Simple Solutions to the Worst Problems in ObamaCare

Now that the Supreme Court has declined to gut President Obama’s health reform, it’s time for Republicans in Congress to re-think how they have been responding to the law. They should begin by asking three questions:

1. What are the worst features of ObamaCare?

2. How are these features harming ordinary American families?

3. How can we get rid of them?

As I explain in a new book, A Better Choice: Healthcare Solutions for America and in a recent article in Health Affairs, there are major problems that aren’t going away unless Congress acts. Here are two of them.

An impossible mandate. The slowdown in the rate of increase in health care spending over the past decade is welcome news, but no one is predicting that health care spending will not exceed the growth of income in future years. In fact, for the past 40 years real, per capita health care spending has been growing at twice the rate of growth of real, per capita income. That’s not only true in this country; it is about the average for the whole developed world.

You don’t need to be an accountant or a mathematician to know that if something you are buying is growing faster than your income, it will crowd out everything else you are consuming. Health care spending will take more and more of the family budget; it will take an ever larger share of workers’ gross pay. The Affordable Care Act did not create this problem. But it limits our ability to manage it by restricting our ability to choose a smaller package of benefits, more cost sharing, etc. In short, the health reform law is trying to force us to remain on an unsustainable path.

Further, there are three “global budgets” in the ACA and (ironically) they are likely to make matters worse for ordinary citizens. The law restricts the growth of total Medicare spending, the growth of Medicaid hospital spending, and (after 2018) the growth of federal tax subsidies in the health insurance exchanges to no more than the rate of growth of real GDP per capita plus about ½ of a percent. This means that as health care costs become more and more of a burden for the average family, they will get less and less help from the government through time.

The traditional idea of a global budget is to restrict overall spending. The global budgets in the ACA only restrict the government’s outlays.

An obvious solution is to jettison the whole idea of a defined health insurance benefit that people are required to buy. Instead, make a defined (tax subsidy) contribution to each family. Then let competition determine what benefits the market can provide.

A bizarre system of subsidies. A family of four at 138% of poverty is able to enroll in Medicaid in about half the states and obtain insurance worth about $8,000. Since the coverage is completely free, that’s an $8,000 gift. If they earn one dollar more, they will be entitled to go into a health insurance exchange and obtain a private plan that costs, say, 50% more in return for an out-of-pocket premium of about $900. That’s a gift of more than $11,000. At the same time, the employees of a hotel earning pretty much the same wage will be forced to have an expensive family plan and they and their employer will get no new help from the government. After calculating the value of employers’ ability to pay premiums with pre-tax dollars, let’s call that a newly created $10,000 burden. This is only one of scores of ways in which ACA’s treatment of people is arbitrary and unfair.

But the biggest problem is not unfairness. It is the impact these differential subsidies will have on our economy. As businesses discover that almost everyone who earns less than the average wage gets a better deal from the federal government in the exchange or from Medicaid and most people who earn more than the average wage get better deal if insurance is provided at work, they will change their employee benefits radically and maybe even restructure the organization of entire firms.

The incentives for small businesses to stay small and for employers to prefer part-time workers, contract labor and outsourcing to full-time employees are all very real. And there are many other perverse incentives as well. All these perversions have a common source: treating people at the same income level very differently depending on where they get their insurance, how many hours they work, how many other employees they work with, etc.

Again, there is a straightforward solution: make the tax subsidy for health insurance the same regardless of where people get their health insurance. It would be even better if we let people use their tax credit to buy into Medicaid and let people on Medicaid leave and claim the tax credit to buy private insurance instead. At a minimum, this would liberate the job market from the arbitrary burdens of health reform.