The Agenda

Obamacare’s Woes Could Pave the Way for a Better Health Reform

Josh Barro argues that private insurance in the U.S. is not understood as truly private, as private insurance is heavily subsidized, whether explicitly through the tax subsidy for employer-sponsored coverage or implicitly though insurance regulations designed to promote cost-shifting. He thus characterizes Obamacare as legislation that basically increases subsidies and tightens regulations relative to the pre-Obamacare status quo, but that doesn’t represent a radical break with the past.

Though I think Josh makes a number of important points — the tax subsidy for employer-sponsored coverage really is essential to understanding the insurance market for under-65s, and it is best understood as an enormously expensive ($260 billion in 2010) and quite regressive social program. But the question is whether Obamacare represents a big enough improvement over the status quo given its cost. In Josh’s view, there may well be ways to improve Obamacare at the margin, but Republicans aren’t being constructive because they fundamentally have the interests of the wrong people at heart:

I’m sure some conservatives will say that health insurance should be a normal insurance product and not a tool of fiscal redistribution. But we have this system for a reason: chronic health conditions are really expensive, and they can’t be addressed through one-year contracts. Addressing the problem of uninsurability requires either heavy-handed regulation of the sort we have now and will have under Obamacare, or some other heavy-handed non-market alternative, like a single-payer plan for catastrophic health expenses.

And anyway, Republicans aren’t willing to endorse the sorts of reforms that would turn health insurance into a normal insurance product. They co-wrote HIPAA with Democrats. When pressed on policy specifics, they talk favorably about redistribution-through-regulation provisions of the Affordable Care Act, like requiring coverage of pre-existing conditions.

This reflects the fact that health insurance is not really a private product but a government program creating winners and losers, and the terms of the debate are about who will win and who will lose. Democrats want the poor and the sick to win. Republicans want people with existing coverage and high tax rates to win. Neither side is calling for a free market.

Republicans are more heterogeneous than Josh allows; some, for example, endorsed proposals (like the Patients’ Choice Act and Sen. John McCain’s 2008 health proposal) that overhauled the tax treatment to health insurance to facilitate coverage expansion in ways that slightly disadvantaged people with high tax rates while benefiting people paying low or no federal income taxes. It is true, however, that Republicans generally favor an approach to coverage expansion that entails lower direct public expenditures, which leads them to favor a model in which insurance primarily serves an income protection function rather than a pre-payment function.

My sense is that because Josh believes that Republicans are fundamentally unserious about health reform, Obamacare ought to be defended and reformed at the margins. Others, like Avik Roy, have been harshly critical of Obamacare while also arguing that the best way forward for Republicans is to reform the law, as the repeal-and-replace effort will prove more challenging that conservatives think. Interestingly, there are many points of convergence between Josh and Avik’s substantive views. For example, Avik has suggested that Obamacare’s tight restrictions on age rating (older beneficiaries can be charged no more than three times as much as younger beneficiaries, while the ratio is 6:1 in the absence of such regulations) are a bad idea, as they will likely swell the cost of premium subsidies. Josh has described restrictions on age rating as “the most assailable part of the cross-subsidies in Obamacare.” Avik and Josh might part company on whether we should ultimately move towards a single-payer plan for catastrophic health expenses, an idea that Josh endorses and that Don Taylor fleshes out in Balancing the Budget is a Progressive Priority. But this is to at least degree a question of semantics, as I’ll argue in a moment.

Given that Josh and conservative health reformers like Avik actually agree that Obamacare is flawed in a number of serious ways, the disagreement seems to be over whether or not Obamacare merits a vigorous defense against conservative criticism. What matters most, in my view, is the nature of the criticisms that are being levied against Obamacare — are the criticisms likely to yield a better health system or a worse health system?

Obamacare rests on a series of political and institutional bets. Obamacare’s complicated four-tranche structure — it includes a commitment to curbing the growth in Medicare expenditures, backed by the Independent Payment Advisory Board, a series of pilot projects, and spendings caps, to generate savings; an ambitious Medicaid expansion financed largely by the federal government and designed to be an offer states couldn’t really refuse (as refusal, prior to the Supreme Court’s 7-2 anti-leveraging decision, would have entailed losing existing federal Medicaid funds); relatively minor reforms of the tax treatment of employer-provided health insurance, including the excise tax, and a weak employer mandate for large employers; a new state-based system of health insurance exchanges; an individual mandate; a new long-term care initiative; and a suite of new taxes, the most important of which are probably new taxes on capital income — is the product of careful political calculation. As Reason’s Peter Suderman explains, the president’s pledge that existing health insurance arrangements wouldn’t face disruption was central to the political case for reform, as earlier coverage expansion efforts, most notably President Clinton’s 1993 effort, failed in no small part because large numbers of voters feared such disruption. And as a 2008 presidential candidate, Barack Obama effectively attacked his Republican opponent on the grounds that the GOP health reform plan threatened the unraveling of employer-sponsored coverage. The Obama campaign also opposed the idea of an individual mandate, but the president evidently concluded that this political commitment was an easier one to break. So the Obama administration found itself boxed in: it couldn’t support a sweeping overhaul of the tax treatment of health insurance, as Democrats had attacked Sen. McCain for promising just that and because it would likely engender a fierce political backlash, and they couldn’t back Medicare-for-all, as the explicit, on-budget expense would be so high as to alienate centrist Democrats. The eventual bill thus involved a large number of moving parts designed to coopt various interest groups and blunt political opposition, but the CBO did find that the net result would be a substantial coverage expansion and (thanks to Medicare savings and new tax revenue) a reduction in federal deficits within the window.

As we know, many of these bets have turned out poorly — the Medicaid expansion became a deal states could refuse, albeit at some cost; the employer mandate and the individual mandate have proven less popular than the Obama administration seems to have anticipated; the health insurance exchanges have faced pretty serious growing pains that have raised doubts about competence; the long-term care initiative proved unviable; organized labor has expressed displeasure with some elements of the law; and there are many other shoes that could still drop.

So if you want a better health system, is it obvious that sticking with Obamacare is the right way to go? At least some voices on the political left are suggested that Democrats should go back to the drawing board and press for a single-payer system for covering under-65s. On the right, people who favor an Obamacare replacement agenda centered around reforming the tax treatment of health insurance feel that the political barriers to their approach are lower now than they were pre-Obamacare, in light of the disruption Obamacare is already causing. If the choice were between Obamacare and the pre-Obamacare status quo, the case for defending and fixing Obamacare would make more sense to me. But my impression is that Obamacare has already made returning to the pre-Obamacare status quo difficult if not impossible, and so I’m hard-pressed to see why reformers (on the left and the right) should give up on the prospect of building a better, more coherent health system. If anything, Obamacare’s woes might represent a teachable moment during which ideas that had previously been deemd too ambitious might have a real prospect of success.


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