expected under current law.
Even so, additional spending reductions will
be necessary to fully offset the added budgetary burden of replacement
legislation. The spending reductions chosen should be real cuts, not budget
gimmicks, and should be of sufficient magnitude to ensure that the legislation
results in a net decline in federal spending, taxes, and future budget
deficits.
The first place to look for such cuts is within
existing health-entitlement spending. For instance, both Medicare and Medicaid
subsidize hospitals for caring for the uninsured and underinsured. These
subsidies could be cut back substantially or eliminated altogether in a
replacement program, since that program would extend insurance protection to
millions of uninsured people, thus allowing tens of billions of dollars in
savings from these indirect means of support.
In addition, the Medicare fee-for-service program
should be modified to reduce costs even during the window that precedes the full
transition to a premium-support program for new entrants. Such changes could
include gradually increasing the retirement age, as well as adjusting the rules
for supplementary insurance coverage so that seniors have an incentive to
responsibly restrain their health-care spending. Policymakers might also
consider using some type of means test, adjusting the level of Medicare
subsidies or premiums based on income, in order to ensure that taxpayer dollars
are not providing needlessly generous benefits to the very wealthy.
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.
Obamacare is deeply unpopular because it is based
on a bureaucratic, government-centered vision of American health care. The
entire program is rooted in an expansion of federal power and everything that
entails: massive new entitlements, additional dependence on government, tax
hikes that hinder economic growth, and federal micromanagement of health care
that produces a sharp decline in the quality of American medicine. This is
exactly what voters do not want in a proposal to reform the nation's
health-care system.
But voters do want a better system, with more
security and with affordable and reliable coverage and care. 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.
Some might observe that if this kind of program
had been advanced by conservatives ten years ago, Obamacare might have been
avoided in the first place. Perhaps. But it is still not too late to avert
disaster: Americans are hungry for a credible alternative to Obamacare, one that
carries much less risk for future taxpayers and does not give government control
over the delivery of medical care. Now is the time to offer it to them.
