How to Transcend Obamacare

by Avik Roy
Conservatives have an opportunity to liberate health care for everyone.

For four and a half years, conservatives have been adamant in their desire to repeal Obamacare. The case for repeal goes something like this:

The Affordable Care Act is the largest expansion of the entitlement state since the 1960s. It represents a tipping point — perhaps a point of no return — in the transformation of America from a free, constitutional republic into a European-style social democracy. The law represents an unprecedented intrusion of the government into our lives, far worse than anything that has come before. Furthermore, because Obamacare is our newest entitlement, it’s less entrenched than older programs, and therefore represents our best opportunity to roll back Big Government.

It’s an understandable — and widely held — view. And it’s an accurate one, in important ways. But there are a couple of things it gets wrong about our current situation, and that’s a good thing.

It turns out that repealing Obamacare is not our only hope for reversing the triumph of the entitlement state. Indeed, there may be an even better one.

The government takeover of health care took place in 1965, not 2010.

One thing you often hear conservatives say about Obamacare is that it represents “the government takeover of the U.S. health-care system.” This is not precisely true. The actual government takeover of the U.S. health-care system took place in 1965, when Lyndon Johnson signed into law the bills enacting Medicare and Medicaid: the “Great Society.”

Medicare and Medicaid were — and are — single-payer, government-run health-insurance programs for the elderly and the poor, respectively. Today, nearly a third of the U.S. population is on single-payer health care, thanks to Medicare and Medicaid. These programs have profoundly distorted the U.S. health-care system, in ways that make health care more expensive for everyone else. Well before anyone had heard of Barack Obama, Medicare and Medicaid had placed America on a path to bankruptcy.

Many conservatives fear that Obamacare is a “Trojan horse” for single-payer health care in the United States. But in 2013 — before Obamacare went online — 93 million Americans were on either Medicaid or Medicare. Another 6 million got coverage through the Veterans Health Administration, the most socialized health-care system in the U.S. That means that nearly 100 million Americans were on single-payer health care, or its facsimile, before Obamacare went into effect.

Obamacare builds on the LBJ legacy, to be sure. The law expands the scale and scope of the Medicaid program. Overall, Obamacare increases federal health-care spending by about 15 percent. But in 2012, U.S. government entities were already spending $4,160 on health care for every man, woman, and child in the country. That’s more than all but two other countries in the entire world.

Many European economies are freer than America’s.

When it comes to government health-care spending, then, the U.S. is actually worse off than most of the European countries at which we wrinkle our noses. Indeed, when it comes to economic freedom, the U.S. has fallen behind many of its European competitors.

In the 2014 edition of the Heritage Foundation’s Index of Economic Freedom, the U.S. ranked 12th, behind Hong Kong, Singapore, Australia, Switzerland, New Zealand, Canada, Chile, Mauritius, Ireland, Denmark, and Estonia. One of the things that’s remarkable about that list is that every single country on it save Mauritius has some form of universal health care.

That’s not to say that all of those countries have health-care systems that are freer than America’s. Canada’s, especially, is the type of single-payer rationing-dependent system that makes Americans recoil. But a few of these higher-ranked countries in the Heritage survey do have health-care systems that are more market-oriented than ours. And it behooves us to learn from what they do better.

The two most notable examples are Switzerland (No. 4 on the Heritage list) and Singapore (No. 2). Neither could be called a libertarian utopia. But both have health-care systems that spend far less than ours and deliver comparable — if not higher — quality.

While nearly a third of Americans are on single-payer health care, not one Swiss citizen is. The Swiss use a system quite similar to that of Obamacare’s exchanges, in which individuals can buy subsidized and regulated private insurance plans. While the Swiss system shares many of Obamacare’s unattractive features — most notably its individual mandate — Switzerland’s per capita government spending on health care is less than half that of the United States.

Singapore does have a single-payer system for catastrophic coverage. But all other health spending is funneled through health-savings accounts: precisely the instrument that free-market health-policy analysts have long advocated. Because Singaporeans control their own health dollars, their government spends about a fifth of what we do on health care.

We can learn two things from Switzerland and Singapore. First, that there are countries out there with freer health-care systems than our own. Second, that it is possible to have one of the freest economies in the world while also ensuring that every citizen has health insurance.

Free-market reform must tackle Medicare and Medicaid.

The impressive results of Switzerland and Singapore drive home a powerful message: that health care works best when individuals have more control over their own health spending. The Left can’t bring itself to believe this; there, it’s an article of faith that “disinterested” government experts will make better and more cost-efficient decisions for you than you would make for yourself.

But the examples of Switzerland and Singapore also drive home the problem with focusing solely on Obamacare. If we were to spend all our capital “repealing and replacing” Obamacare, we might not have enough left to tackle the real drivers of unsustainable single-payer health care in America: Medicare and Medicaid.

One of the ironies of our partisan health-care debate is that Paul Ryan’s plan to reform Medicare employs a “Medicare exchange” that is actually to the left of Obamacare’s. The current version of the Ryan plan contains a government-run public option, unlike the Obamacare exchanges. And the Obamacare exchanges are more aggressively means-tested than the Ryan Medicare reforms. To put it another way: If we gradually migrated future retirees onto Obamacare’s exchanges, the result would actually be more market-oriented than that of implementing the Ryan plan for Medicare.

Migrating the Medicaid population onto exchanges would also yield dividends. Exchange-based plans would give those below the poverty line access to high-quality, private insurance and phase out single-payer public-option health insurance. Over the long run, only private insurers will have the competence and the incentive to come up with innovative, cost-efficient ways to improve health outcomes for the poor.

In short, migrating future retirees and low-income Americans onto exchanges could yield substantial benefits to the quality and cost of subsidized health coverage. But there’s no reason we should accept the Obamacare exchanges as they are.

Bring freedom, choice, and affordability back to insurance markets.

Instead of forcing Americans to buy insurance plans that they neither need nor want — the Obamacare way — we should convert the exchanges into real marketplaces, places where people can voluntarily buy coverage that is suited to them. We can do this by repealing Obamacare’s individual and employer mandates, and by rolling back the plethora of new federal regulations and tax hikes that make insurance more costly without improving its quality.

It’s possible to do all this while still ensuring that Americans with preexisting conditions can obtain coverage at a reasonable price. Indeed, in a new Manhattan Institute paper entitled “Transcending Obamacare: A Patient-Centered Plan for Near-Universal Coverage and Permanent Fiscal Solvency,” we estimate that this collection of reforms could increase by 12 million the number of Americans with health insurance, over and above projected Obamacare levels.

“That sounds expensive,” you might say. But using a microsimulation model from the University of Minnesota — a comparable technique to the one used by the Congressional Budget Office — we project that over three decades this approach would actually reduce federal spending by $10.5 trillion, and federal revenues by $2.5 trillion, for a net deficit reduction of $8 trillion. If the Medicare portion of the deficit savings were applied to shoring up the Medicare program, it would make the Medicare trust fund permanently solvent. Not merely for four or six or twelve years, but forever.

How is this possible? Several reasons. First, the Manhattan Institute plan makes consumer-driven health plans, with health-savings accounts, the centerpiece of a reformed set of state-based insurance exchanges. This drives down the cost of insurance policies for a single person by approximately 17 percent. Because health insurance is cheaper — especially for young and healthy people — more people freely choose to buy it.

Second, the plan deploys the power of private competition and choice to drive costs down. The market-driven Medicare prescription-drug benefit, for all of its flaws, spent 43 percent less in 2013 than it had been projected to in that year. Government bean-counters have a hard time understanding that harnessing market forces keeps costs much lower than in traditional government-run programs, but it does. Furthermore, the Affordable Care Act itself specifies a long-term growth rate for exchange-based subsidies that serves as an additional control against spiraling costs.

Third, the plan focuses federal subsidies on the people who truly need them: the poor and the sick. One of the main reasons American health care is so expensive is that we spend trillions of dollars subsidizing health coverage for the well-to-do. More than four-fifths of Americans receive federally subsidized health insurance; in Switzerland, only about one-fifth do. That’s the difference between an entitlement leviathan (ours) and a true safety net (theirs).

We’ll get gradual reforms in the near term, big dividends in the long term.

A key to this approach is to make gradual reforms today that pay off down the road. The plan’s deficit savings in the first decade are minimal: $29 billion from 2016 to 2025. But over time, as the plan shifts downward the growth of health-care entitlements, the rate of savings grows: $1.3 trillion in decade two, and $6.7 trillion in decade three.

While the Manhattan Institute plan is perfectly compatible with the “repeal and replace” framework favored by Republicans — you simply repeal Obamacare and replace it with the structure outlined above — the plan doesn’t require the total repeal of Obamacare.

As a result, this approach solves a political conundrum for Republicans: how to bring our health-care entitlements under control, while avoiding the political pitfalls that would come from repealing the health-insurance plans that, according to the CBO, 36 million Americans will be on by 2017. If there’s one thing that Obamacare has taught us, it’s that Americans don’t like it when you disrupt their health-insurance arrangements. Any reforms that conservatives seek to implement must respect that sentiment, and reflect the principles of voluntarism and incrementalism.

The good news is that we can do this. We can solve the problem that conservatives care about more than any other — that America is broke — while actually making the health-care system work better for everyone. The poor and the sick and the elderly will benefit from higher-quality, fiscally sustainable health coverage. And average tax-paying Americans will benefit from affordable insurance, lower long-term tax liabilities, and a consumer-driven health-care system that is centered around them rather than the bureaucracy.

In 1981, in a speech at the University of Notre Dame, Ronald Reagan said, “The years ahead are great ones for this country, for the cause of freedom and the spread of civilization. The West won’t contain Communism; it will transcend Communism. It won’t bother to denounce it; it will dismiss it as some bizarre chapter in human history whose last pages are even now being written.”

His point was that we as Americans shouldn’t spend our time hoping and waiting for Communism to fail. Instead, we should work to ensure that capitalism succeeds, and thereby leave the Soviet economy in the dust.

It’s time for conservatives to bring Reagan’s lesson to health reform. Instead of waiting for Obamacare to fail, we should instead devote ourselves to liberating the entire U.S. health-care system from government control. If we do that, and demonstrate the value of our economic principles with tangible results, it won’t matter whether we have formally repealed Obamacare. We will have transcended it, and solved the most important policy problem of our time: that of unsustainable government spending. If we want our children and grandchildren to inherit the country we grew up in, we have no time to waste.

— Avik Roy is a senior fellow at the Manhattan Institute.