An Obamacare Replacement in the Senate

National Review Online | Published on January 27, 2014

By Yuval Levin

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The past few months have seen some very promising new conservative reform initiatives emerging from Capitol Hill — ideas that build on the work of conservative wonks in the think-tank world and the academy and translate them into practical proposals. Senator Mike Lee has offered a very appealing tax-reform proposal and important ideas for transforming our approach to transportation andhigher-education policy. Senator Marco Rubio and Representative Paul Ryan have outlined some promising improvements to the safety net.

And today, senators Tom Coburn, Orrin Hatch, and Richard Burr have proposed a conservative health-care reform that has enormous promise. Herewith, some quick (if not short, with apologies) thoughts on what they’ve offered.

The senators’ proposal in some respects builds on ideas that have been in various Republican proposals before (including the American Health Care Reform Act, proposed last year and co-sponsored by a majority of House Republicans), but it goes further and probably amounts to the most promising conservative health reform we have yet seen from Republican politicians. Its basic structure involves a version of the combination of reforms that James Capretta (for instance inthis National Affairs essay with Robert Moffit) has been laying out in some detail in recent years, and which other conservatives (including Ramesh Ponnuru and myself) have pointed to: It would repeal Obamacare and instead address the key particular deficiencies of our health-care system in a way that enables more Americans to be genuine consumers and that employs actual competition among insurers and providers (giving them real freedom to shape products and business models) to restrain costs while expanding coverage.

The proposal would extend a tax credit for the purchase of health insurance to all Americans below 300 percent of the poverty level who do not have health coverage from a large employer. That credit (paid for largely by capping the tax exclusion for employer-provided coverage), would provide all of these Americans with the same benefit now extended only to people with employer-based coverage. The credit would be age- and income-based, and intended to enable the people receiving it to afford at least catastrophic coverage, and to far more easily purchase more comprehensive coverage if they choose to. It is designed in a way that would extend the benefit now only available in the employer system without destabilizing the employer system (as some proposals to fully replace the employer exclusion would do) — which strikes me as both substantively and politically wise.

States would also be allowed, if they chose, to establish an opt-out auto-enrollment process for recipients of the credit. They could, for instance, automatically enroll any person who hasn’t already purchased insurance in a plan (chosen at random from such plans offered by insurers in the state) with a premium exactly equal to his tax credit, with insurers adjusting that person’s deductibles and co-payments accordingly. States would have a strong incentive to do this, since it would dramatically reduce the number of uninsured people in the state at no cost to the state or those individuals, and the cost to the federal taxpayer would only be the cost of the tax credit. But the result would be that people who spend no money on health insurance (who today, and before Obamacare, would therefore have no protection from extreme costs) would now have at least catastrophic coverage — which is, after all, the core benefit provided by insurance. People could easily opt out of such coverage and be uninsured if they wanted to, or could supplement the credit and buy other coverage instead, but those who did nothing would have some very significant protection at no out of pocket cost to them and much lower public cost than anything Obamacare would allow for, and in a way that makes use of the private insurance market rather than trying to replace it.

The proposal would also allow small businesses to band together for the purchase of insurance, and would allow states to join together through interstate compacts to enable their residents to purchase coverage across state lines. And it would allow people who are eligible for Medicaid to opt instead to receive the full credit and purchase coverage in the larger health-insurance market (and people now covered by Obamacare’s Medicaid expansion, which would be repealed, would also qualify for the full credit, since it only begins to phase down at 200 percent of poverty). In conjunction with that, it would set a per capita cap on the federal portion of Medicaid funding for most eligible populations while allowing the states far more freedom to design their Medicaid programs (an idea that has been around since the Clinton administration proposed it in the 1990s, but toward which Democrats have more recently not been very friendly).

Crucially, the proposal also includes the combination of protections and rules that conservative health-policy experts have long proposed (here’s a good example) for covering Americans with preexisting conditions: It would exempt those with continuous coverage (whether in the employer or individual market) from medical underwriting when they switch insurance plans, giving even the healthiest Americans a powerful incentive to have some form of insurance coverage without the need for a mandate; it would allow for a one-time sign-up period in which people now uninsured could buy coverage without such underwriting; and it would help the states fund high-risk pools for those with the highest health costs.

And in all these respects, the proposal sees its purpose as enabling the functioning of a genuinely competitive market in coverage. This has always been the essence of conservative approaches to our health-care system. They seek to empower all Americans to be consumers in a competitive market where insurers can offer them genuinely different options and they have the resources to turn their preferences into market power and so to drive health and coverage providers to give them more appealing options at more appealing prices.

Conservatives want to use the market to answer the question at the core of our health-financing dilemma: How can we maximize quality and access while minimizing cost? Liberal approaches to our health-care system, on the other hand, try not to create consumers who would choose among real options designed by insurers and providers but rather to enact the will of select experts, who they assume already possess the knowledge to enable the system to do all of that. Obamacare embodies that prescriptive approach – it defines the insurance product very strictly and then requires insurers to sell it, requires consumers to buy it, and calls the result a market. It should surprise no one that this turns out to be no way to discover paths to efficiency in health care. Today’s proposal embodies an approach that strikes me as having a far better chance of succeeding, and without the sorts of new mandates, taxes, and exceedingly burdensome rules that Obamacare inflicts on the country.

The problems with the health-care system that preceded Obamacare called for a move to the right, not to the left – toward provider competition and consumer choice, not centralized prescription and expert management. This proposal offers such a move, going well to the right not only of Obamacare but also of what came before it.

Of course, I don’t agree with everything it does. First, one point on which I think the materials released today may just be unclear: The document laying out the proposal says the plan “caps the tax exclusion for employee’s health coverage at 65 percent of an average plan’s costs.” I think they must mean it caps it at the 65th percentile of employer plans – which would be an altogether different and less disruptive cap. If they don’t mean that, then they should.

Second, the proposal doesn’t get specific about any Medicare reforms, and as a result appears to leave in place Obamacare’s ill-conceived and counterproductive Medicare cuts while the rest of the law is repealed. The document the three senators released today refers in general to two recent proposals (one from Hatch and one from Coburn and Burr) that would replace those cuts with much more reasonable near-term and medium-term reforms to the program that could achieve the same savings, but it doesn’t actually propose those in place of Obamacare’s payment-rate cuts, which will reduce seniors’ access to care without improving the program. It should have.

I also think a flat, universal tax benefit for coverage would be better in many respects, as noted here. And that means I think the phasing out of the credit at 300 percent of poverty is not ideal, as it does not extend the tax benefit to much of the middle class. Presumably the proposal employs that phase-out for reasons of cost, and you’d have to see how different approaches to this pan out on that front to know which is best, but a flat tax benefit (which would be less generous at the margin, where the Coburn-Hatch-Burr proposal provides almost $9,000 to a family) would allow for greater reach.

The threshold this proposal sets is not random, to be sure: There is no universally agreed-upon measure of when people can afford insurance, given all the many variables involved, but the kind of standard proposed by health economists Kate Bundorf and Mark Pauly a decade ago offers a reasonable guide, and generally speaking they deem insurance to be affordable if a family earns more than three times the federal poverty level. As this table (from another recent National Affairspiece) shows, using 2010 Census figures, such a threshold would provide the credit to more than three-quarters of the uninsured, and the rest might be presumed to be able to afford coverage if they chose, or else would be helped by high-risk pools. But the cost of coverage is a problem for many middle-class families who do have coverage, and those now denied the tax exclusion made available to people with employer coverage should receive the same kind of benefit. Changing that would correct a serious distortion in the tax code as well as reducing the cost of living for many middle-class families, and it would also extend the (already no-doubt very significant) coverage expansion achievable by the Coburn-Hatch-Burr proposal.

Still, the senators’ proposal would correct that tax distortion for many (and would allow everyone to use tax-free dollars in health-savings accounts to pay for insurance premiums, which would do some more to correct that distortion). And it would offer a very significant benefit to those who most need it and would extend insurance coverage to many of those now uninsured. We’ll have to see how its coverage expansion ends up being scored. Presumably these preliminary legislative specs are still a long way from a CBO score, especially as they come from a group of minority-party senators. But I assume we’ll see some academic scoring much sooner, and the elements laid out in today’s proposal suggest its coverage expansion will probably be very much in the neighborhood of those modeled for Obamacare but at much lower cost than Obamacare — to our wallets, our liberty, and our system of government. If Obamacare, which was projected to leave about 30 million Americans uninsured in the long run even before its unpleasant encounter with reality began in October, can be called “universal coverage,” then this proposal can too.

It can also be called a very encouraging sign that congressional Republicans know that they will need a serious Obamacare replacement if they are to persuade the public that Obamacare must be repealed. It’s especially encouraging that OrrinHatch – who is the ranking Republican on the Senate Finance Committee (the key committee with oversight for federal health-financing policy) and would likely become chairman of that committee if Republicans took over the Senate next year – is among the sponsors of this proposal. The ideas here are also very much in line with those laid out over the years by Paul Ryan, who is likely to become chairman next year of the equivalent House committee, the Ways and Means Committee.

This proposal is just a step, of course – an imperfect and an incomplete step, like any legislative proposal. But it is a major and important step, and a very encouraging one. The notion that Republicans have no alternative solution to the problems that bedevil our health-care system is one of the last remaining arguments that defenders of Obamacare have to offer the public. Republicans need to take that argument away from them and to offer a serious conservative approach to fixing America’s health-care system, which has long suffered under ill-conceived federal policies and is now being subjected to even worse ones. It increasingly seems like Republicans officeholders understand that.