What Should Be Done With Obamacare?

Regardless of who wins the election, Congress will have to deal with two important questions next year: whether to extend the Republican (Trump) tax cuts and whether to extend the Democratic “enhanced” subsidies for Obamacare, or let them both expire. Conventional wisdom says Congress will divide on these questions almost perfectly along party lines.

Could there be an alternative? How about bipartisan reform of Obamacare in a way that saves money and creates better insurance at the same time?

The Case for Reform

No objective observer can think that Obamacare is working the way we were promised it would.

Wasteful spending: Obamacare is costing taxpayers roughly $240 billion a year. Yet we are not getting any additional health care. One study found that there has been a small uptick in doctor visits by those at the bottom of the income ladder, offset by insignificant changes for the rest of the population. Doctor visits per capita for the country as a whole have actually gone down, and visits to the emergency room haven’t changed.

Medicaid expansion: The original promise of Obamacare was to insure the uninsured with private health insurance. In fact, almost all the increase in health insurance under Obamacare has been an increase in Medicaid. The small increase in the percent with private insurance is less than what we would have expected from coming out of the Great Recession alone.

Junk insurance: The typical plan sold in the (Obamacare) exchange looks like Medicaid with a high deductible. It is not accepted by many doctors and medical facilities, and if enrollees go out of network, the plans usually pay nothing. The deductibles are two to three times what we find in employer plans.

Misallocation of resources: Insurance sold in the exchange undercharges the healthy and overcharges the sick. Nearly half of beneficiaries are paying a zero premium. If they are healthy, the only care they need is preventive care and that is also free. But if they have a serious health problem their out-of-pocket costs can be as high as $9,400 a year and double that for family coverage.

Failure to price risk: The insurers in the exchanges get a subsidy for each enrollee, a subsidy that is unrelated to health status. Although there is some risk adjustment, it is highly imperfect – leaving the health plans with strong incentives to attract the healthy and avoid the sick.

A Model for Reform

There are two places in our health care system where there is an annual open enrollment, competing private health plans, federal government subsidies, and no discrimination based on health status: Medicare Advantage and the marketplace exchange.

The former is highly popular, is reasonably efficient, and has attracted the enrollment of more than half of the Medicare population. The latter is dysfunctional, creates perverse incentives for buyers and sellers alike, and can prevent people with serious health problems from getting the care they need. There are three reasons for the difference.

First, Medicare Advantage is the only place in the health care system where health plans receive risk-adjusted premiums that reflect the health status of the enrollees. The enrollees pay the same premium, regardless of their health condition. But the government’s additional premium payment makes the total amount the health plan receives equal to the expected cost of the enrollee’s health care. Although not perfect, it is the most sophisticated risk-adjustment system in the world.

Medicare Advantage is also the only place in the health care system where a doctor who discovers a change in a patient’s health condition (say, the detection of cancer) can send that information to the insurer (in this case, Medicare) and receive a higher premium payment for the health plan, reflecting the higher expected cost of care. This means plans are rewarded, not penalized, when they find and treat medical problems.

Second, Medicare Advantage is the only place in the health care system where insurance plans can specialize. There are special needs plans for diabetes, respiratory problems, heart problems, etc. This means that health plans can become centers of excellence, or what Harvard professor Regina Herzlinger calls “focused factories.”

Third, the entire Medicare program discourages “gaming” – the practice of remaining uninsured while healthy, and enrolling only after a sickness occurs. People who delay enrollment past the point of eligibility are penalized and the longer the delay, the higher the penalty.

Using the Medicare Advantage model to reform the exchanges should be an easy reform. After all, we’ve already enacted the reform for more than 30 million Medicare enrollees.

Additional Reforms

With the individualized risk adjustment described above, there is no reason to force everyone to purchase the same health insurance benefits.

No one whose income is above the level of eligibility for Medicaid should be getting health insurance for free (paid by taxpayers). At the same time, they shouldn’t be forced to buy insurance that does not meet their financial and health care needs. They should be able to buy limited benefit insurance in the short-term market, for example, and receive a smaller subsidy from the government.

What if the kind of insurance people buy doesn’t cover every eventuality – say, a million-dollar premature baby? That is where government can play a safety net role – paying for catastrophic care directly or making an exchange plan available.

Here is the principle: We should let markets meet all the needs they can meet, on the theory that markets almost always do what they do better than government. If there are any remaining unmet needs, that should be the limited role for government.

Among other improvements, people in the exchange should have access to a Roth-type Health Savings Account and access to 24/7 primary care from a doctor of their choice. We should also give health plans in the exchange the opportunity to reinsure the risk that some enrollees will have a very high medical expense – a reform that can cut the cost of a silver plan by almost 20 percent.

If Congress is willing to set aside partisan bickering, these and other low-hanging fruit offer ways to greatly improve the current system.