Magazine | December 3, 2012, Issue

Redeeming Obamacare

How to introduce the Affordable Care Act to free markets

Sometimes it is hard to accept defeat. On December 18, 1974, Teruo Nakamura, the last known holdout from the Imperial Japanese Army, finally surrendered to Indonesian authorities. It may take three decades, too, for some conservatives to accept the defeat of the movement to repeal Obamacare. But just as Japan reinvented itself after World War II to become one of the wealthiest countries in the world, there is an opportunity in this moment: for conservatives to coalesce around a long-term strategy for reforming our entitlements and liberating our health-care system.

The first thing to understand about Obamacare is that its existence stems directly from a blind spot in the postwar conservative movement. The coalition forged by Bill Buckley and others in the 1950s — famously, a fusion of anti-Communists, free-marketeers, and cultural conservatives — focused, in practice, on lowering taxes and defeating the Soviets. Health-care policy rarely appeared on conservatives’ radar.

Progressives, by contrast, from the Truman administration on, have had one public-policy goal above all others: universal, single-payer health care. And they have been spectacularly successful at sneaking health-care half-loaves into their policy agenda. Even LBJ, with historically large Democratic majorities, couldn’t push single-payer through Congress. Instead, he created health-care programs for the very poor (Medicaid) and the elderly (Medicare), leaving everyone else, in theory, in the private system.

In 1967, Congress projected that Medicare would cost a modest $12 billion in 1990, inclusive of inflation. Actual Medicare spending in 1990 was not $12 billion, however, but $110 billion. This year, we spent $550 billion on Medicare. Ten years from now, the Congressional Budget Office projects that we will spend $1.1 trillion on the program. When it comes to health care, liberals’ half-loaves always seem to grow into industrial bakeries. Another example: the State Children’s Health Insurance Program, or S-CHIP, created in 1997 by a Republican Congress at the behest of Ted Kennedy. A decade and a half later, one in four American children are enrolled in this Medicaid-like program.

Conservatives, by contrast, have never coalesced around a vision of what a free-market health-care system would look like. As a result, Republicans’ compromises have been myopically tactical, and have tended to move health care in a liberal, rather than a conservative, direction.

Republicans criticized LBJ’s original Medicare bill as too modest, because it didn’t cover physician services, a flaw that Democrats were quite happy to correct in the final product. In 1974, as a conservative alternative to single-payer, Richard Nixon proposed a “Comprehensive Health Insurance Plan” that would have forced all employers to provide costly, government-defined coverage to their workers. In 1993, as an alternative to Hillarycare, Republicans rallied around a bill sponsored by Senator John Chafee (R., R.I.) that proposed an individual mandate.

From 2001 to 2006, when Republicans occupied the White House and controlled most of Congress, they did not push for large-scale, free-market health-care reform. Their most significant health-care legislation, the 2003 Medicare prescription-drug law, contained some salutary reforms but left the broader health-care system largely unchanged. Instead, Republicans focused on lowering taxes, prosecuting the War on Terror, and funneling taxpayer dollars to their constituencies.

This is not to say that no Republican has ever proposed far-reaching reforms. Some have. But lack of interest among the broader conservative movement meant that good market-based proposals went nowhere. Republican politicians never faced pressure from the conservative base to reform health care in a conservative direction. Contrast that to the 2008 Democratic primaries, in which universal coverage was a main focus for candidates and activists alike.

It is often said, by both liberals and conservatives, that Obamacare moves America in a European direction. But this is a flawed conception. For one thing, per capita government health-care spending in the United States was the third-highest in the world in 2009, prior to the passage of Obamacare. In that year, federal and state governments spent $3,795 per person on health care in the U.S. The French, by contrast, spent only $3,100. Canada spent $3,081, Sweden $3,033, Belgium $2,964. And the most socialized system in the developed world — the British National Health Service — spent a mere $2,935 per person. In other words, if we measure health-care statism by the amount our government spends on the category, the U.S. is already more statist than our “European” peers.

#page#The other big misconception is that the U.S. has a “free-market” health-care system, whereas the rest of the developed world suffers (or benefits) from single-payer welfarism. One can make the case that, in certain ways, the French health-care system is more market-oriented than America’s. The U.S. system is far more statist than those of the two world leaders: Singapore and Switzerland. The Swiss model, in particular, provides American conservatives with a strategic road map for achieving a fiscally sustainable, market-oriented, private-sector health-care system.

In Switzerland, government spending on health care is less than 3 percent of gross domestic product. By contrast, U.S. government health-care spending approaches 8 percent of GDP. Despite spending far less than we do, the Swiss have achieved universal health coverage, in a system composed entirely of private insurers. Because Swiss citizens purchase insurance for themselves on a government-regulated market, instead of having it chosen for them, Swiss insurers are focused on reducing cost and improving quality.

The strengths of the American system are also those of Switzerland’s. The Swiss enjoy nearly complete freedom to choose their own doctor, and have access to all the latest medical technologies. Waiting times for doctors’ appointments are similar to those in the U.S.

The Swiss system is no libertarian utopia. It includes an individual mandate. It requires that insurers provide a specified set of minimum benefits, but also requires that beneficiaries pick up a meaningful portion of the costs of their own care, so as to incentivize frugality. Indeed, in 2003, 42 percent of Swiss citizens opted for high-deductible health plans of the kind advocated by American conservatives. Swiss citizens who seek additional coverage are free to purchase it, and the Swiss cover the poor by offering low-income citizens a means-tested premium subsidy with which to purchase insurance for themselves.

If this approach sounds vaguely familiar, it should. Paul Ryan’s proposals for Medicare reform borrow heavily from the Swiss model. And so does a key portion of Obamacare: the law’s subsidized, state-based exchanges for certain low- to middle-income Americans. Both the Ryan reforms and Obamacare provide means-tested premium subsidies for certain Americans to shop for insurance on a regulated market. And this commonality sows the seeds of what could be, in the long term, a strategic victory for free-market health care.

Obamacare, of course, has many destructive features. The law dramatically expands Medicaid, America’s worst health-care program, and makes matters worse by cutting payments to health-care providers, which will drive hospitals and doctors out of business. The law raises taxes by $1.2 trillion over the next ten years. It significantly increases the cost of health insurance, through burdensome mandates and regulations. Above all, it deeply injures our already damaged constitutional tradition of individual and local autonomy.

But Obamacare’s one Swiss-like component — its state-based insurance exchanges — provides a ray of hope. Imagine an alternative universe in which Obamacare’s exchanges had entirely replaced Medicare and Medicaid, instead of being used to expand coverage. Such an outcome would have been justly viewed as a conservative triumph.

The Obamacare subsidies apply only, on a sliding scale, to those below 400  percent of the federal poverty level: $60,520 for a two-person household. Ryan’s plan, by contrast, subsidizes every retiree, regardless of income, though his proposals do apply modest means-testing. So Obamacare’s exchanges, if applied to Medicare, would result in significantly less spending than the Ryan plan would, while still providing comprehensive insurance to those who can’t afford it on their own.

#page#In this way, we begin to conceive of a strategy for gradually converting the broken U.S. health-care and entitlement system into one of Swiss-like efficiency and fiscal sustainability.

Step One of this new strategy would be to improve the market orientation of Obamacare’s insurance exchanges. The exchanges are larded with excessive mandates and regulations that will drive up the cost of their insurance products. Republicans in Congress should require the Department of Health and Human Services to reduce this regulatory burden. The centerpiece of their message ought to be: “Democrats want to raise the cost of your health insurance. We want to lower it.”

And red states shouldn’t feel obligated to hew to Obamacare’s restrictions. Last summer’s Supreme Court decision gave states significant leverage in their health-care dealings with Washington. Utah, for example, has set up a health-care exchange that is far more market-oriented than Obamacare’s. Utah could agree to accept Obamacare’s subsidies in return for a contractual assurance that HHS will not interfere in the operation and structure of its exchange.

Step Two would be to move Medicare patients into Obamacare’s exchanges. For example, Congress could agree to raise Medicare’s eligibility age by three months every year for the foreseeable future. In effect, over time, this would gradually introduce premium-support-style reforms into the retiree population, without requiring Congress to get bogged down in complicated reform legislation.

Congress could also transfer the “dual eligible” population — seniors who are enrolled in both Medicare and Medicaid — onto the exchanges. Because this high-risk population consumes health care through two different programs, its care is usually uncoordinated and costly. The exchanges might help address this problem.

Step Three would be to accept that many employers will move their workers onto the exchanges. It is reasonable to be concerned that this migration will drive up Obamacare’s subsidy spending, but the Congressional Budget Office makes a plausible case that the new spending would be offset by a reduction in the $300 billion–per–year federal subsidy for employer-sponsored insurance that is granted through the tax code. Over time, this migration could actually help reduce the deficit. Congress could consider reforms of Obamacare’s employer mandate — for example, exempting businesses with fewer than 200 employees, or eliminating it entirely — so as to stimulate economic growth while improving the market for individually purchased health insurance.

Step Four would be to move the Medicaid population into the exchanges, starting with higher incomes and working down to lower ones. This change would have the important effect of lifting the disincentive that Medicaid recipients have to find work, because they would now enjoy a reasonable continuity in their health coverage even as their incomes rose. Such a reform would significantly reduce state-based health-care spending, at the cost of higher federal health-care spending. Congress would need to offset this change by reducing federal spending elsewhere. Senator Lamar Alexander (R., Tenn.) has proposed a “Grand Swap” in which Washington takes over Medicaid spending in exchange for abandoning its role in funding K–12 education.

After these four relatively simple steps, we would be left with a health-care system that would look a lot like Switzerland’s. Rises in premium subsidies could be held to a sustainable growth rate to ensure their long-term fiscal stability. And Americans might finally have the opportunity to purchase insurance for themselves, gain control of their own health-care dollars, and enjoy a wide range of low-cost, high-quality coverage options.

The movement to repeal Obamacare may lie in ashes. But all hope is not lost. Indeed, the great irony of Obamacare’s victory at the ballot box is that there remains a path for the most desired conservative outcome of all: a fiscally sustainable, fully reformed set of health-care entitlements. It’s an outcome that is far from assured, but one that is eminently achievable.. It would be the most significant policy victory of our generation. So let’s get back to work.

– Mr. Roy is a senior fellow at the Manhattan Institute and was a health-care adviser to the Romney campaign.

Avik Roy is the President of the Foundation for Research on Equal Opportunity (, a non-partisan, non-profit think tank.

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