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Replacement Plan

by Ramesh Ponnuru

Devising the alternative to Obamacare

On health care, Republicans have unified behind a slogan rather than a policy. The slogan, “repeal and replace,” describes what they want to do to the Democrats’ health-care law, also known as the Patient Protection and Affordable Care Act, or Obamacare. So far, the emphasis has been on repeal. By the fall of 2012, however, they are going to have to spell out what they want to replace Obamacare with. And that’s where things get tricky.

So far the heavy emphasis on repeal has made sense. Only if Obamacare is not here to stay, after all, do discussions of what will replace it have a point. The practical political appeal of this emphasis for Republicans is also obvious: There is more opposition to Obamacare than there is support for any specific alternative. This is true both among voters at large, who are naturally unfamiliar with specific proposals, and among Republican congressmen, many of whom have their own pet ideas.

In the 2010 election, the conservative challenge was to register a protest against both Obamacare and the larger governing philosophy it represents. The 2012 elections present the opportunity to replace both. Moral obligation and political necessity alike counsel Republicans to spell out what replacement would entail.

In doing so they should avoid some past Republican mistakes. Sen. John McCain ran on a bold free-market health-care platform in 2008. But he seemed unfamiliar with and uninterested in his own health-care plan, and did nothing to defend it from ferocious Democratic attacks. And even if the debate had been truly joined, the plan might well have proved unpopular.

Its key provision was to end the tax preference for employer-provided health insurance, and thus encourage the growth of the market for individually purchased insurance. Free-market policy analysts make a compelling case for the virtues of this approach. It would, among other things, give individuals more control over their health care, provide them an incentive to control costs, and make it easier for them to take their insurance from job to job. People who are locked out of the employer-based system would get more options. McCain’s plan is both simple and, compared with the current system, fair.

The drawback is that it is potentially very disruptive. If young and healthy people dropped their employer-based insurance for the cheap premiums they would likely find on the individual market, everyone who stays with company plans would be stuck paying much higher premiums — causing more people to exit them, and possibly unraveling the employer-based system altogether. For some conservatives, that’s a feature rather than a bug: The fact that a truly free market wouldn’t tie insurance to employment is a sign that it makes no sense to do so. But most people are satisfied with their existing health insurance and wary of any grand plans that would upend them. That sentiment was a major reason voters opposed Clintoncare and Obamacare, and it would surely stymie free-market reform as well.

In 2009, House Republicans offered an alternative health-care plan that steered clear of this problem. Their bill included malpractice reform and freed individuals to buy health insurance across state lines, but it did not change the tax treatment of health insurance. As a result of this omission, it also had limited potential to help people without insurance. (The Congressional Budget Office, perhaps too pessimistically, estimated that the plan would increase the insurance rolls by only 3 million people.) The Republicans may have assumed that the insured majority of voters care more about affordability and avoiding rationing than about helping the uninsured, and if so they were correct. But voters would like to make a dent in the problems of the uninsured, too, if they can do so in a way that does not threaten their own care or pocketbooks.

A new conservative health-care plan should offer a gradual transition rather than a sudden shove to a market less reliant on employer provision of insurance. Currently the biggest tax breaks go to the highest-wage employees, and the most expensive insurance plans get the biggest tax breaks. The tax break should be converted into a flat credit, so everyone gets the same tax benefit and nobody has an incentive to overspend. Employees should be able to use the credit toward their company plans, and allowed to use them for self-purchased plans only if their company does not offer them coverage. This compromise, floated in these pages by Ethics and Public Policy Center scholar and Bush-administration budget official James Capretta, would help the uninsured get coverage while keeping the disruption of the policies of the currently insured to a minimum. In time, the growth of the individual market might make bolder reform possible.

The second component of conservative health-care reform is one that most Republicans have already embraced: allowing individuals to buy health insurance across state lines. In 1944, the Supreme Court ruled that insurance, as a form of commerce among the states, should be regulated by the federal government rather than the states. The federal government promptly passed a law handing the matter back to the states. Each state has its own regulatory requirements, such as mandates spelling out what health insurance has to cover. (Congress lets large companies out of these requirements.)

This set of state-by-state regulations has prevented the emergence of a national market for individually purchased insurance policies. Both the McCain plan and the House Republican plan proposed to force the states to allow people to buy insurance sold in other states. Competition among insurers would increase, and states’ cost-raising regulations would do less damage.

In the long run, a robust individual market should shrink one problem of the current system: When people with chronic illnesses lose their coverage, they have trouble getting new policies. If they were buying insurance themselves instead of relying on their workplaces, they would be able to select renewable policies (or buy insurance against changes in their health status). Until that market has matured, however, Republicans advocate that the government fund “high-risk pools” for the uninsurable. They have not, however, been willing to put up enough money. It’s a penny-wise policy. The needs of people with “preexisting conditions” were the chief rationale for Obamacare, which is much more expensive. So a third component of a conservative alternative to Obamacare should be much higher funding for these pools.

In 2012, Republicans should also pledge to reform the two big health-care entitlements, along the lines that Rep. Paul Ryan (R., Wis.) proposes. Medicaid, the program for the poor, is a dysfunctional partnership between the federal government and the states. The federal government foots half the bill even though the states are free to increase benefit levels and expand the rolls. This arrangement only seems like a good deal for the states, since it leaves them in a bind during recessions: They spend too much on Medicaid, but cutbacks impose a dollar of pain on their constituents for every 50 cents they save the states. The insurance Medicaid provides, meanwhile, is crummy. Many doctors don’t take it.

If we were going with the McCain plan, it might make sense for the federal government to take more control of the program, cash it out, and give the money to the program’s beneficiaries in the form of insurance vouchers, as some conservative health wonks have recently proposed. But a more politically realistic reform would be for the federal government to cap its total spending on the program and give it to the states to spend on health care for the poor as they see fit. In addition to minimizing disruption, a program of block grants could win the active support of some governors, especially Republican governors.

Medicare, on the other hand, is a fully federal program, and its growth is the most alarming part of the budget outlook. It has also terribly distorted health markets, both by attempting to set prices and by encouraging a fee-for-service model of medicine that experts of all political stripes consider economically wasteful and medically counterproductive (because it creates an incentive to perform procedures of limited value). The program should be converted into vouchers for tomorrow’s senior citizens, with the size of the voucher varying based on the recipient’s health status and lifetime income and total spending kept within budgetary limits.

Squeezing savings out of Medicare won’t be popular, and voucherization can easily be caricatured as “privatizing” or “gutting” the program. But the alternative is augmenting the least popular features of Obamacare: tax increases and rationing through price controls. We have followed this approach to shoring up Medicare for decades, Obamacare doubles down on it, and trying to get to solvency this way would require much, much more of the same — and probably still wouldn’t work.

The liberal version of health-care reform is highly Washington-centric. The Obama administration’s recent promise to grant states more flexibility turns out to amount to allowing them to establish Canadian-style single-payer programs within their borders. Republican governors and state legislators can and should play a more active role in promoting free-market medicine.

Many states have reformed their medical-malpractice rules, and continued experimentation should be encouraged. Some states have ended their policies of requiring medical facilities to get “certificates of need” before investing in new equipment; others should follow suit, these policies having proven ineffective at cost control or, really, at anything other than discouraging competition. States can also take many steps to free up the supply side of health markets. Lifting restrictions on telemedicine, allowing advanced-practice nurses to perform more procedures, and easing training requirements for physical therapists and audiologists are among the suggestions of health-care economist Shirley Svorny.

While the federal government may rightly make state governments let their residents buy health insurance across state lines, the states do not need permission to allow it themselves. Any state can pass a law stipulating that meeting the regulatory requirements of any other state will satisfy its own regulations. State governments have typically preferred to maintain their own regulatory fiefdoms and cosset protected provider groups, but the new interest among conservatives in interstate commerce in health insurance may change this habit.

These policy proposals may seem like a grab-bag, but they have several features in common. They proceed from the assumption that what ails our health-care system is less market failure than a failure to have free markets. They attempt to match levels of authority with their competencies. (The federal government is no good at forcing health-care providers to be efficient. It is rather good at writing checks.) They involve gradual change: Today’s seniors can stay in traditional Medicare, and younger people can stay in their company plans. While the proposals complement each other, they do not all have to be implemented together in one huge piece of legislation. They tackle discrete problems rather than trying to impose a rationalizing vision on a complex social system. They neither assume nor require superhuman wisdom from program administrators.

Republicans should still place most of their emphasis on the case for repealing Obamacare. But as part of that case they should be able to point to something better.

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