The Corner

Republicans Use the Grandfather Option to Fix the Mess Made by Obamacare

One aspect of the much-derided House Republican opening bid on Obamacare replacement should be retained as the plan evolves: grandfathering Obamacare’s existing subsidy recipients, at least the Medicaid recipients.

After eight years of promises to repeal Obamacare and a lot of lively intra-party debate over how best to replace it, Republicans are in a bind. More than one bind, in fact, but close to the center of their problem in deciding how to replace Obamacare is this: every government program or policy, no matter how good or bad, has winners and losers. Because of this, every change also has winners and losers. And when a program involves government handouts or subsidies to individuals, the recipients will be the first people to notice if they lose their source of free money (this is a point now being gleefully noted at every turn by the same liberal pundits and Democratic politicians who called Mitt Romney an amoral monster for pointing out that this was their view of the world in 2012).

Moreover, the healthcare marketplace is a complex business, and Obamacare’s distortions reach into nearly every aspect of it. When Obamacare was launched in 2013, it was designed to be hard to repeal – Obama basically burned the ships of the existing insurance market behind him like Cortez, forcing a significant number of people out of their existing policies, and changing the mix of insurers and policies on the market in each state. There’s a vigorous debate over exactly how many Obamacare enrollees were previously otherwise insured – a 2014 McKinsey study found that about 75% of new insurance enrollees were already insured, but was less than clear on the proportion of Obamacare enrollees. A 2014 Kaiser Family Foundation study suggested that a majority of Obamacare recipients had insurance before. A 2015 RAND study found 9.6 million new enrollees in employer plans, while 5.9 million lost coverage. What everyone agrees on is that most of Obamacare’s coverage has taken place through the Medicaid expansion (by some estimates, most of these are people who were already eligible for Medicaid anyway), and most Obamacare enrollees receive subsidies.

Regardless of the exact proportions, two facts remain: one, millions of people now receive government subsidies for health insurance that would go away if Obamacare’s subsidies were immediately repealed; and two, the insurance market would need to look very different than it does today in order for those people to afford insurance without paying a good deal more money out of pocket. In most cases, particularly recipients of Medicaid, these are not people for whom this extent of out-of-pocket expenses are a minor irritant. These two facts are true even if you believe that the conditions created by Obamacare cause the insurance market to be a significantly worse deal on balance for most Americans than the alternatives. A total and immediately effective repeal with no backup plan would create losers who would be angry and sympathetic.

A lot of the distortion in the intra-Republican healthcare debate – including the Rube Goldberg nature of the already-being-rewritten House plan and the demands by Senate moderates to protect people covered by Medicaid expansion – is driven not by a desire to produce the best plan for the country’s future, but rather by a desire to address the difficulty of transitioning out of the bind created by Obamacare’s entrenchment over the past four years. That’s understandable and necessary – conservatives take the world as it already is, and any reform plan in any area of government needs to start with the realities of what was left behind by the last Administration. But rather than introduce permanent distortions into the future system, Republicans should aim to create the best system they can. That means closing Obamacare to new entrants quickly, and handling the existing recipients by grandfathering their benefits over a more extended transition period. That’s already a partial feature of the current House plan, and the concept should be retained or even expanded as the plans are revised, while making changes to the program for prospective beneficiaries more immediately effective:

The GOP measure significantly restructures the Medicaid program, which provides coverage for around 70 million poor, disabled and elderly people, to cap federal payments. 

The repeal of the Medicaid expansion and ­ObamaCare’s subsidies would not take effect until 2020, meaning current enrollees could keep their coverage this year.  

Republicans would also grandfather in current Medicaid enrollees so that they can stay on the program. But once 2020 arrives, the federal government would no longer provide the extra federal funds that allow for expansion. 

There’s already precedent for this approach, both in government and in conservative policy proposals. The Supplemental Social Security Income program, when it was established in 1972, grandfathered eligibility for people who had previously received state benefits, even if not eligible under the new SSI requirements. Most every proposal Republicans have offered over the years for Social Security reform starts with the assumption that existing Social Security recipients should continue receiving benefits from the program they paid into, with reforms being prospective. Even Obamacare grandfathered some existing healthcare plans.

By contrast, only pure politics has been driving efforts to hand over new Medicaid funds to states that never accepted Medicaid expansion. The politics is understandable, since in the short run, grandfathering will benefit the mostly Democrat-run states that expanded Medicaid, rather than the Republican-run states that refused to. But there will be plenty of opportunities to throw a bone to red states; bloating Medicaid is not the right place to look for that. Instead, those states should be offered more immediate flexibility in how they run their Medicaid systems.

Continuing benefits for existing recipients past the time when the system is no longer accepting new beneficiaries is not an admission that Obamacare was a good thing, but rather a practical admission that standing up a replacement will take time. Once the pool of subsidy recipients is finite and inevitably diminishing, it becomes a less potent political force, a smaller fiscal burden, and easier to absorb into the newly liberated marketplace. That gives policymakers the freedom to deploy any further subsidies or tax credits on the basis of what system is prospectively best, rather than from fear of the political wrath of existing beneficiaries. True, grandfathering can make it even more challenging, over the early years of a replacement, to satisfy the CBO, but America is ultimately governed by a Congress, not a Congressional Budget Office, and Congress should always prioritize long-term sustainable finances over short-term budgetary gimmickry. It’s worth taking short-term hits for long-term gains – unless you think the long-term gains are illusory. But designing the program to shrink on its own will reduce the odds of that. An explicitly two-tiered system with existing beneficiaries grandfathered for a more extended and gradual unwinding is both good policy and good politics.

Dan McLaughlin — Dan McLaughlin is an attorney practicing securities and commercial litigation in New York City, and a contributing columnist at National Review Online.

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