Fixing Obamacare

I am extremely nervous about a Donald Trump Presidency but one potential bright spot would be an opportunity to fix President Obama’s signature legislation, The Affordable Care Act, aka Obamacare. The goals of Obamacare to expand health care coverage to most Americans including the poor and those with pre-existing medical condition were worthwhile. But the structure of the law was a problem. Obamacare, while providing coverage to an additional 20 million people, has led to dramatic rises in premiums both in the exchanges and in policies provided by employers. Many economists and analysts believe that the use of more market and patient centered mechanisms could help control costs and improve quality without a severely detrimental effect on coverage rates.

After reviewing some of the proposals under consideration by the GOP, I am optimistic that new health care legislation will keep some of the most important features of Obamacare while rolling back or limiting some of the overreaching elements of the law.

Here is a guess at what a new health care regime will look like.

• “Guaranteed issue” and “community rating” will be preserved. Guaranteed issue means that an insurer cannot refuse coverage to someone because of their medical history. Community rating requires insurers to price their policies within a certain multiple of the least expensive policies. Both of these policies are very popular with the public. Community rating within Obamacare utilized a 3:1 price band which means that the most expensive policy could be no more than three times as expensive as the cheapest policy. The GOP plan will likely loosen this band to 5:1 or even 6:1. The narrow bands within Obamacare made insurance more expensive for the young and healthy although this population doesn’t have the wealth or financial stability of older populations.
• The individual mandate will likely be overturned but will be replaced with strong voluntary incentives to acquire and maintain coverage. Guaranteed issue regulations cannot work unless healthy people have a strong incentive to sign up for coverage. Otherwise, only the sick would ever sign up for coverage since the healthy could buy it at anytime in the event of illness or an accident. It’s like buying homeowners insurance after your house is already on fire. Since the sick would be the only one buying coverage, coverage would become very expensive and fewer healthy people would sign up. Most GOP requirements use a continuous coverage requirement as an incentive for people to acquire and maintain coverage. If someone seeks to acquire health insurance after dropping coverage for a period of time, then insurers would be allowed to price premiums according to actuarial risk.
• Subsidies are also likely to remain but will occur as refundable tax credits paid to individuals rather than a direct subsidy to insurers. Subsidies will either be made available based on income (means-tested) or will be provided based on age regardless of income. Subsidies are not likely to be as generous as they are under Obamacare but they may not need to be if premiums are reduced.
• The heavy regulation of the insurance industry requiring “minimum essential benefits” are likely to be curtailed or eliminated. This would unleash more and new kinds of insurance products that would be less expensive and more closely aligned to the needs of customers. New insurance products would likely include higher deductible policies paired with Health Savings Accounts.
• HSA’s are likely to be a signature provision of any new health care system. These consumer oriented savings account are very popular and also provide incentives for patients to shop around for care, unleashing competition on the dimensions of price and quality. Subsidies are most likely to come in the form of premium supports but if they also include subsidies to fund HSA’s (as discussed here by Senator Bill Cassidy) then it would be the most consumer friendly, patient centered provision of the new health care law.
• New legislation may reduce the tax exclusion provided to employer based health insurance. This is a complicated but important issue. Health insurance provided to people through employers is not taxed as income. This policy dates back to World War II in the midst of wage and price controls and full employment. Since wages couldn’t used to attract new workers, employers began to offer health insurance as a non-cash benefit and in 1943 the War Labor Board determined that these benefits were not taxable. This was codified in the tax code in 1954. This exclusion has distorted health insurance and labor markets because it provides incentives for both employees and employers to favor non-cash insurance benefits over wages and encouraged the purchase of more comprehensive coverage. The benefit is poorly targeted, benefiting high wage earners the most, and increases the overall costs of health care by encouraging the overconsumption of services.

Taken together, the GOP’s proposed changes to our health care system should reduce the cost of premiums, make health care consumers more aware of the price and quality of the care they receive, improve transparency in the pricing of health care services while protecting and providing insurance for those with pre-existing conditions and the poor.