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.