The collapse of the American Health Care Act in the House did nothing to change one fundamental reality: Republicans simply don’t have the luxury of failing when it comes to repealing and replacing Obamacare. No other campaign promise has galvanized conservative voters more over the past seven years; failure to keep it will irreparably sever trust and demoralize the grassroots as the 2018 midterms approach.
Given the united Democratic opposition, inside-the-bubble D.C. thinking has made the tug-of-war between Republican moderates and the Freedom Caucus into an impossible zero-sum game. But a viable path for free-market health-care reform still exists — if Republicans in Congress can coalesce around some key ideas, such as pursuing smart insurance deregulation that puts families back in charge, creating a targeted and robust free-market safety net, and unleashing productivity and innovation by unshackling the health-care-delivery system.
Separating Insurance from Redistribution
True insurance spreads the risk of unknown future events and sets premiums individually based on projected claims. Imagine two groups of people, Group A and Group B. Those in Group A have a 5 percent chance of experiencing a severe health episode that generates $100,000 in claims and a 95 percent chance of zero health expenses. Ignoring profit margins — which, despite the wild hyperbole, are quite small — Group A’s annual premiums should equal 5 percent of $100,000, or $5,000. The lucky 95 percent pays the $5,000 premium despite generating no actual expenses. The unlucky 5 percent faces $100,000 in claims, but insurance kicks in to cover the bill. Those in Group B, meanwhile, face a 10 percent chance of experiencing a severe health episode. In a properly functioning insurance market, their annual premiums would be twice as high as Group A’s — $10,000 — because they present twice the risk to insurers.
Unfortunately, the market created by Obamacare does not function properly because the law enacts community-rating restrictions to subsidize the higher-risk Group B at Group A’s expense. In practical terms, Obamacare forces Group A to overpay for insurance so that Group B underpays, subjecting both groups to an individual mandate as a way of preventing Group A from walking away. Essentially, the law taxes the young and healthy to subsidize the old and sick under the pretext of “consumer protection.” This de facto insurance-premium tax is worse than even a typical tax because it destabilizes insurance markets by causing a cascade of rising premiums and fleeing customers, which then forces market consolidation as many insurers follow suit and depart.
The best way to fix this problem, restoring affordability and stability to the health-care sector, is to unleash market competition by stripping away Obamacare’s insurance mandates. But while deregulating insurance markets is likely to win the support of the Freedom Caucus, moderates may worry — not without reason — that removing these “protections” will make insurance unaffordable for people with preexisting conditions, even as it dramatically lowers premiums for the vast majority of Americans. Which means that deregulation of the market can’t be the only feature of any repeal-and-replace proposal.
Committing to a Free-Market Safety Net
One enduring legacy of Obamacare is likely to be the widespread acceptance of the idea that every American should have the ability to obtain health insurance, regardless of financial means. On political grounds, any repeal-and-replace bill that results in millions of Americans losing insurance is likely to be a nonstarter. This doesn’t mean, however, that Republicans must succumb to glum predictions of creeping socialism. Properly envisioned, a safety net tailored toward helping those most in need is perfectly consistent with free-market principles. In fact, no less a luminary of free-market economics than Friedrich Hayek himself once stated that there is no reason that “the state should not help organize a comprehensive system of social insurance in providing for those common hazards of life against which few can make adequate provision.” Where Democrats go astray is in transforming this targeted safety net into a cradle-to-grave entitlement laden with intrusive government meddling and an unhealthy dose of class envy.
What would a free-market safety net look like? Ideally, Republicans should put forward a replacement bill that actually increases the number of insured relative to the Obamacare baseline, albeit with leaner insurance designed specifically to shield Americans from financial devastation and medical bankruptcy. The government has no business forcing people to obtain expensive insurance that covers a list of lobbyist-determined benefits. But a leaner baseline insurance plan would simply cap out-of-pocket spending at some reasonable fraction of household income, providing financial assistance to cover the premiums for those who can’t afford them. Americans with preexisting conditions would receive much more generous assistance, and to prevent gaming of the system, assistance would be higher for people who maintain continuous coverage. Supplemental insurance could then be purchased independently by those who wanted it.
Unshackling the Health-Care-Delivery System
The biggest impediment to bringing down costs is the all-consuming focus on insurance coverage to the exclusion of broader cost-containment efforts. If you entered a restaurant and were told that some other anonymous table would pay your bill and that you would pay theirs, the inevitable result would be a substantial increase in both bills, as there would be no reason for cost-conscious ordering. The current debate amounts to patrons having loud arguments after seeing the bills, instead of addressing that original, flawed ordering arrangement. In the few instances when politicians do discuss broader reforms, Democrats keep pushing for government micro-management of health-care delivery while Republicans pin all of their hopes on the notion that sick people would shop around for better prices if only they had health savings accounts (HSAs). There is a positive role for HSAs to play, but they still amount to an insurance reform, which is not going to get the job done alone.
There is no silver bullet, but at a basic level, the only way to keep up with growing demand while holding prices in check is to expand supply. Republicans should first drastically reform the way Medicare and Medicaid compensate providers, loosening price controls and making both programs follow the lead of more innovative market actors. An intelligent repeal-and-replace bill would also expedite the drug-approval process, liberalize excessive occupational-licensing laws, and strip away lobbyist-determined barriers to entry that drive up prices.
This combination of free-market deregulation, targeted premium assistance, and health-care-delivery reforms holds great promise to bend the cost curve downward, stabilize the insurance market, and ensure peace of mind by guaranteeing that no American is prevented from receiving high-quality, affordable health care. It’s a prescription conservative and moderate House Republicans alike should be able to get behind.
— Aaron Hedlund is an assistant professor of economics at the University of Missouri-Columbia.