Yes, There Is a Good Alternative to Obamacare

Published April 28, 2011

National Review Online

In Sunday's New York Times, we argued that along with the Paul Ryan budget, Republicans need to get behind some specifics for replacing Obamacare. Simply repealing the law would certainly be better than implementing it, since Obamacare would put in place a structure even worse than the status quo, but the status quo is very problematic and voters are right to expect conservatives to offer their own answer. As we noted, a number of conservatives have proposed such an alternative—the transformation of the open-ended tax exclusion for employer-provided health insurance into a fixed tax credit that everyone could use in purchasing insurance of their choice.

Combined with the kinds of Medicare reforms the Ryan budget offers, this would start to move us toward an actual consumer-driven market in health insurance, which would have a better chance of holding down costs than both our current peculiar mix of government programs and policies (all of which create incentives for more spending rather than less) and Obamacare's move toward price controls and heavier regulation. But this approach raises major political problems, since it could change the insurance arrangements of many Americans who like the employer coverage they have. We proposed a more gradual version of this idea, which would allow people who qualify for employer coverage to use the credit only for that coverage while allowing those who don't have employer coverage to use the credit to buy their own insurance.

In response, Matt Yglesias writes that there's a lot to like about this idea, but that it couldn't work because of adverse selection (because, that is, insurance companies would refuse to cover the sick at affordable prices), and that this problem means an Obamacare-type approach is the only answer. Paul Krugman agrees with him (but doesn't say there's a lot to like about the tax-credit idea). Brad DeLong agrees too, but thinks that our proposal would lead not to Obamacare but to a single-payer system (he seems implicitly to argue that Obamacare can't work either, and will lead to a single-payer system).

This argument assumes (and indeed Yglesias more or less asserts) that the only way to address the problem of pre-existing conditions in a real insurance market is by basically banning the insurance business—i.e., by prohibiting insurers from taking account of health risks when pricing their products. But if you allow people to buy insurance for basically the same price whether they're sick or healthy, then you give healthy people no reason to buy it until they're sick, so you have to force everyone to buy it; and if you do that then you have to subsidize the purchases of those who can't buy it because they can't afford it. And then you've got large parts of Obamacare, as Yglesias argues. And (as he doesn't argue) you've got a system that continues to inflate rather than control health-care costs, preventing the creation of a real consumer market in insurance because it assumes such a market can't exist.

This series of claims offers a very telling insight into the liberal approach to the health-care debate. And it helps to explain why the idea of pre-existing-condition exclusions (which under our current system affect perhaps about 1 percent of the American population) played such a large role in the case for Obamacare in 2009-2010. As liberal health-care experts are right to argue, the problem would grow larger (at least initially) if more people got their insurance in the individual market rather than through their employers. But the liberal remedies are not the only ways of dealing with the pre-existing-conditions problem. James Capretta and Tom Miller lay out one promising approach in detail here, for instance: Congress could expand existing HIPAA protections for people who are continuously insured, and together with the states could create a sufficiently funded system of high-risk pools. The emphasis on protecting those who have continuous coverage would substitute for a mandate, creating a huge incentive to stay insured when you're healthy (and insurance is cheap) since you could keep that cheap insurance when you get sick. In a thriving individual market people would also have an incentive to purchase, and companies to sell, easily renewable policies. Over time, as the individual market grew, the need for high-risk pool coverage would decline some, since more people would have insurance they could keep as they changed or lost jobs. The pools (which Capretta and Miller estimate would at first cost about $15 to $20 billion a year) would be part of the transition costs to a real market in coverage.

There is of course plenty of room to argue about how this kind of approach should be designed (the temporary risk pools in Obamacare, for instance, are a good model of how not to design it), but does Yglesias really think that there simply is no way to address the problem of covering people with pre-existing conditions other than Obamacare, and that this problem is the reason for the kind of approach that law would take? The under-65 population of the United States is on the whole a fairly healthy population and makes for a perfectly reasonable overall risk-pool for insurers, and the idea that insurers just won't cover any but the youngest and healthiest members of that population seems based on a caricature of how insurance works.

The most interesting part of Yglesias's argument, though, is the idea that addressing this problem is basically all that Obamacare does: that it starts by wanting to create an individual market and does the three things you have to do in order to create one—an individual mandate, a minimum-benefits package, and subsidies. This is why he says we basically agree with him on the ends, but that the means require Obamacare.

In fact, however, Obamacare is a huge step in the opposite direction of the one we propose. It proceeds from the premise that the solution to our health-care problem is to give the government significantly more power as a regulator and a purchaser of health insurance—a regulator through the new exchanges which (despite the fact that they share the name “exchanges” with an idea that has also been part of some conservative health-care proposals) are essentially a means of turning private insurers into a few large public utilities; and as a provider through a massive expansion of Medicaid. (The government's role as a provider was also to be expanded through a public-insurance option in the exchanges, which was crucial to the logic of the law since it would have created an additional public system that could impose Medicare-style price controls for younger Americans, but had to be withdrawn at the last minute for political reasons, making the resulting legislation a little less horrible but a lot less coherent.) The idea is then to use the government's increased muscle, together with new price controls in Medicare, to force down health-care costs.

The trouble is that the cost explosion is in the first place largely a function of the way the government has used its power as a provider and regulator of health insurance. The open-ended structure of Medicare and of the employer-based-insurance tax exclusion, together with the way Medicaid costs are shared by states and the federal government, have created huge incentives to spend more on health care, and therefore pushed costs upward. Obamacare wo
uld double down on an approach to limiting Medicare costs that has failed for decades, would massively expand Medicaid without reforming it, and would largely keep in place the tax exclusion while adding a new entitlement on top of it. It would exacerbate the causes of the cost problem while moving us further away from a real market in health insurance. And along the way it would also basically end the insurance business, create an unconstitutional mandate to buy coverage, and massively increase both spending and taxes. Yet in describing the law, Yglesias ignores most of what it would actually do and claims it's all about addressing the pre-existing-conditions problem while moving away from the employer-based insurance system.

This selective focus is very much in keeping with the pattern of recent defenses of Obamacare. Others among its champions, most notably Ezra Klein, have recently taken to arguing that conservatives who want to transform our health-care entitlements into premium-support systems should also support Obamacare, since that's what its “exchanges” would do. Leaving aside the fact that this is not actually what the exchanges would do (and that starting from the Medicare system is quite different than starting from the employer-based insurance system), each pundit suggests that the particular element he takes up is all there is to Obamacare, so that supporters of one alternative or another should really support Obamacare. But taken as a whole, Obamacare would move us far in precisely the wrong direction, which is why its opponents want to undo it as a whole and try instead to control costs by better enabling consumer choice and competition.

If the argument for Obamacare now amounts to the argument that there is no alternative solution to the problem of pre-existing conditions, then opponents of the law are in a stronger position than we imagined. That, of course, is yet another reason why Republicans should champion a specific alternative.

Yuval Levin is editor of National Affairs and a fellow at the Ethics and Public Policy Center. Ramesh Ponnuru is a senior editor at National Review.

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