Obamascare: Repeal and Replace

Having failed with court challenges and Congressional de-funding, Republicans still hope to derail ‘Obamacare’ through legislative repeal

Like most Republicans, Donald Trump wants to get rid of ‘Obamacare’ – the Affordable Care Act enacted during President Obama’s first term. Obamacare’s main objective is to secure health insurance coverage for all Americans, including the poor and the sick. Health insurance in the US is phenomenally expensive, largely because underlying healthcare costs are wickedly high. In their core indictment, Republicans contend that Obamacare: 1) costs way too much; 2) hampers private sector job creation; and 3) downplays the urgency of cutting healthcare costs. Some add that Obamacare is objectionably ‘socialist’, that it gives too much new power to an already oversized federal government or that it snarls the healthcare sector in spools of red tape. Without going into detail, I submit that these latter objections are less substantial than the core three-point indictment. Republicans have already tried to kill Obamacare through legal challenges in court and by attempting to block necessary Congressional funding. They have failed on both fronts. But if Trump wins the presidency and Republicans continue to control both houses of Congress, they might succeed in a third attack: repeal and replace.
One cannot understand

Obamacare without first grasping some peculiar features of the American healthcare and insurance system. No planner with a smidgen of sanity would ever devise such a system. Having evolved in fits and starts without rational planning, it now blunders forward with such enormous momentum as to make rational reform very difficult.

Obamacare’s main objective is to secure health insurance coverage for all Americans, including the poor and the sick

Most US health care comes from private providers and is obscenely expensive, although generally of high quality. While other developed countries spend less than 9% of GDP on health care, America spends over 16%, almost double. Theories differ as to why costs are so high. Doctors make much more money in America than in comparable countries. Charges for services are typically non-transparent and vary wildly among hospitals. In a classic market failure, huge information disparities between providers on one side and patients/insurers on the other mean that the latter fail to exert meaningful price discipline on the former.

Another problem is that most Americans pay for healthcare not out of pocket, but through insurance, which they also do not pay for directly. Because consumers do not bear expenses directly, they worry little about immediate costs and consume services they may not really need, thereby stressing scarce resources and forcing costs upward. In any case, sky-high costs mean that Americans without health insurance risk financial catastrophe. Prolonged hospital care for a family member can easily bankrupt an American household. On the other hand, health insurance is also terribly expensive, because the underlying care is so costly.

Most Americans with health insurance get it through their employers as part of job compensation, rather than paying for it out of pocket (or having it paid by the government). But if you don’t have a job or have one without insurance benefits, you must pay for coverage out of pocket or go without. The one is expensive and the other potentially ruinous, and those in this position are predominantly the low income, of course. This peculiar employer-centered system emerges froma quirk in the tax code, thereby employer-provided health insurance is not counted as taxable income to the employee. Firms and workers alike, therefore, find it advantageous that compensation be partly in the form of health insurance rather than take-home pay.

With the exception of government-funded Medicare (for the old) and Medicaid (for the very poor), US health insurance comes from private underwriters. For understandable reasons, they attract the young and healthy by offering them low premiums while charging more for those with higher health risks and excluding coverage altogether for those who are seriously sick (‘pre-existing conditions’). Those who need coverage least get it most cheaply, while those who need it most cannot get it at all, unless they have jobs with insurance benefits.

Obamacare rests on several pillars. Mandatory issuance means that insurers must cover anyone who applies, without higher prices for pre-existing conditions. Employer mandate means that firms with 50 or more full-time employees must offer health insurance with specified coverage or pay a penalty. Individual mandate means that persons without employer-provided insurance must purchase their own coverage or pay a penalty. This prevents the young and healthy from gaming the system, going uninsured until they need healthcare and then buying coverage under the mandatory issuance rule. Allowing low-risk (young and healthy) citizens to avoid paying premiums would force insurers to charge the old and sickly higher rates in order to maintain profitability – a problem called ‘adverse selection’.

Obamacare emphasizes extending coverage to the currently uninsured. In its fine print, it also supports initiatives to cut healthcare costs

Exchanges are online markets where citizens can enroll for insurance after comparing coverage and prices. Subsidies are tax-funded support for those who cannot afford the insurance they are compelled to buy. Cost control comes in theory from ongoing governmental scrutiny of healthcare charges and unspecified future regulations to pull them downward.

From the left, in the Democratic Party presidential campaign, Bernie Sanders proposes replacing private health insurance entirely with ‘single payer’ government-funded health insurance. Bernie deserves credit for bringing this option into mainstream discussion. Because single-payer eliminates insurer profits and incentives to charge the old and sick too much or leave then uncovered completely, it can deliver more coverage for less money than with a private insurance system. In theory, this gives it a big efficiency advantage, once you’ve decided that full coverage is your goal. But Bernie’s plan fails to grapple with a crucial problem. If you’re going to cover everybody, you can’t cover them for everything as Bernie now proposes. It’s just too expensive, especially in view of current US healthcare prices. For single-payer to become viable, sound consensus must be reached on what it should and should not cover. This will take time, as will working out the transition plan for abolishing the entire private health insurance sector.

Republicans doubt the efficacy of Obamacare’s speculative cost-control mechanisms. Their other two core critiques focus on the price tag for subsidizing coverage and on the employer mandate’s negative job-creation effect.

The Congressional Budget Office has estimated that subsidies will cost $1.76 trillion over Obamacare’s first decade. This comes at a time when the US government already stands $19 trillion in debt, with deficits currently running at roughly half a trillion per year, down from over a trillion not long ago. Already concerned about the drag on growth these deficits and debts may pose, Republicans insist that Obamacare’s massive new spending commitment is catastrophic.

(Source: nerdwallet)

(Source: nerdwallet)

Republicans also contend that the employer mandate will make job creation more expensive because full-time jobs in firms with 50-plus full-time employees must now offer healthcare coverage. They add that firms with less than 50 full-timers may keep workers in part-time status so as to avoid the Obamacare mandate. With US job creation still subpar, should we be making it more costly? No, say Republicans: repeal and replace.

Obamacare emphasizes extending coverage to the currently uninsured. In its fine print, it also supports initiatives to cut healthcare costs. Republicans respond that broadened coverage should take second place: the crucial priority must be to reduce underlying healthcare costs, thereby making both care and insurance more affordable.

One leading Republican proposal boils down to extracting routine care from insurance coverage altogether so that Americans would pay for it out of pocket. This will induce them to forego health services they do not really need, and to scrutinize services and prices more carefully. With lower consumption and greater price discipline, healthcare costs will go down, as will the price of health insurance. Suppose every family can secure a tax exemption for $5,000 per year to be held in a health savings account (HSA). That tax-favored money can be used for health care that year, saved for future years or even invested. It becomes subject to taxation only if later spent for something besides health care, which families are also free to do. Under this system, as Republicans contend, households have an incentive to get smart about healthcare consumption and costs will consequently come down.

Critics point out that this plan invites adverse selection. Those most drawn to HSAs will be the  young and healthy: those most likely to amass wealth through the tax break, through low consumption of care and accumulated savings. Older and sicker Americans more dependent on health insurance will tend to stick with their current coverage, if they have it. But they or their employers will see their premiums spiral upwards as the healthy and young depart, forcing proportional payouts upward in the ‘risk pool’ of remaining clients. One may also wonder whether the smart-shopper model makes sense for health care in the first place. Can consumers really grasp the complexities of modern medicine and can they make dispassionate judgments to control costs when the health of self or family is at stake?

A second Republican proposal is that households be allowed to buy insurance across state lines (currently disallowed because insurance is regulated by the states, not the federal government). With nationwide sales, interstate competition among underwriters will intensify compared with what currently takes place in the separate states. Underwriters competing for customers nationwide will strive harder to cut premiums. This, in turn, will drive them to bargain harder with healthcare providers on charges for services. Costs will come down for both care and insurance.

Obamacare amounts to a patch job on a deeply flawed system and seems especially weak on cost control while Bernie’s single-payer plan is both premature and poorly conceptualized. But this does not mean that Americans should fall for repeal and replace, Republican-style

There are at least two reasons to doubt this cost-cutting proposal. First, it assumes that more underwriters operating in any given state means more ‘competition’ in an economically relevant sense: not true, if there are already enough players in the separate states to prevent oligopoly pricing or if oligopoly pricing continues after nationwide sales kick in. Second, the proposal forgets that reducing healthcare costs reduces the need for insurance. How plausible is it that underwriters will fall over themselves to cut the costs that make insurance necessary in the first place? Won’t they instead fall over themselves trying to avoid this?

In addition to cost-cutting proposals, Republicans suggest expanding coverage through tax breaks to low-income families that buy health insurance. For this to be seriously helpful with hard-pressed families, tax breaks would need to equal the presumably unaffordableco st of the insurance in question. And as a means of helping the poor, the proposal runs up against the fact that some 45% of US households pay no federal income tax anyway, largely because their earnings are too low. If you pay no taxes, tax breaks won’t help much. Those without health insurance fall overwhelmingly in that bracket.

Obamacare amounts to a patch job on a deeply flawed system and seems especially weak on cost control, while Bernie’s single-payer plan is both premature and poorly conceptualized. But this does not mean that Americans should fall for repeal and replace, Republican-style.