Can Obamacare Be Fixed?

It’s a 2,700 page bill. There are 20,000 pages of regulations. Major provisions seem to change every other week. And despite Nancy Pelosi’s promise, four years after it passed most of us still aren’t sure about everything that’s in it.

How can something like that possibly be fixed?

It’s easier than you might suppose. Previously, I recommended four simple ideas:

1. Replace all the Obamacare mandates and subsidies with a universal tax credit that is the same for everyone.
2. Replace all the medical savings accounts with a Roth Health Savings Account (after-tax deposits and tax free withdrawals).
3. Allow Medicaid to compete with private insurance, with everyone having the right to buy in or get out.
4. Denationalize and deregulate the exchanges and require them to institute change of health status insurance.

Clearly much more needs to be changed. But you could keep an awful lot of Obamacare and still have a workable health care system by making these changes and these changes alone.

In this post, I will describe all of the mechanical problems that would be solved with these four changes. In a subsequent post I will show that these changes would also get all the important economic incentives right.

Technical problems with the online exchanges would be gone.

Virtually every problem with the online exchanges has one and only one cause: People at different income levels and in different insurance pools get different subsidies from the federal government.

Consider that when you apply for insurance on an exchange, the exchange has to check with the IRS to verify your income; it needs to check with Social Security to see how many different employers you work for; it needs to check with the Department of Labor to see if those employers are offering affordable, qualified insurance; and it has to check with your state Medicaid program to see if you are eligible for that.

To make matters worse, the subsidy you get this year is almost certain to be the wrong amount. Whether people use last year’s income or guess what this year’s will be, they are almost certain to err. If they underestimate what they will earn, their subsidy will be too high and they will have to give money back to the IRS next April 15th. If they overestimate, their subsidy will be too low and they will be entitled to a refund. All this will be annoying. It may also cause financial hardship.

With a universal tax credit, it doesn’t matter where you work or what your employer offers you. It doesn’t matter what your income is. It doesn’t matter if you qualify for Medicaid. You get the same subsidy regardless of all of the above.

That means that we could turn all of the exchanges over to EHealth, which has been operating an online private exchange for a decade and has insured more than 4 million people.

All the perverse outcomes in the labor market would be gone.

No need to explain them here. They are becoming quite well known. Employers have perverse incentives to keep the number of employees small, to reduce their hours of work, to use independent contractors and temp labor instead of full time employees, to end insurance for below average wage employees, to self-insure while the workforce is healthy and pay fines instead of providing the full insurance the ACA is designed to encourage.

With a universal tax credit and no mandate, all of these perversions would be gone. The subsidy for private health insurance would be the same for all: whether they work on the assembly line or whether they are a CEO; whether they work less than 30 hours a week or more; whether their workplace has fewer than 50 employees or more; whether they are in a union or not; and whether their employer provides the insurance or whether they obtain it on their own.

The “race to the bottom” in the health insurance exchanges would end.

As previously noted, there are three main features of insurance: a benefit package, a network of providers and a premium. Obamacare regulations fix the benefit package and leave insurers free to compete on networks and premiums. They are responding by choosing narrow networks in order to keep costs down and premiums low. They are doing that on the theory that only sick people pay attention to networks and the healthy buy on price; and they are clearly trying to attract the healthy and avoid the sick.

The perverse incentives that are causing these perverse results have one and only one cause: when individuals enter a health plan, the premium the insurer receives is different from the enrollee’s expected medical costs.

Precisely the opposite happens in the Medicare Advantage program, where Medicare makes a significant effort to pay insurers an actuarially fair premium. The enrollees themselves all pay the same premium, but Medicare adds an additional sum, depending on the enrollee’s expected costs. For example, some special needs plans are paid as much as $60,000 per enrollee. Under this system, all enrollees are financially attractive to insurers, regardless of health status.

What we are calling “change of health status insurance” would accomplish the same result. The only difference is that the extra premium adjustments would be paid by one insurer to another and the amount paid would be determined in the marketplace—not by Medicare.

People would no longer be trapped in one insurance system rather than another.

If you are offered affordable coverage by an employer you are not allowed into the exchange. If you are a dependent of an employee who is offered affordable individual coverage, you are not allowed into the exchange even if the coverage offered to you is not affordable. If you are eligible for Medicaid you are not allowed into the exchange. If your income is 100% below poverty, you are not allowed into the exchange even if you aren’t eligible for Medicaid.

To make matters worse, eligibility for one system versus another will change frequently for millions of people because of fluctuations in their incomes. According to one study:

Nearly 40 percent of adults experienced a disruption in Medicaid eligibility within the first six months. After a year, 38 percent were no longer eligible, and an additional 16 percent had lost eligibility but then regained it (churning). By three years, 47 percent of adults had incomes above the 133 percent cutoff, and an additional 30 percent of adults were below the cutoff but had experienced at least one episode of churning. By the end of the study period at four years, only 19 percent of adults would have been continuously eligible for Medicaid.

All of these problems have one and only one source: the federal government is giving markedly different subsidies to people at the same income level, depending on where they get their insurance. With a universal tax credit that is independent of income, it would not matter where people get their insurance. If everyone could be in Medicaid, regardless of income, people on Medicaid could stay there if they like. If everyone in Medicaid could claim the tax credit and buy private insurance, they could keep their insurance regardless of fluctuations in income.

Note: This change would work best if the universal tax credit is set at the level the CBO estimates a new enrollee in Medicaid will cost. Currently, that’s about $2,500 for an adult and $8,000 for a family of four.

The financial burden of high deductibles would be reduced.

The out-of-pocket exposure under many plans in the health insurance exchanges is apparently quite high—more than $6,000 per person in some cases. And this is only for in-network expenses. If a patient has to go out of network to get needed care or to get a lifesaving drug, the insurer may pay nothing.

To reduce this burden and the horror stories it is likely to produce, we should spend fewer taxpayer dollars subsidizing benefits people may not want or need and use the savings to match contributions to Roth Health Saving Accounts. For example, we might match the first $1,000 contributed for an adult and the first $500 for a child. The deposit could be made by the enrollee, the insurer or by an employer.

With this opportunity in place, insurers would almost certainly offer plans with $1,000 HSA deposits because they could use the government’s $1,000 match to make their total package more attractive.

There you have it: Four easy to understand, not very difficult changes, and millions of problems vanish in a heartbeat.