Repairing ObamaCare

In the aftermath of the recent election, virtually all commentators were quick to conclude that ObamaCare has been saved. The health reform law can now go forward and Republicans are powerless to stop it.

The trouble is: ObamaCare is a deeply flawed piece of legislation. Its defects are so huge that Democrats are going to want to perform major surgery on it in the near future, even if the Republicans stand by and twiddle their thumbs.

That raises this question: What changes need to be made in the legislation to turn it into a health reform that solves existing problems without creating even more serious new problems? Here are six essential short term fixes:

Nothing stays the same…
It’s coming around again.

Subsidize all insurance the same way. The way the government subsidizes health insurance under the current system is arbitrary and unfair. Employees with employer-provided insurance get that benefit tax free — a subsidy that is worth almost half the cost of the insurance for middle-income families. However, there is almost no subsidy available for people who must purchase insurance on their own. They must pay taxes on their income and then buy the insurance with what’s left over.

Under ObamaCare the subsidies become even more arbitrary. Although the new law creates generous tax credits for low and moderate income families who must buy their own insurance in newly created health insurance exchanges, the subsidy in an exchange can be as much as $12,000 higher than the same family will get if the same insurance is obtained through an employer!

This is why so many hotel and restaurant companies are considering making all their low-wage employees part-time — so they can escape the requirement to provide insurance and make their employees eligible for insurance in the exchanges at the same time.

Even more bizarre, for higher-income employees, the arbitrariness goes in the opposite direction. They get the current law’s generous tax subsidies at work, but no subsidy in the exchange.

ObamaCare will force an entire restructuring of American industry unless its subsidy structure is radically changed. And the change that is needed is easy. All insurance should get the same tax relief, regardless of where it is obtained.

Make the subsidy a fixed sum tax credit. Under the current system, there is no limit on how much health insurance we can buy through an employer with untaxed dollars. And the last dollar of frivolous coverage is subsidized just as generously as the first dollar of catastrophic coverage. Most of us get insurance because we want protection against very large medical expenses. But once we have that, we face a perverse incentive to get additional — even wasteful — coverage because Uncle Sam is paying half the extra premium we must pay.

ObamaCare leaves these perverse incentives at work in place and creates similar incentives in the health insurance exchanges.

There is a better way. Make the subsidy a fixed sum tax credit. For example, we could offer a $2,500 refundable credit against the first $2,500 of health insurance premiums. For a family of four, the credit would be about $8,000. These credits would be refundable, so that people would get the subsidy even if they did not owe any income taxes.

With this subsidy system, the health insurance marketplace would change radically — almost overnight. Whereas the typical large employer family plan now costs about $16,000, alternative plans (with fewer benefits and fewer provider options) would soon be selling for $8,000 instead.

Create and fund a safety net option. Under ObamaCare 30 million people are expected to remain uninsured. What happens to them? The new health law could make their problems worse, especially as it withdraws uncompensated care money from hospitals (on the theory that they won’t need the funds if everyone has health insurance!). There’s a better way.

If people turn down the offer of a tax credit, make that credit available to safety net institutions in the areas where the uninsured live. If the uninsured can’t pay their medical bills, these funds would be there as a backstop. Under this arrangement, money follows people. If everyone in Dallas, Texas, opts to be insured, all the tax credits will be claimed and used to pay insurance premiums. If everyone in Dallas opts to be uninsured, those same funds would be available to safety net institutions to pay for uncompensated care.

Restore the cuts in Medicare to reform Medicare. ObamaCare is not paid for — at least in any practical political way. Over the next 10 years it will require about $716 billion in reduced spending on Medicare. Yet the Medicare Office of the Actuaries has made abundantly clear, these spending reductions will exact a heavy cost for Medicare enrollees. One in seven hospitals is expected to leave the system over the next eight years and seniors will have increasing difficulty finding doctors who will see them, as they become less attractive to doctors than welfare mothers from a financial point of view.

Most people inside the Washington Beltway think that this will never happen. Future Congresses will not be able to withstand the political pressure from elderly voters and will act to prevent them from taking place — just as Congress has done repeatedly with reductions in doctor fees legislated years ago. Moreover, even if the spending cuts are possible, the savings will be needed as part of an essential effort to fundamentally reform Medicare.

Don’t let people game the system. ObamaCare has a requirement to obtain health insurance (a mandate) enforced with a fine. However, the fines are small relative to the cost of the insurance. Plus there is not much the IRS can do by way of enforcement. The IRS cannot garnish wages or attach assets, for example. About the only enforcement tool it has is to withhold refund payments. To make matters worse, the agency has announced it has no plans to vigorously enforce the mandate.

This will leave individuals with strong incentives to game the system by remaining uninsured while they are healthy, obtaining insurance after they get sick, and then dropping coverage after the medical bills are paid and they are healthy again. Clearly if large numbers of people do this, insurance will become prohibitively expensive.

The ideal answer here is to give people a one-time opportunity to obtain insurance on a guaranteed issue basis, without regard to health condition. But if they turn down that offer and subsequently apply, insurers should be able to medically underwrite and charge a premium that reflects full expected health care costs.

Get rid of the health insurance mandate and the fines for being uninsured. With the first five fixes in place, there is now no need for a mandate. Nor is there any need to impose fines on people who disobey the mandate.

What we have instead is a strong financial incentive to obtain health insurance. Government offers everyone a generous subsidy to buy health insurance in the form of lower taxes. If they turn down the subsidy, they will pay higher taxes. The flip side of a subsidy is a penalty. Put differently, not getting subsidy is a penalty. That’s not different in principle from the current system, except that the reform suggested here would make that arrangement much more rational.

Comments (26)

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  1. Ken says:

    Good post. Good ideas.

  2. Harv Randecker/NAABC says:

    Obviously, don’t expect the Administration or HHS to implement any of these suggestions. ObamaCare was never intended to “fix” the ailing health care system. It is a socialist overeach to take more control of our lives. Here in Chicago, there are talk show hosts who actually call Obama only a charismatic “suit” to be the front man for a Manchurian candidate-like take over effort.

  3. Cindy says:

    “The ideal answer here is to give people a one-time opportunity to obtain insurance on a guaranteed issue basis, without regard to health condition. But if they turn down that offer and subsequently apply, insurers should be able to medically underwrite and charge a premium that reflects full expected health care costs.”

    Great idea! Infinitely saner.

  4. Kenneth A. Fisher, M.D. says:

    There may be an easier way using similar principles, http://www.washingtontimes.com/news/2012/may/3/prudence-of-a-patient-centered-approach/

  5. Chris says:

    Amen, also, block grant medicaid to the states.

  6. Thomas says:

    I’m a little concerned with what else Democrats may add in.

  7. Jordan says:

    +1 on doing away with the mandates.

  8. Linda Gorman says:

    Second Medicaid block grants. Only way to get reckless Medicaid expansion, and spending, under control.

  9. Mae says:

    Good article, good points, great ideas…

  10. Buster says:

    It’s unfortunate that this is the message conservative health economists have been saying for a few years now. But Democrats wouldn’t listen because they thought (what became ObamaCare) was the way to reform health care. They are now realizing that it’s not workable. Republicans weren’t terribly interested because they didn’t think Republican voters cared about health care. What came to pass is a very flawed piece of legislation that we all — Democrats and Republicans alike — are stuck with for the foreseeable future.

  11. Steven Bassett says:

    Agree. If we had all of these we could live with 3:1 rating and a guaranteed issue open enrollment period with strict rules to prevent future gaming, just as you suggest. You’d also need to allow deductibles higher than $2,000, but voters would eventually demand that under with the changes you suggest. A broad, competitive, innovative health INSURANCE market would form and subsequently a health CARE market as people bought levels of insurance that make sense for them. Cost and quality would go in the right direction. Apart from the faithful few in the U.S. legislature and judiciary the tendency when this law collapses on itself would be direct price controls (see what Massachusetts is trying to pull off).

  12. Tom Newsome says:

    An excellent post with practical and doable suggestions.

    Tom Newsome

  13. Bill Bettag says:

    There is one additional huge disparity in subsidies which will probably take the courts to decide the outcome. Despite the IRS “interpretation” to the contrary, ObamaCare legislation as it has been enacted only provides premium subsidies to citizens of states who are implementing the insurance exchanges within their state. Currently, there are about 18 states who have declared that they will not be setting up their own exchanges, but rather deferring to let the Federal government run them, which is perfectly legal under the law. The IRS has opined that they will ignore the law and deem all citizens eligible for the subsidy, regardless of whether it was a state run exchange or a Federal run exchange. This is fine until an employer in one of the states with the Federal government run exchange gets fined for one of his employees getting the subsidy, and the court battle begins. What was put into the bill as an incentive for states to adopt exchanges has turned into another nightmare for this flawed legislation.

  14. Slater says:

    Obamacare is deeply, deeply flawed.

  15. seyyed says:

    great suggestions that are so straight forward and easy to understand

  16. H D Carroll says:

    The problem with a flat tax credit amount is that it does not reflect the actuarial realities of age, area, and family size when it comes to the price to be paid for the insurance coverage. (Just as health status has been eliminated by no underwriting, so has the very real differentials that exist for sex, but there you go.) Also, would you anticipate allowing people to move freely (not free, of course) between insurance plans as long as they had the proof of continuous coverage at at least the same level? That would make sense to encourage competition on service, etc. between carriers even once a policy has been purchased.

  17. bart says:

    A fixed dollar amount makes sense if you are trying to minimize economic distortion. But as I understand it, the entire purpose of a tax credit would be to _create_ distortion, in the form of an incentive to purchase insurance. If that’s the case, then wouldn’t a fixed percentage of premium, rather than fixed dollar amount, make more sense?

    Separate question, does the ACA’s low income subsidy take savings into account, or only current income? If the latter it sounds as though it may be useful to people who retire before the age of 65.

  18. Henry GrosJean says:

    None of these ideas will work as they are just too logical :)

  19. John Goodman says:

    @ Bart

    The fixed sum tax credit subsizies core insurance that we want people to have but leaves them to pay for extra insurance with after-tax dollars. A percentage tax credit would encourage peole to buy more extra insurance than they otherwise would. The pirnciple: people should never be able to lower their taxes by buying more insurance.

    The ACA subsidy ignores assets.

    @ HD Carroll

    The credit could vary by age, geography, etc., but why should it? Why encourage areas with high health care costs by giving people who live there greater susidies.

    Yes people should be able to move from plan to plan but only at market prices. (This is accomplished with change of health status insurance.)

    @ Chris and Linda

    I agree that we should block grant Medicaid.

  20. August says:

    Making the subsidy a fixed sum tax credit against premiums would incent high premium/low deductible plans that don’t create the consumer behavior that could lower price.

  21. bart says:

    I was assuming a reasonably low credit percentage (say 20-25 percent, or half that of the employer tax exclusion for most people), so that there wouldn’t be much incentive to overconsume, but would allow the credit to scale with cost of necessary coverage.

    On my second question, it looks like ACA contains a rather large incentive to take early retirement. If you can keep your income low and live on savings for a few years, you can receive mostly-paid health coverage. I think I’m beyond trying to fix anything, I just want to know how to game the system.

  22. Joe Fitzgerald says:

    Agree w/Goodman, Obamacare is a “deeply flawed piece of legislation”. Recently pur. his book, “Priceless” excellent resource. Obamacare violates our Constitutional principles. As the Declaration says “Whenever any form of Government becomes destructive of these ends it is the Right of the People to alter or abolish it.” Justice Roberts by his single vote made a pseudo constitutional silk purse out of an unconstitutioanl sows ear. In the interest of brevity, I wrote a “poem” some months ago, stapled it in my pocketsize Constitution for ready reference. You can hear/see “Dad on Obamacare”
    go to http://www.youtube.com/watch?v=_PrNgqNYfJk

  23. bart says:

    Just to counter my own argument, the ACA’s relatively narrow 3:1 age banding already contains an implicit subsidy for older premium payers. Combined with a fixed dollar amount tax credit, the resulting net subsidy would be roughly proportional to cost anyway.

    So a 60 year old who pays $600 under ACA, and would have paid $750 under a 5:1 scheme, receives an age-based subsidy of $150. A 25 year old who pays $200, and would have paid $150 under the 5:1 regime, has a negative $50 age-based subsidy.

    Applying a fixed $100 tax credit to both of these, the young consumer would receive a combined net subsidy of $50 and the older consumer $250, roughly proportional to the pre-ACA cost. Which leaves a little bit of incentive for both to participate, and compensates them for subsidizing the sicker members of their own age cohorts.

    This works because of ACA’s narrow age banding and because the plans offered are required to be fairly uniform. In a more open non-ACA environment, I still think a fixed percentage credit (or a combination of fixed percentage and fixed dollar) would have been more robust.

  24. Boetica says:

    Enforce the immigration laws and discuss the true meaning of the 14th Amendment, which was not about giving citizenship into perpetuity to anyone born onto US soil. Do NOT give citizenship to indigents, or those who are likely to become indigent. Force wealthy legal immigrants to support the relatives they sponsor.

    How many billions of dollars would this save us?

  25. Wanda J. Jones says:

    John and Friends:

    Don’t forget the need to provide a rational basis for increasing the amount of subsidy from year to year, one that is tied to something less amorphous than the GDP. And one that is not subject to Congressional confusion.

    I’m eagerly waiting for the day when the Dems have a flash of insight that THEY now fully own all the idiot provisions of Obamacare. There will have to be a series of changes. Our best hope is to pre-write those changes and hand them into their flaccid, numb-nut hands.

    And–IN addition to the good sense you offer in this blog, you and all your friends should collaborate on listing provisions that have to GO.

    I’m sending you a current paper that may be a contribution to that cause. It’s about both intended and unintended consequences to the law.

    I figure this is like the decision on which military bases to close; Congress had to vote on the whole list up or down. We will have to give Congress something to vote up or down, since every single provision has lobbyists hanging off of it.

    Really, when will Pelosi go on the Sunday morning talk shows to state out loud that she knows that there will have to be changes in the law. I can’t wait….

    Wanda J. Jones
    President
    New Century Healthcare Institute
    San Francisco

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