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The Replacement

After Obamacare is repealed, Republicans should offer sensible improvements to the health care system

Feb 14, 2011, Vol. 16, No. 21 • By JEFFREY H. ANDERSON
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When discussing Obamacare during his State of the Union address, President Obama told congressional Republicans, “I am eager to work with you” in finding ways “to improve this law.” But Obamacare has never lent itself to meaningful compromise or substantial revision, as its supporters have been the first to note. Shortly before last year’s health summit, Health and Human Services Secretary Kathleen Sebelius discouraged much tinkering, explaining that the complex interconnectedness of Obamacare’s component parts prohibited it. Sebelius said, “Pieces of the puzzle are necessarily tied together if you have a comprehensive approach.” In other words, Obamacare’s “comprehensive approach” requires one of two results: comprehensive acceptance or comprehensive repeal.

The Replacement

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In his closing statement at that health summit, Obama said that if Republicans couldn’t get on board with his approach, “then I think we’ve got to go ahead and make some decisions, and then that’s what elections are for.” 

Indeed. And now, after an election in which the Republicans rode a wave of anti-Obamacare sentiment to their largest House gains since before the release of Gone with the Wind, they aren’t about to accept Obama-care as a permanent fixture of American life—and neither is the citizenry that elected them. If an architect gives you a horrible plan for a house you didn’t ask for, can’t afford, and don’t want to live in, you don’t work with the architect to change the color of the paint or modify the placement of a closet—especially when the foundation hasn’t yet been poured. Rather, you fire the architect and get to work on replacement plans for something far more livable and affordable. 

The American people couldn’t fire the principal architect in November, but they did the next best thing. They canned members of his party and empowered House Republicans who, of course, have now passed a full repeal bill—by a 56-vote margin, 8 times as large as the 7-vote margin by which Obamacare squeaked through the previous Democratic House. 

But while Americans want repeal, they don’t just want repeal. And thus the House Republicans are now confronted with their greatest challenge—and opportunity—in the whole span of the health care debate. They need to show the American people that the choice is not between Obamacare and nothing. They need to provide a meaningful, sensible alternative to Obamacare’s comprehensive failings. 

The American people want three main things out of health care reform: They want health costs to drop. They want the number of people with insurance to rise. And they want to make sure that people with expensive preexisting conditions aren’t going without medical care. Republicans can deliver on all three counts. 

There are also many things that Americans don’t want out of health care reform: the loss of their health care plans; reductions in medical innovation; a decline in the quality of care; massive increases in federal spending and debt; the government injecting itself into the doctor-patient relationship; eventual federal rationing. Republicans can avoid following in Obamacare’s ominous footsteps on each of these counts. 

The Republican plan should emphasize three relatively simple things: lowering health costs, stopping the tax code from discriminating against the uninsured, and funding state-run community (“high-risk”) pools. A GOP plan that did these three things would be scored by the Congressional Budget Office (CBO) as cutting costs and adding on the order of 10 million people to the ranks of the newly insured.

(1) Lowering health costs. The health plan released by House Republicans in late 2009 already provides the framework for lowering costs. It would allow Americans to buy health insurance across state lines; allow small businesses to pool together to buy insurance; allow private entities greater latitude in following the Safeway cost-cutting model of offering lower premiums for healthier lifestyles; prevent runaway malpractice lawsuits, which lead doctors to practice costly defensive medicine and thereby substantially raise health costs for everyone; and make it easier to use pre-tax Health Savings Accounts (in connection with real insurance, used to cover unforeseen expenses, not routine care)—which let people control their own health care dollars, shop for the best values, and pay for care directly—rather than providing a tax break only for those who funnel their money through insurers. 

The CBO has estimated that the 2009 Republican plan would lower premiums by 5 percent to 8 percent on the open market, while Obamacare would raise them by 10 to 13 percent—a massive difference. The CBO says that, on the open market, Obamacare would increase premiums for the average family by $2,100 per year, while the Republican proposal would reduce families’ premiums by nearly $1,000 per year. That’s a difference between the two alternatives of about $3,000 a year per family. In the small-group market, the CBO says that the Republican plan would likely lower premiums by more than $1,000 a year per family from their projected level under Obamacare. So, over the course of a decade of living under the Republican plan, versus living under Obamacare, the average American family would save about $30,000 in health insurance premiums for plans purchased on the open market and about $10,000 for those purchased in the small-group market. 

(2) Stopping the tax code from discriminating against the uninsured. The Obama administration repeatedly abuses the word “discrimination” when talking about health care. It is not “discrimination” for insurance companies to charge more for those who cost more: That is how the insurance business works and has since the Renaissance. But the federal tax code truly does discriminate, and that’s how Republicans ought to talk about it: It offers tax breaks for health care to Americans who get health insurance through their employers, but none to uninsured Americans who try to buy policies on the open market. Therefore, unlike nearly everyone else, the uninsured have to buy insurance with after-tax dollars, meaning that their real costs for insurance are much higher than everyone else’s. 

This is a simple issue of fairness, and Republicans should propose to fix it. Why not fix what the government is already doing wrong, rather than rewarding it by giving it control over the whole health care system? 

At the same time, Republicans need to remember that they have far fewer allies in the press corps than the president, and they don’t have his microphone. Any change Republicans propose that can possibly be portrayed as threatening the preexisting employer-based insurance of millions of Americans will be mischaracterized to instill fear. So the GOP needs to make crystal clear that its proposal would not change the tax status of employer-provided insurance one iota. A major overhaul that did do this, while arguably good policy, would be better suited to a presidential campaign. 

For the time being, the GOP should take a more incremental, conservative approach. It should roughly level the playing field by giving refundable tax credits to the uninsured (and self-insured) for use only in buying health insurance. A sensible credit would be $2,000 per adult and $500 per child, with a maximum of $5,000 per family. In this way, all Americans—and not just those with employer-provided insurance—would get a tax break on health insurance. Stopping the tax code from discriminating against the uninsured would also inject much needed life into an insurance market that at present lacks vibrancy and competitiveness.

(3) Funding state-run community (“high-risk”) pools. Having failed on costs and having found that talking about the sheer number of uninsured gains them only so much political mileage, the Obama administration and congressional Democrats have now made the preexisting-condition issue the centerpiece of their Obamacare sales pitch. In reality, however, almost no one has yet been helped by Obamacare. The requirement that insurers cover all comers at the same price, which is the ticket to higher premiums for everyone else, isn’t scheduled to go into effect for three more years. 

Most of the Democrats’ examples of the reputed beneficiaries of Obamacare involve those enrolled in its high-risk pools. The Medicare chief actuary had estimated that 375,000 people—about 0.1 percent of the population—would sign up for those pools by New Year’s. Instead the Department of Health and Human Services managed to sign up only 8,000 people. Why didn’t folks sign up? Like the rest of Obamacare, these pools are poorly designed: They’re overregulated, they mandate overly expensive benefits, and (as a result) they charge excessively high premiums. Also, they are underfunded and designed to be short-term, so they—again, like Obamacare as a whole—create great uncertainty and offer little incentive for people to drop out of their current arrangements to join up. 

Admittedly, some people (about 1 out of every 35,000 Americans) have been helped by these pools. But a lot more could be helped by better designed, less expensive, less heavily regulated, more locally controlled pools.

Such community pools—“high-risk” is a misnomer, as John R. Graham and John Goodman have noted; these pools are for people who are high cost, not high risk—would be designed and run at the state or local level. They would provide public funding to help cover the cost of insuring people with prohibitively expensive preexisting conditions. To keep people from gaming the system and signing up for insurance only after they’re sick, such plans should ideally cost their recipients more, not less, than most people pay in health care premiums—though far less than such plans would cost on the open market (if they were even available). They should also offer a meaningful, sensible range of benefits; being publicly subsidized, they shouldn’t be Cadillac plans. Such community pools would provide an important safety net for those who otherwise couldn’t get coverage. But they would not throw a net over the entire health care system and everyone who’s affected by it, as Obamacare would.

The CBO has estimated that the 2009 House Republican health bill would provide a surplus of about $75 billion over 10 years in relation to pre-Obamacare spending projections. That bill didn’t include a proposal to stop the tax code from discriminating against the uninsured, but judging from its scoring of a similar provision, the CBO would likely score such a proposal as increasing spending (through refundable tax credits for people who don’t pay that much in taxes) by something in the range of $100 billion over 10 years. James Capretta and Tom Miller have estimated that funding the community pools would probably require about $150-$200 billion, or about $125-$175 billion more than the 2009 House bill allocated. To take the midpoint of Capretta and Miller’s range, this would require finding about $175 billion over a decade ($150 billion, plus $100 billion, minus $75 billion) to reach deficit-neutrality. 

A great deal of federal funding, in the form of Disproportionate Share Hospital (DSH or “dish”) payments, goes to reimburse hospitals for treating the uninsured in emergency rooms. The argument, made repeatedly by the Obama administration and others, is that if we can just get people insured—as this proposed plan would do—we can get them out of emergency rooms and save money in the process. The CBO has already scored a proposal to convert some DSH funds into block grants to states. With fewer uninsured, fewer DSH funds would be needed. Starting the block grants at 75 percent of each state’s current federal DSH funding level, reducing them by 5 percent annually until they reach 50 percent in year six, and then indexing them to the consumer price index minus 1 percentage point, could likely generate roughly $175 billion, offsetting the $175 billion figure cited above. 

Beyond that, the tax credits would likely reduce revenue (as opposed to increasing spending) by about $100 billion. True, this $100 billion would become deficit spending—but deficit spending resulting from a tax cut. It would represent, moreover, only a fraction of the $341 billion that the CBO estimates Obamacare would add to the debt (through its effect on Medicare and its implementation costs). In all, the Republican proposal would cost some $300-350 billion in its real first decade (about $60 billion for the provisions in the 2009 GOP bill, $150 billion more for community pools, and $100 billion in increased spending, in addition to another $100 billion in decreased revenue, from tax credits). That’s about 15 percent as much as Obamacare’s $2.3 trillion.

True, the Republican bill could follow Obamacare’s lead and in its real first decade increase taxes by about $1 trillion and siphon close to $1 trillion out of Medicare, and thereby (unlike Obamacare) become a huge budget surplus bill. But that would hardly be the responsible course. 

All of this brings up a key point: Republicans shouldn’t be overly skittish about putting forward a replacement bill that would moderately increase the deficit. No one outside of the Obama administration and its core allies believes that Obamacare would do anything other than explode federal spending, deficits, and debt. The American people have no illusions to the contrary. They aren’t going to believe that the Republican bill is less fiscally responsible than Obama-care is. But they will believe (if given reason to believe it) that the Republican plan isn’t serious about covering the uninsured. So the Republicans need to be scrupulous on that point. 

Each of the three parts of this proposed plan addresses an essential aspect of Americans’ health care concerns. If any part is missing, you can bet the Obama administration will mercilessly focus on its absence like the missing leg of a three-legged stool, likely toppling the GOP proposal in the process. The New York Times will once again say (as it said of the last GOP offering) that it’s a “paltry effort,” providing “scandalously” little help for the uninsured. But if all three legs are securely in place, and the Obama administration is left to fight this battle on the ground of deficits and spending, the administration will lose.

The stakes are high for the Republican party and the nation. The American people clearly want to trade in Obamacare. But the Republicans need to give them something compelling in exchange.

Jeffrey H. Anderson was the senior speechwriter for Secretary Mike Leavitt at the Department of Health and Human Services.

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