NR Digital

A Chronic Disease

by Ramesh Ponnuru

Obamacare won’t go away on its own

Conservatives and Republicans in Washington — activists, strategists, politicians — are increasingly embracing a theory about Obamacare: It’s going to collapse of its own weight, and its failure could yield a sharp right turn in the 2014 and 2016 elections. That theory is probably wrong, and dangerously so. To be rid of Obamacare, Republicans will have to do more than just wait for it to go away — and more than they have done so far.

You can see why the theory has caught on. The early implementation of Obamacare is not going well, with every week bringing fresh news embarrassing to the law’s proponents: Insurers are raising premiums, sometimes dramatically; the administration has had to announce that it will miss statutory deadlines; companies are planning to scale back coverage or even drop it completely. Senator Max Baucus, the Montana Democrat who did as much to shape the law as any other person, said that implementation could be a “train wreck” and then said he would not run for reelection next year. And there are reasons for thinking that the law is too badly conceived ever to work well.

The law takes an inefficient model of health financing — in which insurance is used to prepay routine and predictable medical expenses — and extends it to more people while making it more inefficient still. It assumes, unrealistically and against precedent, that government-backed experts can drive efficiency in health markets. It ignores how people respond to incentives: by performing fewer services when price controls are imposed, for example. These flaws are central rather than incidental to the law. They follow from its misdiagnosis of what ails American health care as, essentially, markets that are too free. Eliminating these flaws would require rewriting the entire law, which is to say replacing it.

President Obama, in a press conference on April 30, conceded that there would be some “bumps” on the road to the law’s destination. He suggested, however, that the only people affected by these bumps would be those who lack insurance now but will have it once the law takes full effect. “For the 85 to 90 percent of Americans who already have health insurance, this thing has already happened. And their only impact is that their insurance is stronger, better, more secure than it was before. Full stop. That’s it. They don’t have to worry about anything else. The implementation issues come in for those who don’t have health insurance.”

Those remarks reflect a disturbing disconnection from reality, one that probably comes from reading too many liberal bloggers. People who have insurance now do indeed have to worry that their premiums will go up, their coverage will be dropped or reduced, and medical innovations that could help them will slow down. And the law will leave many people who lack health insurance without it: The Congressional Budget Office estimates that even after all the law’s taxes, spending, and regulation are implemented, 30 million people in our country will not have health insurance.

Because the law is unlikely to work, because it cannot be meaningfully improved while keeping its basic design, and because it remains unpopular, Republicans would be mad to acquiesce to it. (For a more extended version of this argument, see my article with Yuval Levin, “Repeal, Replace, Still,” in the April 8 issue of NR.) They should not worry that in five or six years almost everyone will see the law as a success. It is likely to be a failure by any reasonable measure.

The reasons for thinking the law will fail are not, however, reasons for thinking it will self-destruct in short order, or harmlessly. Critics have, for example, raised the possibility that the law will cause a “death spiral” in insurance markets. The law allows people to buy insurance without prejudice once they are sick. In one scenario, many people will therefore stop buying health insurance when they are well. The law will make them pay a penalty for going without insurance, but the penalty will be much lower than the insurance premiums they will be avoiding. The fewer healthy people are in the insurance pool, the higher premiums will have to go. And the higher premiums go, the more sense it will make for healthy people to drop their coverage.

The law requiring insurers to treat the sick and well alike takes effect at the start of 2014. While it would be politically convenient for Republicans if the death spiral were well underway by the time of the November elections, the process seems much more likely to take some time. People are used to buying insurance if they can afford it. The new incentives in the law will almost certainly erode that norm, but no one can say with confidence how rapidly that will happen. It might take time for word to spread about how low the penalty for not buying insurance is — and the first penalties will not be imposed by the IRS until 2015, when people file their tax returns for the previous year.

The Congressional Budget Office projects that the number of people being covered by the law’s new health-insurance exchanges will drop, and costs will rise, after 2018. We can infer that it is predicting that healthy people will drop their coverage to save money. The CBO is probably erring on the low side in estimating how many people will take advantage of the chance to go without insurance, but its estimate of the timing is plausible. If it turns out to be correct, the real devastation to insurance markets will occur well after the next two national elections.

There’s another scenario that could produce a rapid collapse of Obamacare. The law authorizes federal tax credits for people who get coverage through state-established exchanges. The law authorizes the federal government to set up exchanges in the states that do not do so on their own, but it does not authorize it to give tax credits to people who use the federal exchanges.

Other provisions of the law hang on those tax credits. Employers are liable for up to $3,000 per employee if they do not offer insurance — but only if employees are taking the tax credits. For some employees, the penalty for not buying insurance will come into play only if they can get the tax credit. In the 28 states that have refused to create exchanges, in other words, the tax-and-regulatory scheme of Obamacare will be severely weakened if the law is applied as written. Facing unexpected resistance from the states, the Obama administration has naturally responded by trying to twist the law: The IRS says it is going to supply the tax credits, and thus levy the penalties, even in the states that are not running exchanges.

If the courts hold the administration to the letter of the law it sought so hard to pass, much of the country will be shielded from it, and it will be crippled right out of the gate. The legal merits of the lawsuit against the administration’s rewriting of the statute are clear. Perhaps those merits will even prevail in court. But Republicans would be unwise to assume they will.

Opponents of Obamacare should plan instead for the likelihood that in its first years of full operation the law will fail in undramatic and unspectacular ways. Premium increases, cost overruns, and the like may keep the law from becoming popular, but they will not prompt the third of the public that supports it to switch sides, or even get its many soft opponents fired up about it. Meanwhile, the administration will spend millions of taxpayer dollars to advertise the law’s benefits. The law’s dogged defenders will explain away all the disappointing developments, and the polls, as the result of continuing opposition in red states. A few conservative lawmakers have speculated that the law will crash so badly that the Democrats will themselves demand repeal in the next couple of years. That is not the way to bet.

Republicans’ confidence that Obamacare will collapse has contributed to their lassitude in coming up with an alternative. It is a perverse complacency. If the program were going to collapse in the next three years, it would be all the more important for Republicans to build the case for a replacement for it. We can be sure that the Left would respond to any such collapse by making the case for a “single payer” program in which the federal government directly provides everyone insurance.

Congressional Republicans have not reached agreement on what should replace Obamacare, let alone a strategy for enacting that replacement. The best option for replacing Obamacare would be a plan that made it possible for almost everyone in the country to purchase catastrophic insurance (and possible for most people to buy insurance that goes beyond catastrophic coverage) by removing the obstacles that government policy puts in the way of that goal.

A plan to do that would involve six key steps. First, the current tax break for employer-provided insurance, which is more valuable the more expensive the insurance plan is, would be flattened. That way, employees who chose to buy cheaper policies and pay for routine expenses out of pocket would keep the savings, while employees who chose more comprehensive plans would pay the full freight for the extra coverage. Second, the tax break would be extended to those people who buy insurance on their own because they do not have access to an employer plan. Third, insurers would be allowed to sell those individual plans across state lines. Fourth, Medicare would be reorganized so that the elderly got the same basic benefits that they do today — but, like working-age people under the new policy, they would be rewarded for economizing. Fifth, Medicaid would be converted into an addition to the basic tax credit working-age people would have.

The result would be a market in which almost everyone would be able to purchase relatively cheap, renewable insurance policies that protected them from the risk of catastrophic health expenses (although most people would be able, and would probably opt, to purchase more extensive coverage than that). Decades of government policy have prevented that market from emerging, however, and made a significant number of Americans uninsurable because they were unable to get renewable policies when they were well and are now sick. So the government should, sixth, directly assist these people by funding high-risk pools, being careful to design them so that they really do help those in need without doing too much to reduce people’s incentive to find private health insurance. As the new market develops, the need for this assistance should greatly diminish.

Republicans have offered some support for many of these reforms. Almost all Republicans support changing Medicare along these lines, and moving Medicaid partway in this direction. Representative Paul Ryan (R., Wis.) has proposed a version of this change in the tax treatment of health insurance. Most House Republicans have supported funding for high-risk pools.

Yet there has been enough resistance to some of these reforms that the congressional party has not united behind them. During the struggle to keep Obamacare from being enacted in 2009–10, congressional Republicans advanced an alternative that left the tax code alone and therefore did little to change the health marketplace, reduce costs, or make coverage more accessible. In recent weeks skeptics of high-risk pools have kept the Republican House from passing a bill to redirect some of Obamacare’s propaganda funds to such pools.

The theory that Republicans need not offer any alternative to Obamacare because it is destined for a sudden implosion is only one reason for their inertia. Republicans have also feared that any alternative would become a target for the Democrats, and that therefore they are better off just making the case against Obamacare. In some conservative circles, the idea that an alternative is necessary is seen as a mark of wimpiness, a weakness for big-government programs that are just slightly less statist than the ones the Democrats favor.

These views are mistaken. The absence of a Republican alternative has itself become a talking point for Democrats, and a solid alternative would strengthen the case against Obamacare by making it clear that something better is possible. Right now support for repeal lags behind opposition to Obamacare, and that gap is probably based on fear and confusion about what would take the law’s place. And the market-oriented plan sketched above would not just be less statist than the Obamacare law it is meant to replace; it would also be less statist than our pre-Obamacare health-care policies. Taxes and regulations would do much less than they did even before Obamacare to distort health-care markets. (The flow of federal Medicare dollars would also do much less to distort those markets, but I need not emphasize the point since Republicans, as mentioned, are almost all on board for that idea already.)

Some conservatives do not believe that tax credits or federal funding for high-risk pools are ideal policies, and in some respects they are not. If we had a tax code that was entirely neutral between the consumption of medical services and other forms of consumption, it would probably be a bad idea to introduce any kind of tax break for health care. But we have for decades had a tax code that distorts health care; moving to pure tax neutrality now would be extraordinarily disruptive, and it won’t happen anyway. So why not make the tax code a good deal less important in determining what kind of health insurance people get? High-risk pools, meanwhile, are not just a way of dealing with the aftermath of bad government policies, but part of a package of reforms that would shrink the government we actually have — which is, again, not a night-watchman state when it comes to health care.

There is one other misguided idea, related to the others, that is affecting Republican debates on health care: the idea of a few Republicans that voters should feel the pain of Obamacare, the better to learn a lesson about contemporary liberalism. This idea has been brought up in response to those Republicans who think the party should propose delaying the implementation of Obamacare.

The delayers believe that calling for more time will highlight the problems that implementation is causing. In the unlikely event the calls are successful, supporters of the law will be demoralized, taxpayers will save a bundle, and some of the bad effects of the law will at least be put off — and if future elections go well, perhaps those effects can be put off forever. More people will be able to keep their current insurance policies, premiums won’t go up as much, the consolidation of health-care providers that the law encourages won’t proceed as quickly.

On the other side of the debate are a few Republicans who believe that these effects should not be put off: that Americans should suffer them so as to see the failure of Obamacare with their own eyes. Only then will they turn against the law and its supporters with the requisite passion to undo it. But the timetable of Obamacare’s implementation is unlikely to work out the way these Republicans think it will. Fuller implementation of the law won’t make repeal and replacement impossible, but it will make it harder. And Americans, flawed as we no doubt are, deserve better health-care laws and a party that will do what it can to seek them.

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