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Going, Going, Gone

The arguments that justified Obama­care are already being discredited. Here’s how to replace it.

Sep 2, 2013, Vol. 18, No. 48 • By YUVAL LEVIN
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In theory, it has always been fairly stupid for young and healthy people not to buy insurance: Coverage has been very cheap for them in much of the country, and the risk of unexpected health costs—which would both deplete their meager resources and make it much tougher for them to get insurance in the future—while statistically low, is financially grave and serious. Low-cost protection against that risk would be worthwhile for most. But in practice, when weighing their particular risks and finances, a great many young and healthy people have nonetheless opted against it. That is a major part of the reason why two-thirds of the uninsured are under the age of 40. 

A reform aimed at getting more of them to buy coverage would have to make it even more stupid for them to remain uninsured. Some reformers would do so with a firm individual mandate backed with a stiff penalty. But the Supreme Court last year said a legal requirement to buy coverage would be unconstitutional and transformed Obamacare’s mandate and penalty into a tax on the uninsured. And since forcing people to buy a product they don’t want doesn’t make for great politics, that penalty (now tax) was in any case set much too low to fundamentally change the financial calculation for most people.

A better approach might even further reduce the cost of coverage for the young and healthy while increasing the risk of choosing to remain uninsured (by rewarding continuous coverage while putting it within everyone’s reach), and so make coverage more valuable. This is the approach favored by conservative health care proposals of recent years. But Obamacare does the opposite, making it less stupid to remain uninsured, and yet relies even more heavily than today’s insurance system on the participation of the young and healthy. 

In the face of this serious problem, Obamacare’s defenders have tended to shift the focus of their arguments from cost to value. Maybe Obamacare will not make coverage cheaper for the essential young and healthy demographic, they argue, but it will make it more valuable—despite the new insurance rules—because it will make coverage more comprehensive, meaning insurance will cover a greater share of people’s costs and offer a wider range of benefits. 

In this telling, the more comprehensive an insurance plan is, the better it is. Ideal insurance would presumably be first-dollar coverage that renders even the most minimal care free at the point of delivery in return for a high premium in advance, while insurance with low premiums and high deductibles that provides protection against catastrophic costs is disdained as less than real coverage. Princeton economist and New York Times columnist Paul Krugman wrote in June that such catastrophic plans can be cheap “because they don’t provide much insurance.” In trying to explain why next year’s premiums look so much higher than this year’s low-cost individual-market plans in many states, HHS secretary Kathleen Sebelius said this spring, “Some of these folks have very high catastrophic plans that don’t pay for anything unless you get hit by a bus. They’re really mortgage protection, not health insurance.” 

Thus, evidence of high premium costs in the exchanges has driven some defenders of Obamacare in recent months to acknowledge that the new system, which depends on getting young and healthy uninsured people to buy coverage, depends in turn on the value and appeal of particularly comprehensive coverage. Maybe insurance will cost these people more next year, but it will be worth it. 

Here, however, we find the second of the major recent liberal confrontations with unpleasant facts, which has undermined precisely the case for fully comprehensive insurance coverage. 

Real Insurance

The story begins a few years ago, when Oregon officials decided to expand their Medicaid program but did not have the funds for a simple expansion of income eligibility, and so set up a lottery by which some eligible Oregonians could gain access to the program. That policy created an unusual natural experiment, allowing for a comparison of two groups of similarly situated people, one of which had won the lottery and so had Medicaid coverage while the other remained uninsured. A group of economists from Harvard and MIT carefully tracked the two groups’ finances and health and published two years’ worth of results in May. 

They found that having Medicaid coverage yielded major financial benefits but could not be shown to have  yielded major medical benefits. Such coverage “nearly eliminated catastrophic out-of-pocket medical expenditures” and was correlated with a significant decrease in self-reported depression, but appeared not to have a statistically significant effect on three key health measures often used in assessing physical health outcomes. That doesn’t mean it had no effect, as no such study could prove a negative (and the sample was not large enough for great confidence) but it means that in terms of health, the difference between having comprehensive coverage and being uninsured was not readily discernible by the best available analysis to date.

The response to this study, on all sides of our politics, was largely focused on Medicaid, and whether the enormous state and federal government expenditures on the program (expected to surpass $7 trillion in the coming decade) could be justified given these findings. But the study’s results do not suggest something unique about Medicaid. Rather, they raise the question of the health value of health insurance more generally. 

The findings are in line with a series of studies reaching back to a famous experiment by the RAND Corporation in the 1970s. RAND divided several thousand families into five groups, each provided with health insurance with a different level of co-insurance and out-of-pocket costs—from very comprehensive to essentially catastrophic coverage. They found that while the financial situations of families in the different groups ended up differing, and the degrees to which they used the health care system differed, their actual health outcomes did not. 

The expense and complexity of this kind of study has made it difficult to repeat, though subsequent analyses and smaller studies have tended to confirm the basic findings, just as this year’s Oregon study did: Insurance can save you from financial catastrophe, but not medical catastrophe. This has hardly been an uncontroversial claim in the field, but it appears to be in line with the available evidence. 

In a 2009 review of the literature in the journal Health Services Research, Richard Kronick found that “it is not possible to draw firm causal inferences from the results of observational analyses, but there is little evidence to suggest that extending insurance coverage to all adults would have a large effect on the number of deaths in the United States.” In 2005, economists Amy Finkelstein and Robin McKnight studied the effects of the introduction of Medicare on the elderly in America and concluded that “in its first 10 years, the establishment of universal health insurance for the elderly had no discernible impact on their mortality. However, we find that the introduction of Medicare was associated with a substantial reduction in the elderly’s exposure to out of pocket medical expenditure risk.”

The response of many defenders of Obamacare to this spring’s Oregon study mostly involved reverting to this well-supported argument to insist that the study should not bring Obamacare’s Medicaid expansion into question. Paul Krugman published a post on his Times blog that read, in its entirety:

Fire Insurance Is Worthless!

    After all, there’s no evidence that it prevents fires. 

   But strange to say (as Mark Thoma points out in correspondence), people seem to think it’s a good idea anyway. 

   I leave the relevance of this thought to the Medicaid discussion as an exercise for readers.

Krugman’s point, which he evidently believed was very cleverly made, was that insurance provides financial protection from catastrophic costs, and such protection is nothing to sneeze at. 

He was certainly right. Protection from catastrophic health costs is extremely important, and public policy should aim to make it available to everyone. But consider what this means for the case for comprehensive health coverage. If health insurance does not prevent ill-health, just as fire insurance does not prevent fires, and both are simply financial products that offer a hedge against the risk of extreme unexpected costs, then why should coverage for medical services that do not involve extreme costs add significant value to an insurance policy? 

In fact, such coverage is not quite insurance at all. Secretary Sebelius’s complaint about catastrophic coverage, noted above, has things roughly backwards: Protection from financial disaster in case of medical disaster is what insurance is for. Coverage that merely acts as an intermediary for small, routine expenses—which you pay for through high premiums and the insurer then turns over to a doctor—mostly acts to make the delivery of health services less efficient, but does little to improve either your physical or your financial well-being. 

This model of comprehensive insurance particularly lacks appeal for young and healthy people, whose routine medical costs are very low. For them, and for many others, the model of health insurance that could best balance cost and use would probably look like most other kinds of insurance: coverage for unusual and particularly expensive needs and a range of options and prices for more routine and cheaper services. 

Real Reform

A Functional health reform might therefore begin with universal catastrophic coverage and build from there. It could involve a highly competitive market for both coverage and care, with today’s preferential tax treatment for employer-provided coverage turned into a universal credit that would cover the premium for at least a catastrophic plan for all and allow individuals to purchase more coverage or care on their own or through their employers (or, for the poor, with the aid of a Medicaid program transformed into an add-on to the credit). It would keep the young and healthy in the system by making coverage far more valuable for them through lower costs and protections for those who are continuously insured, as described above, and would enable Americans with preexisting conditions who have not had continuous coverage to buy insurance through subsidized high-risk pools. 

This approach would aim at a model of coverage that encouraged consumer choice and provider competition, rather than eliminating price signals and encouraging overspending. It would require far less public spending than Obama-care, and could make coverage available to as many people as Obamacare without the mandates, taxes, and irrational insurance rules because its organizing principle would not be forcing people to buy products they don’t want but rather making insurance more appealing and affordable. 

Such plans exist, of course, and have been advanced by some conservative policy experts for many years. But the last few months have seen the advocates of Obamacare implicitly acknowledge some of the key premises of this conservative approach, as the law they enacted confronts some significant practical difficulties. 

These early difficulties do not by themselves prove that Obamacare will be a train wreck. Predictions at this early stage are inevitably speculative, and the Obama administration has shown itself willing to engage in frantic (and often lawless) ad hoc transformations of the system to avoid near-term catastrophe. But the early signs do suggest serious problems that run deep, and that will be difficult to juggle for long. They suggest, above all, that America’s health care debate is very far from over. 

This is a fact that many Obamacare defenders have found difficult to accept. Passage of the law has neither made it more popular nor settled the basic dispute about it, as both the law itself and the case for it continue to weaken and shift. Obamacare as it is now being implemented could not have been enacted in 2010. Shorn of the short-term fiscal fig leaf of the CLASS Act, absent the revenue and insurance-market stabilization of the employer mandate, stripped of eligibility verification for subsidies costing billions of taxpayer dollars, saddled with an assault on religious liberty—all of which has been done by the law’s own champions and defenders—the bill would never have had the votes to become law even in the heavily Democratic 111th Congress. 

But more than that has been lost. The basic case for Obamacare now looks much diminished. Its flaws, as made evident by the liberal confrontations with reality of the past few months, point toward a different model of insurance reform. But that model will only become apparent to the public if conservative politicians articulate and embrace it, and help voters see how it could address the real problems of American health care. Obamacare stands to leave our health care system significantly worse than it was before the law’s enactment, but that system was itself badly broken. Real reform that made reliable coverage and high-quality care available to all would move well to the right of the pre-Obamacare status quo. 

The practical problems of Obamacare’s implementation mean the debate will go on. But only a forthright public case for a serious alternative that would replace Obamacare by addressing the problems that preceded it can enable Republicans to win that debate. 

Yuval Levin, the Hertog fellow at the Ethics and Public Policy Center, is a contributing editor to The Weekly Standard and the founding editor of National Affairs.

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