Health Reform Without Deception

MIT professor Jon Gruber is getting a lot of flak lately. As the intellectual architect of ObamaCare, he has shocked a lot of people with his video confessions that passing health reform required “deception” because the public is too “stupid” to understand what needs to be done.

I believe voters are smart. And that with three simple (and very transparent) reforms we could replace the mess that is ObamaCare with a health system the public would readily accept:

1. Replace all the ObamaCare mandates and subsidies with a universal tax credit that is the same for everyone.
2. Allow Medicaid (or private insurance that looks very much like Medicaid) to compete with other insurance, with everyone having the right to buy in or get out.
3. Denationalize and deregulate the exchanges.

You could have a very workable health care system by making these changes and these changes alone.

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.

In theory, when you apply for insurance on an exchange, the exchange needs 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, everyone’s subsidy is almost certain to be wrong—leading to refunds or extra taxes next April 15th.

With a universal tax credit, it wouldn’t matter where you work or what your employer offers you. It wouldn’t matter what your income is. It wouldn’t matter if you qualify for Medicaid.

All the perverse outcomes in the labor market would be gone. As is 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 insurance the law requires.

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 less than 30 hours a week or more; whether their workplace has fewer than 50 employees or more; and whether they obtain insurance at work or obtain it on their own.

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

What I call “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 cannot get subsidized insurance in the exchange. 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.

With a universal tax credit that is independent of income, it would not matter where people get their insurance. People could join a plan and stay there.

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.

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