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Obamacare’s Achilles’ Heel

by Avik Roy

To defeat it, offer a low-cost alternative

At his August 9 press conference, President Obama made this telling claim about his signature health-care law: Americans are “going to be able to . . . sign up for affordable, quality health insurance at a significantly cheaper rate than what they can get right now on the individual market.”

This assertion is telling for two reasons. First, it shows that Obama knows that public support for the law hinges on whether it lives up to its promise of making health care more affordable. Second, it is factually untrue — and you know you’re losing an argument when you have to say untrue things to defend it.

Actually, to call the president’s statement “untrue” might be too restrained. In California, healthy 40-year-olds who shop for coverage on their own will see rate increases approaching 150 percent. In Washington State, most 64-year-olds will see rates increase by an average of 59 percent. Residents of nearly every state will face similar problems.

Americans with incomes near the poverty line are among the few who won’t experience “rate shock,” because taxpayer subsidies will protect them from increased costs. And a small minority who are already very sick will benefit from forcing healthy people to subsidize their coverage. But everyone else will pay more.

In June, a survey from the Morning Consult, a company focused on health-care policy and research, asked 1,000 likely voters: “In your own personal opinion, which of the following do you see as the biggest problem facing healthcare today?” By far, the most popular answer — attracting 58 percent of respondents — was that health care is “too expensive.” Seventeen percent said that it is “not worth the price,” which is another way of saying the same thing. Only 11 percent said that the biggest problem is “too many uninsured.”

That is, 75 percent of respondents felt that the biggest problem with our health-care system is that care is too costly. And yet Obamacare makes health insurance even more expensive. It is this fact that explains a good deal of why Obamacare is enduringly unpopular with the public, and why the president has to mislead Americans about the law’s true cost.

Ironically, the reason that there are so many Americans without health insurance is precisely that it is too expensive. Rather than address the underlying causes of high premiums, however, Obamacare doubles down on the broken system we already have.

You might think that these poll numbers make clear that the public would back Republicans’ approach to health care. But they don’t. When the Morning Consult asked the same voters, “When it comes to handling healthcare, which political party do you trust more?” respondents favored Democrats over Republicans, 42 percent to 32. Voters are appropriately skeptical that they will benefit from Obamacare, but they give the president credit for expending his political capital on an important policy problem.

Republicans, as a group, have expressed little to no interest in addressing the high cost of health insurance. The GOP appears to have settled on a strategy that involves implacably opposing Obamacare — an approach with maximal appeal to the party base — while studiously avoiding proposals for free-market reforms, reforms that would be highly controversial to those who benefit from the status quo.

It’s this dynamic that explains the effort by Republican senators Mike Lee, Ted Cruz, and others to risk shutting down the government in order to defund Obamacare. Such a strategy would almost certainly backfire, costing Republicans seats in the 2014 elections while failing to derail the law’s implementation. But the shutdown strategy is intensely popular among tea-party conservatives, many of whom are under the false impression that Obamacare represents a government takeover of a private  health-care system.

That takeover, in fact, has basically already happened. Prior to the implementation of Obamacare, in 2010, U.S.-government agencies spent $3,967 per capita on health care, the fourth-highest sum in the world. Those European-style welfare states we’re always mocking? They spent less: $3,158 per person in Canada, $3,061 in France, $3,046 in Sweden, $2,857 in Britain. The U.S. hospital-industrial complex is, in gross terms, the most heavily government-subsidized industry in the history of the world.

To be sure, Obamacare makes these problems worse. But repealing Obamacare and returning to the status quo ante would do nothing to tackle America’s preexisting condition: the trillion dollars a year we already spend on health-care entitlements. And the Morning Consult poll suggests that Americans would rally behind a Republican-led effort to make health insurance more affordable.

In order to reduce the cost of health insurance, we must first appreciate why it is so expensive. The two principal causes predate Obamacare by 68 and 45 years, respectively.

First, wage controls enacted in 1942 did not include limits on health benefits. So employers, prohibited from competing for workers by offering higher salaries, offered richer health benefits instead. In 1943, a federal court held that employer-sponsored health insurance was exempt from income and payroll taxes. Today, this tax exclusion for employer-sponsored health insurance is worth $300 billion a year. It has made most Americans dependent on their employers for health coverage, and has made individuals highly insensitive to the price and the value of the coverage they receive.

Second, the passage of Medicare in 1965 resulted in the massive enrichment of hospitals and doctors at taxpayers’ expense. Medicare gave retirees access to heavily subsidized health care, with little in the way of cost controls. Like people drinking at an open bar, seniors were suddenly in a position to ask for the most expensive care that technology could design. Doctors and hospitals were in a position to get paid handsomely for recommending procedures and services of marginal benefit.

Even if Republicans manage to repeal the president’s health-care law, without further reforms the growth of Medicare, Medicaid, and our other health-care entitlements will continue unabated. Those who crusade against Obamacare while de-emphasizing these more consequential problems are complicit in the runaway cost of health care and therefore the growth of government.

To their credit, Republicans have, by and large, gotten behind Representative Paul Ryan’s plan to make modest market-oriented changes to Medicare. But fewer Republicans are willing to make substantial changes to the highly popular tax exclusion for employer-sponsored insurance. (Ryan, Senators Tom Coburn and Richard Burr, and a few others are notable exceptions.)

And even fewer Republicans seem to have any stomach for the much-needed fight against the growing power of the hospital industry, which is fully behind the implementation of Obamacare and is lobbying heavily for the law’s expansion of Medicaid in the states that remain undecided on that issue.

If Republicans want to draw the greatest contrast between their own ideas for health care and Democrats’, they should highlight the degree to which Obamacare is driving up the already high costs of health insurance and articulate a series of proposals that would reduce those costs.

In particular, Republicans should make two policy proposals. The first, a “Plan A,” would take the form of “repeal and replace,” with an emphasis on the “replace.” Plan A would incorporate Paul Ryan’s reforms of the Medicare and Medicaid programs or a close facsimile. But its core would be to replace Obamacare and the employer tax exclusion with a universal tax credit that could be used to purchase health insurance or deposited in a health savings account. Such a policy would revolutionize the health-care industry, by forcing insurers and hospitals to offer coverage and care at transparent, low prices.

Plan A, however, will have a critical deficiency. By the time we might next see a GOP president, in 2017, a “repeal and replace” strategy will involve disruption in the health-insurance arrangements of nearly every American: the 34 million who are slated to enroll in Obamacare’s exchanges and its Medicaid expansion, and the 160 million or so in the employer-sponsored system. Only current Medicare beneficiaries, per the current Ryan plan, would be spared any changes. While such a plan is effective as a flagpole for free-market principles, its chances of overcoming a Senate filibuster in 2017 are slim.

This is where Plan B would come in. Plan B would be designed for passage in a Washington where Democrats wield significant power. It would focus on repealing or reshaping the parts of Obamacare, and of our preexisting health-care system, that make coverage so expensive. But it would not be as disruptive to Americans’ health-care arrangements.

Such a plan would encourage individual ownership of health coverage by repealing Obamacare’s employer mandate and replacing the law’s “Cadillac tax” with a cap on the value of the tax exclusion for employer-sponsored insurance. It would repeal “community rating,” the feature of the law that drives up premiums for the young. It would repeal the law’s benefit and cost-sharing mandates, which increase rates and discriminate against religious institutions. It would expand insurers’ flexibility to offer higher deductibles and health savings accounts. And it would restructure Obamacare’s subsidies so as to encourage migration to consumer-driven health-care plans.

While Plan B would not itself repeal Obamacare, it would not preclude eventual repeal. And by emphasizing those aspects of Obamacare that increase the cost of health insurance, it would allow Republicans to go on legislative offense. Democrats would feel immense pressure to vote for a cost-oriented reform package precisely because of their responsibility for nationwide rate shock. And success would have a significant impact on the scale and growth of federal spending.

Obamacare is unpopular. But voters still trust Democrats over Republicans, by double digits, on the issue of health-care reform. If Republicans want to take advantage of the former fact to reverse the latter one, they must launch an agenda tailored specifically to the problem of the high cost of health insurance. It is, by far, the public’s biggest concern. It is Obamacare’s Achilles’ heel. But it is, at present, Republicans’ weakness too.

– Mr. Roy is a columnist for National Review Online and a senior fellow at the Manhattan Institute.

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