Ethics & Public Policy Center

Repeal, Replace, Still

Published in National Review on April 8, 2013


Is it time to give up the fight against Obamacare? That’s a question some conservative health-care experts, pundits, and — more quietly — politicians are asking.

In the first years after its passage, opponents had hoped that the Supreme Court would strike down the law or that a new president would sign its repeal before most of it took effect. But the Supreme Court decided to modify a few of its provisions instead of striking it down, and President Obama was reelected. Repeal is almost certainly off the table for four years. Obamacare will continue to be implemented. Its main provisions will begin to take effect in 2014, even if some deadlines will be missed.

Yet the law still has only weak popular support. According to the exit polls, even the relatively liberal electorate that showed up on Election Day preferred repealing some or all of the president’s health-care law to leaving it as is or expanding it — by a margin of 49 to 44 percent. The election was not a referendum on Obamacare: Mitt Romney did not run on a specific replacement for it, and he felt inhibited in making the case against it because a health-care law he signed in Massachusetts had features in common with it. And still the electorate that reelected Obama registered dissatisfaction.

The public has certainly not moved toward Obamacare since the election. On the contrary, the Kaiser Family Foundation, a strong supporter of the law, has found only slippage in support since November. Its pollsters recently explained the trend by pointing to a significant decline among Democrats — whose support fell from a post-election height of 72 percent to 57 percent in late February. (Only 32 percent of independents and 12 percent of Republicans reported a favorable opinion of the law in that latest poll.)

The public may not be enthusiastic about Obamacare, but it is going to get it anyway. Republicans have not formulated a strategy for this new situation. Senate Republicans have voted to repeal the law, and House Republicans have included repeal in their budget. These moves reaffirm Republican opposition to the law but do not amount to a plan to make that opposition matter. In the absence of such a plan, such expressions of opposition feel a bit ritualistic.

Conservatives have organized significant resistance to Obamacare at the state level. Most states have declined to create the “exchanges” that were to be their main way of working with the new health-care regime. One state, Oklahoma, has filed a lawsuit with a serious chance of dramatically undercutting the law. (Obamacare as written allows only state-run insurance exchanges to funnel subsidies to individuals, yet the administration is intent on providing such subsidies, and the taxes they trigger, in federally run exchanges too.) Some states have even declined to take advantage of Obamacare’s provision to let them expand Medicaid services for their residents, at first almost entirely on the federal tab.

Some Republican governors have, however, accepted the Medicaid funds. Conservatives are furious with them. But expecting the governors to block coverage expansion indefinitely is not a workable strategy to fight Obamacare, in part because it depends on a large group of politicians’ looking past short-term expediency.

Some conservatives are arguing that, given the election results, Republicans should make their peace with Obamacare and seek to improve it. So, for example, some policy wonks on the right argue that the exchanges should be redesigned to encourage high-deductible coverage. Consumers paying out of pocket for routine health-care expenses, they hope, will keep a close eye on prices. Other reformers say the law should be modified so that Medicaid recipients can buy coverage on the exchanges.

Many of the specific ideas these reformers advocate make sense, but they are wrong to think of them as reforms of Obamacare. The law is flawed in its conception and basic design, not just in some of its provisions, and blocking its worst effects would require a rewrite rather than modest modifications. Indeed, the changes these reformers want would amount to that rewrite. Their proponents would therefore have to overcome the advocates of Obamacare — which is another way of saying that enacting these reforms would require assembling the same coalition that repeal would require.

The health-care law was built on the assumption that the well-known deficiencies of our health-care system — the large number of uninsured Americans, the rising costs of coverage and care — are not the result of misguided public policies that have prevented markets from addressing these problems, but are a sign that health-care markets cannot work without extremely heavy regulation. This view in turn rests in part on liberals’ assumptions about what health insurance should do. During the legislative debate over the law, President Obama argued that all coverage should be “comprehensive,” pre-paying for a large percentage of medical expenses. The alternative would be insurance that guards against the risk of catastrophic expenses but leaves routine expenses to be covered out of pocket. Wide-ranging government intervention logically follows from the first preference: Liberals are quite right to think that markets will not yield widespread comprehensive coverage, because such coverage is a highly inefficient arrangement.

In short, Obamacare seeks to expand the reach of an inefficient model of health-care coverage, and since markets won’t do so, it avoids them. The law’s basic method is to transform insurance into a product that few would voluntarily buy and then force everyone to buy it. It outlaws insurance as traditionally conceived by requiring insurers to cover everyone on the same terms regardless of his health status — the equivalent of requiring companies to offer homeowner’s insurance at the same price whether or not the home is burning down. Because this regulation removes the incentive to buy insurance, the government then orders people to do it — or, after Chief Justice Roberts amended the law, taxes them for not doing it.

The law also vastly expands Medicaid, which is a crummy form of insurance: Researchers who compare the program’s beneficiaries with people who have no insurance at all often have a hard time finding much of a difference in health. Many doctors do not take Medicaid patients because the program underpays them, and the law does little to improve those patients’ access to care even as it increases their numbers.

Obamacare attempts to cut costs in Medicare by tightening the price controls that have failed to restrain the program’s costs for more than three decades. It retains the structure of Medicare’s fee-for-service system but reduces some of the fees. The predictable result will be that hard-pressed physicians either stop taking Medicare patients (reducing elderly Americans’ access to care) or perform a greater volume of services to make up the difference: and such excess care is more or less the definition of costly inefficiency in American health care. The Independent Payment Advisory Board — a 15-member panel charged with forcing Congress to trim costs — is prohibited from using any method except such traditional price controls.

The law also encourages the centralization of medical practices. It gives hospitals more bargaining power over doctors and incentivizes the consolidation of hospitals, which will only contribute to the larger consolidation of the health-care system. If you think fewer providers facing less competition and giving patients fewer options is the way to restrain health-care costs, then you should expect good things.

President Obama promised that the law would reduce insurance premiums by $2,500 a year for families. In reality, we can expect higher premiums — especially if a lot of healthy people act on the realization that paying the fine will be cheaper than buying insurance, and that if they get sick while uninsured they will be able to buy insurance at the same price they would pay if they were healthy. In its latest assessment of Obamacare’s expected effects, published in February, the CBO quietly doubled down on this assumption, projecting that the pool of people covered through the law’s exchanges will start to decline precipitously after 2018 while the costs of subsidizing those who remain will grow by nearly 6 percent per year. We can infer that the CBO expects younger and healthier people to rush out of the exchanges as premium costs escalate. Many employers will make the same calculation as individuals, paying a fine rather than covering their employees, who will then go on the heavily subsidized exchanges. Obamacare raises taxes on investment and on medical devices, but those taxes will not cover the added expenses it puts in the federal budget.

And, of course, Obamacare promised universal coverage, but in its latest report the CBO projects that a decade from now — after $1.7 trillion in new spending and about a trillion in new taxes — there will still be 30 million people without health insurance in America.

The mess that is Obamacare is increasingly moving from a set of troubling projections to a set of real failures and problems, and the early fruits of the law suggest serious trouble to come. The CLASS Act — a new long-term-care entitlement that was part of the original law — was informally abandoned by the administration as fiscally unworkable last year, and formally repealed in this year’s fiscal-cliff deal. Obamacare created high-risk pools as a temporary bridge to the full implementation of the law’s provisions for people with preexisting conditions, but these attracted far fewer people than anticipated and yet ran out of money far sooner than projected. The Accountable Care Organizations intended to encourage cost savings in Medicare are proving a serious flop, as the model providers chosen to spearhead the effort are threatening to drop out of the program because the rules they must work under are unclear and unreasonable.

Meanwhile, employers and insurers preparing for the new system have powerful incentives to avoid its rules and mandates. As insurers warn of double-digit (and for some younger people even triple-digit) premium increases, regulators are increasingly worried that employers will seek to self-insure to avoid costly regulations. Last month the Department of Health and Human Services announced that it will devise new means — means that, like so much of what the administration has done in implementing Obamacare, are not spelled out in this or any other law — to close off avenues to that choice. And the fear that individuals will find it economically irrational to purchase insurance is leading to demands for other new restrictions. As Politico reported in January, “America’s Health Insurance Plans, the main trade group for health insurance companies, has asked HHS to impose late enrollment fees, so people who don’t sign up until they need the coverage will pay more than people who enroll right away.”

These early problems have something in common: They all reflect failures of basic economic rationality in the law’s design. The rules and incentives established to replace traditional insurance with a comprehensive benefit do not account for some very basic facts of human motivation, and appear set to cost far more and achieve far less than the law’s designers promised.

Reforming the law to prevent these foreseeable problems is essentially impossible. Consider again the notion of deregulating the exchanges so that high-deductible plans can be purchased in them. This idea flies in the face of the law’s preference for comprehensive over catastrophic insurance. It also defies its suspicion of risk rating. Insurers who have to charge the same rate to the healthy and the sick will have an incentive to offer policies that appeal more to the former than the latter, so the system cannot work unless regulators force insurers to cover more or less everything and prevent them from gaming the system in countless ways. (Regulators won’t want insurers to offer free memberships to gyms located on the fourth floor of buildings without elevators.)

Similar considerations doom an idea advanced not just by conservative reformers but by liberals (and insurers) worried about the adequacy of the individual mandate. Limiting enrollment periods so that people cannot wait until they are sick to get coverage would address that inadequacy, but implementing this idea would require us to let sick people go without health insurance, and if we are willing to do that it’s not clear why we are keeping this burdensome law at all.

Other proposals advanced by well-meaning tinkerers run into the same general difficulty. These reformers would like a more consumer-driven health-care market in which public dollars subsidize private choices and efficiency is achieved by enabling consumers to make providers compete in offering more attractive options at lower costs. Obamacare, on the other hand, is a managerial system in which public dollars follow expert judgments and efficiency is achieved by incentivizing consolidation and centrally enforcing best practices across the health-care sector.

These are not differences of degree. Rather, they embody a fundamental disagreement about whether market forces can work in health care as they do in the rest of our economy. The truth is that if we want a system in which real insurance has been outlawed, then we have to have something like Obamacare or a single-payer plan. We can then decide whether we want to control costs by imposing some kind of bureaucratic rationing, or want to pay ever higher taxes to mitigate such rationing. If we don’t want this kind of system, we have to repeal Obamacare.

That cannot be done in the next four years. But we should nonetheless be laying the groundwork for an eventual replacement of the law: a replacement that may be achieved in one piece of legislation a few years from now, or incrementally in a series of bills.

The core of a replacement would be a change in the tax treatment of health insurance. The tax break for coverage would be flattened and capped so that people would not get a bigger break the more comprehensive their insurance. The break would also be extended to people who do not have access to employer coverage. People would be allowed to purchase health insurance across state lines. Medicaid and Medicare would be converted into subsidies — essentially add-ons to the tax break or credit for coverage — for people to buy private coverage and pay for out-of-pocket health expenses.

Once a robust market for individually purchased insurance has emerged, the problem of people who are locked out of that market because of preexisting conditions should diminish: People will have both the incentive and the ability to buy cheap, renewable catastrophic policies before getting sick. In the interim, though, conservatives should commit to funding well-designed high-risk pools to cover the health-care expenses of sick people who have been failed by the current system. These subsidies will be much cheaper and more likely to work than Obamacare’s solution to the problem, which is a federally imposed redesign of the entire health-care system.

The basic structure of such an approach — which would address the twin problems of access and cost in a way roughly opposite Obamacare’s — has long been discussed by conservative health-care experts. Forms of it have been proposed by George W. Bush, John McCain, Paul Ryan, and even Mitt Romney. More detailed and developed forms have been worked out by a number of conservative policy thinkers in recent years. These ideas are available for Republican politicians, who need to realize that without such an alternative their objections to Obamacare will ring increasingly hollow. Even though they cannot become law for at least four years, such ideas must become Republican orthodoxy if the party is plausibly to call for repeal.

They will also be essential to enabling Republicans to think clearly about incremental steps. While Obama is president, conservatives do not face a choice between offering impossible wholesale transformations and just tinkering with the Democrats’ law. They should look for opportunities, especially amid the coming chaos of implementation, to advance their agenda incrementally and better enable an eventual replacement.

For instance, House Republicans should advance legislation to delay the implementation of Obamacare for a year. It is already behind schedule, and Health and Human Services secretary Kathleen Sebelius has pushed back key deadlines, often without clear legal authority to do so. Why not ratify those delays and put off the new system? Such a move would be something of an embarrassment to the law’s champions, of course. But it would also be a huge relief to them — putting off the greater embarrassment of what looks to be a disastrous implementation process.

It would certainly be helpful to the people actually charged with putting the law into effect, who yearn for more time to try to make that implementation less disastrous. And it would be helpful to the law’s opponents too, since we believe that the disaster is a function of the law’s very design (and so not ultimately avertable by delay) and that the more time we have to help people see the flaws in that design, and to advance superior alternatives, the more likely we are to replace the law before it has become entrenched.

Republicans could also push to repeal IPAB: to strike a blow against the centrally managed price-control model of health-care reform at the heart of Obamacare and force a very difficult vote upon the Democrats. They could move to strip out some key taxes, such as the medical-device tax, or to repeal the individual-mandate tax. Or they could offer states far greater latitude to control their Medicaid dollars, whether they have opted for Obamacare’s Medicaid expansion or not, in return for a cap on federal Medicaid spending. Each of these moves would make both a point and a difference.

A continued insistence on repeal may seem quixotic; certainly that’s what supporters of Obamacare will say. But the prospects for repeal — or for reforms amounting to repeal –  depend on whether conservatives’ warnings about the effects of Obamacare are correct. Higher premiums and larger budget costs, should they materialize, are not going to make the law turn popular for the first time.

Some conservative pessimists warn that Obamacare’s failure will result in a single-payer solution. We do not share this fear. In 2009–10, liberals had more power in Washington, D.C., than they had had at any point since 1966. Still they could not achieve a single-payer system, or even a “public option” that could metastasize into one. Liberals now own the health-care system. If it fails to work as they have projected, they will be discredited rather than empowered. The public will not be eager to turn itself over to them for more experimentation. It will be more likely to turn to those who warned all along that Obamacare would not work.

But that is precisely why it is crucial for conservatives to rally around both a serious, broad vision of what a conservative health-care reform would look like and a set of incremental steps that might begin to move the country in its direction even now. That task begins with accepting the possibility that we have not already lost.

Yuval Levin is Hertog fellow at the Ethics and Public Policy Center and editor of National Affairs. Ramesh Ponnuru is a senior editor for National Review, a columnist for Bloomberg View, and a visiting fellow at the American Enterprise Institute.

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