The House Health-Care Proposal

Published March 9, 2017

National Review Online

What should we make of the House Republican health-care proposal released this week? It has certainly been off to a difficult start. And I suspect that in a week’s time its authors will look back fondly on that difficult start as the glorious interlude before the Congressional Budget Office had scored the proposal. There are rough waters ahead. But this process is far from over.

It is an old political truism that a successful compromise is an outcome no one likes. But that surely doesn’t mean that any proposal no one likes must be a good idea or a plausible compromise. The House Republicans have managed to propose an approach to health reform that almost no one really likes.

So how did that happen? And where is this process likely to go? Stipulating at the outset that I sure don’t know, I have a few conjectures.

First, it’s important to recall how legislative endeavors like this, and particularly regarding health care, tend to work. In very general terms, the House establishes the framework and the Senate fills it in. As we have seen most recently with Obamacare and (on a smaller scale) with the 2015 Republican reconciliation bill that sought to repeal Obamacare, the Senate tends to respond to House bills like these with wraparound amendments that essentially replace the substance of the bill with a version more suited to Senate procedure—and frequently also more developed and cooked. You might say the House writes the chapter headings and the Senate writes the text. I would expect that to happen here. But the way the House begins the process obviously matters enormously, and in this case things are not off to a very good start.

If the House is writing the framework, what are its basic elements? The House proposal involves two fairly distinct sets of reforms: an aggressive and appealing Medicaid reform that conservatives (and a few prominent liberals too) have sought for 20 years, and a set of incremental individual-market reforms that have some real trouble holding together.

The Medicaid reform, which would gradually bring to an end the federal-state “match” approach to Medicaid funding that has done enormous harm to American health care and federalism for decades, is very worthwhile. It would replace that match approach with a capped federal contribution, based on the size of the beneficiary population (or more precisely, several beneficiary sub-populations) in each state. There is room for debate about the growth-rate of such a capped contribution, and there would be such room in an ongoing way in this sort of system, as well as for thinking about how to handle the transition to that system given that some states have expanded Medicaid eligibility in the last few years under a much higher federal match and others haven’t. I don’t love all the details of the House proposal on all those fronts, but they are clearly subject to negotiation.

That kind of negotiation and renegotiation is appropriate and unavoidable, and it would be best entered into with a default inclination to be protective of vulnerable people and to be willing to accept higher near-term spending levels in return for enduring structural reforms. But this reform is an excellent idea on the whole, and it is very encouraging to find it here and to see Republicans largely united in support of it. It’s surprising, too. Until the last few weeks, I would not have guessed that what Republicans put forward to take on Obamacare would advance a transformation of Medicaid’s funding system to per-capita caps. This reform would be, in some respects, more significant than anything else the House bills would do.

The individual-market reforms are another story. Some of them are a kind of twisted, fun-house mirror version of an approach to the federal role in the individual insurance market that has been proposed by some conservatives for years, but a number of the twists are peculiar and problematic. These twists have been explained by some this week as a function of the longstanding divisions about health-care policy on the Right, and there is surely some truth to that. But the House approach actually very clearly takes a side in that longstanding fight. It takes the side of the refundable tax credit camp, and isn’t particularly shy about it. Some of its problems—like the credit being means tested at the top but not the bottom, leaving it not helpful enough to people just above the new Medicaid thresholds—are probably a function of trying to make the bill a little more palatable to critics on the Right. But as a general matter, it doesn’t twist itself in knots over the basic question of the tax-credit approach.

The twists, it seems to me, are much more a function of a different problem: The proposal has the form it does because it isn’t quite sure how aggressive to be about the Senate’s procedural rules. It is being pursued through the budget reconciliation process to avoid a Senate filibuster, which means that in the Senate it has to survive the Byrd Rule that requires each element of the bill to be relevant to the budget. That means pure tax and spending measures are allowed, but pure rules changes—like reforms of insurance regulations—may not be unless they are deemed by the Senate parliamentarian (or the presiding officer) to have clear budget implications. And there is a vast gray area in between.

The House Republican proposal has clearly been designed with a very specific set of assumptions in mind about what can make it past the Byrd Rule in the Senate and what cannot. But it’s less clear where these assumptions come from or how valid they are. Some of them are downright strange. The bill assumes that Obamacare’s core feature—the federalization of health insurance—cannot be undone through reconciliation. So it does what it does within the boundaries of Obamacare’s imposition of specific guaranteed-issue and community-rating rules on the insurance system. But some of Obamacare’s insurance regulations, like the premium age bands (that determine how much higher the premiums of older people may be than those of younger people) are altered in the House proposal. And the proposal also introduces some elements, like a 30 percent surcharge on premiums for people who haven’t been continuously insured, which seem (to me) very unlikely to survive a Byrd Rule challenge.

This inconsistency about the limits of reconciliation strikes me as the source of the bill’s core structural strangeness. The conservative reforms on which it is modeled (like Tom Price’s bill, Paul Ryan’s past proposals, the Hatch-Burr bill in the Senate, and various conservative wonk ideas in the Obama years) were premised on a repeal of Obamacare, or were proposed before it was enacted.

Those various proposals all involved bringing premium costs down by enabling insurers to sell catastrophic coverage plans (along with more comprehensive plans) and enabling everyone in the individual market to afford at least those catastrophic coverage plans. This would enable far greater competition and let anyone not otherwise covered by insurance enter the individual market as a consumer.

That would be achieved, first, by freeing insurers from the benefit and design mandates of Obamacare and returning almost all health-insurance regulation to the states. The main exception is that those past proposals would require that people with continuous insurance coverage be allowed to keep their plans (and to an extent to switch to new ones) without being newly risk-rated. This would create a strong incentive for healthy people to purchase coverage.

And second, those kinds of proposals would provide a refundable tax credit for the purchase of coverage and enable—or in some cases require—insurers to offer some plans with premiums equal to the amount of the credit (with deductibles and other cost sharing adjusted accordingly). This would mean that people could get catastrophic coverage for extreme expenses for the same price they now pay to be uninsured—i.e., nothing.

The combination of these features would mean that everyone could afford to purchase at least catastrophic coverage in a competitive individual insurance market, and there would then be a wide range of options above that and real downward pressure on premium costs. The credit would be paid for by a cap on the tax exclusion for employer-provided health coverage, which has long been open-ended and so has encouraged high-premium insurance coverage.

The House proposal bears a clear resemblance to this approach. It involves some deregulation from Obamacare, it includes a refundable tax credit for coverage, it gestures toward incentives for continuous coverage. But it is also fundamentally different from this approach, because it functions within the core insurance rules established by Obamacare, which means it can’t really achieve most of the key aims of the conservative reforms it is modeled on.

Perhaps the clearest example of this problem is one of the more peculiar features of the new proposal: the 30 percent surcharge on premiums for people who have not been continuously insured. This is an echo of the protection for continuously covered people that has been part of many Republican health-care proposals in recent years. But it is distorted by the fact that Obamacare’s rules would remain in effect.

Its goal, presumably, is to discourage people from waiting to buy coverage until they are sick by making insurance more expensive to people who haven’t been insured for a while. But in practice, this kind of penalty would probably have the opposite effect. It would create a disincentive for everyone who hasn’t been continuously covered to get coverage, by making insurance more expensive for them. But that disincentive would do more to drive away healthy people than sick people, since the added premium is more likely to be worth it to someone who otherwise would have higher costs than to someone just looking to get insurance for a rainy day. It would, in other words, exacerbate the problem it is trying to mitigate. And why have such a peculiarly designed continuous-coverage feature? Because Obamacare’s rules would remain in effect.

The way continuous coverage protection has usually been thought of in prior conservative proposals assumed you’d get rid of Obamacare’s form of community rating and then re-introduce a version of community rating available only to people who have been continuously insured (in a system where everyone could afford to be continuously insured with at least catastrophic coverage). So as a benefit of being continuously covered you get guaranteed renewability of your existing plan regardless of changes in your health and also some constraint on risk rating when switching plans. That would make insurance much more attractive to healthier people, since they could get in at a lower rate and then either keep their plan at that rate or have some protection from the full effects of pre-existing conditions on their premium when switching to another plan. It would be a strong reason to get covered when you’re healthy, rather than a reason not to.

The architects of the House proposal seem to think they can’t do this because they can’t alter Obamacare’s community rating in reconciliation. So they opt for a new surcharge instead of a rule change. But (as suggested above) it’s not clear why they should be able to get this new surcharge through reconciliation but not be able to get rid of or alter the terms of community rating through reconciliation. As a chapter heading called “continuous coverage protection” this could be excusable. As a specific policy provision, I don’t think it can.

Other structural elements of the proposal seem to be functions of a similar process of imaginary negotiation with an imaginary Senate parliamentarian. Not all, of course. The absence of a cap on the employer tax exclusion, for instance, seems to have its roots in more familiar political pressures. It, too, is a serious mistake that needs to be remedied.

But if they’re going to talk about remedying mistakes, then Republicans have to confront the basic inconsistency in this proposal about the Senate’s reconciliation rules, and the proposal’s resulting fundamental identity problem. They will need to decide whether what they’re moving is a repeal and replacement of Obamacare or a much more limited incremental measure defined by the bounds of the reconciliation process.

Both of those are viable and legitimate options, and which of them should be pursued depends on what Senate rules make possible at this point. But a combination of the two risks a dangerous incoherence—dangerous both to the political prospects of Republicans and (more important) to the practical prospects of the individual insurance market and the people who depend on it.

The two possible answers to that basic question would point toward two sets of remedies for problems with the bill. House Republicans could decide that it is not their job to solve procedural problems in the Senate and proceed with a bill that aggressively rolls back the insurance regulations in Title I of Obamacare and then enacts a different approach—returning insurance regulation to the states and subsidizing catastrophic coverage. That would leave it to the Senate to decide how much of such a bill to retain and in what form, whether on the floor in response to Democratic challenges under the Byrd Rule or in preparing a wraparound amendment in advance. Senators would presumably want to alter the credit in such a bill to make it more generous at the bottom, perhaps to require insurers to offer default plans with premiums equal to the credit, and also to reinstate the cap on the employer exclusion. (James Capretta has outlined what some of these changes might look like.)

Elements of such a bill that could not be included in reconciliation might then be attempted separately on regular-order legislation (like the reauthorization of the Children’s Health Insurance Program coming later in the year) that Democrats will feel pressure to vote for. And whatever gets enacted could be supplemented by regulatory action from HHS. Some of this might succeed, some of it would not. But Republicans will have tried to repeal and replace Obamacare and can proceed based on the outcome.

Or House Republicans could decide that there is no reason to expect Senate rules to allow them to take on Obamacare’s insurance regulations and instead pursue something more like a set of stabilizing transitional reforms through reconciliation. These could be things like what the House bill envisions as a transition to a new system, which breaks the bounds of the exchanges and loosens rules some—again, in conjunction with vital regulatory reforms from HHS. It could also involve the replacement of Obamacare’s subsidies with the kind of credit the House bill envisions (albeit more generous at the bottom and funded by a cap on the employer exclusion). But it would not pretend to be a repeal of Obamacare, but rather an effort to loosen its strictures to the extent possible, with more to come if and when it’s achievable. Avik Roy has proposed changes to the bill that would essentially work this way. Given that such a bill would also include the House’s aggressive Medicaid reform, which surely can get past the parliamentarian, a bill that only goes this far would still be the most significant Republican policy achievement in a generation.

After either of these options is attempted, Republicans could look for paths to achieve more outside of the reconciliation process, by administrative action and perhaps through something like the Cassidy-Collins bill that would give states the option to retain Obamacare’s rules or adopt a more consumer-friendly, deregulated alternative framework (and which might get some Democratic votes).

In other words, a bill pursued now could do more than the House bill now sets out to do, or it could do less. Presenting a partial step as a full one and pre-negotiating particular insurance-rule changes based on expectations about the Senate parliamentarian just doesn’t make for a coherent product.

Changes in one of these directions could now come through the work of the House committees or the Rules Committee. But they are more likely to happen, if at all, in the Senate. For that to happen, though, this process will need to get that far. And the substantive incoherence of this first version of the bill presents an obstacle to that happening. The score it receives from the CBO probably will too.

It is much too early to draft eulogies for this effort. Meaningful success remains entirely plausible. But the intense emphasis on speed and pure momentum is likely to undermine that prospect rather than advance it now. And in any case, momentum depends on a strong, successful push at the start. This could have started better, and it needs to end smarter.

Yuval Levin is the Hertog Fellow at the Ethics and Public policy Center.

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