Obamacare led to wasteful spending, Medicaid growth, and misallocation of resources
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Regardless of who wins the election, Congress will have to grapple with two important issues next year: whether to extend the Republican (Trump) tax cuts and whether to extend Democrats’ “enhanced” Obamacare subsidies or let them expire. Conventional wisdom suggests that Congress will split almost entirely along party lines on these issues.
Could there be an alternative? How about bipartisan reform of Obamacare in a way that saves money and creates better insurance at the same time?
The matter of reform
No objective observer can believe that Obamacare is working as promised.
Wasteful spending: Obamacare costs taxpayers about $240 billion a year. However, we do not have additional health care. One study found that there was a slight increase in doctor visits among those at the bottom of the income ladder, offset by negligible changes in the rest of the population. The number of doctor visits per capita across the country has actually declined, while the number of emergency room visits has not changed.
Medicaid expansion: Obamacare’s original promise was to provide uninsured people with private health insurance. In fact, almost all of the health insurance growth under Obamacare was an increase in Medicaid. The slight increase in the percentage of people using private insurance is smaller than we would expect coming out of the Great Recession.
Garbage insurance: The typical plan sold on an exchange (Obamacare) looks like high-deductible Medicaid. This is not accepted by many doctors and medical facilities, and if enrollees go out of network, the plans usually pay nothing. Deductibles are two to three times greater than employer plans.
Misallocation of resources: Insurance sold on the stock exchange underestimates the costs of healthy people and overestimates the costs of sick people. Almost half of the beneficiaries pay zero contributions. If they are healthy, the only care they need is preventive care, which is also free. However, if they have a serious health problem, their out-of-pocket costs can be as high as $9,400 a year and double that with family insurance.
No risk valuation: Insurers on the exchanges receive a subsidy for each registered participant, a subsidy not related to health status. While some risk adjustment exists, it is highly imperfect – leaving health plans with strong incentives to attract the healthy and avoid the sick.
Reform model
There are two places in our health care system where there is annual open enrollment, competitive private health plans, federal government subsidies, and no discrimination based on health status: Medicare Advantage and marketplace exchange.
The first method is very popular, quite effective, and has attracted over half of the Medicare population. The latter is dysfunctional, creates unfavorable incentives for both buyers and sellers, and can prevent people with serious health problems from getting the care they need. There are three reasons for this difference.
First, Medicare Advantage is the only place in the health care system where health plans receive risk-adjusted premiums that reflect the health status of enrollees. Enrolled people pay the same contribution regardless of their health condition. However, the additional government contribution makes the total amount received under the health plan equal to the enrollee’s expected health care costs. While not perfect, it is the most sophisticated risk adjustment system in the world.
Medicare Advantage is also the only place in the health care system where a doctor who discovers a change in a patient’s health (say, a cancer diagnosis) can send that information to the insurer (in this case, Medicare) and receive a higher health plan premium payment to reflect higher expected costs of care. This means plans are rewarded, not penalized, when they detect and treat health problems.
Second, Medicare Advantage is the only place in the health care system where insurance plans can specialize. There are special needs plans for diabetes, respiratory problems, heart problems, etc. This means that health plans can become centers of excellence, or what Harvard professor Regina Herzlinger calls “concentrated factories.”
Third, the entire Medicare program discourages “gaming” – the practice of remaining uninsured when you are healthy and only enrolling after you become sick. Those who delay registration beyond the point of eligibility are subject to a penalty, and the longer the delay, the higher the penalty.
Using the Medicare Advantage model to reform the exchanges should be an easy reform. After all, we have already implemented reform for over 30 million people enrolled in Medicare.
Additional reforms
With the individualized risk adjustment described above, there is no reason to force everyone to purchase the same health insurance benefits.
No person whose income exceeds the level that qualifies for Medicaid should receive free health insurance (paid for by taxpayers). At the same time, they should not be forced to purchase insurance that does not meet their financial and health needs. They should be able to buy limited-benefit insurance on the short-term market, for example, and receive less subsidy from the government.
What if the type of insurance people buy doesn’t cover every eventuality – say, a million-dollar premature baby? This is where the government can play a safety net role – paying directly for catastrophic care or providing a replacement plan.
Here’s the principle: we should let markets meet all the needs they can, based on the theory that markets almost always do what they do better than the government. If there are any unmet needs, it should be a limited role for government.
Among other improvements, people participating in the exchange should have access to a Roth savings account and access to 24-hour primary care from a doctor of their choice. We should also give health plans in exchanges the opportunity to once again hedge the risk that some enrollees will face very high medical costs – a reform that could reduce the cost of a silver plan by almost 20 percent.
If Congress is willing to put aside partisan disputes, these and other low-hanging fruits offer ways to significantly improve the current system.
