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How to Transition from Obamacare to Real Health Care Reform

 by James C. Capretta and Yuval Levin     •     Weekly Standard

Obamacare-DelayObamacare—or at least the version of it that the president and his advisers currently think they can get away with putting into place—has been upending arrangements and reshuffling the deck in the health system since the beginning of the year. That’s when the new insurance rules, subsidies, and optional state Medicaid expansions went into effect. The law’s defenders say the changes that have been set in motion are irreversible, in large part because several million people are now covered by insurance plans sold through the exchanges, and a few million more are enrolled in Medicaid as a result of Obamacare. President Obama has stated repeatedly that these developments should effectively shut the door on further debate over the matter.

Of course, the president does not get to decide when public debates begin or end, and the public seems to be in no mood to declare the Obamacare case closed. Polling has consistently shown that more Americans oppose the law than support it, and that the opposition is far more intense than the support. The law is built on a foundation of dramatically expanded government power over the nation’s health system, which strikes many voters as a dangerous step toward more bureaucracy, less choice, higher costs, and lower quality care. The beginning of the law’s implementation does not appear to have eased these fears, and in some cases has exacerbated them.

But opponents of Obamacare must also reckon with the reality that the goal of repealing the law and replacing it with real, market-based health reform to bring down costs and enable more people to get covered is no longer aimed at a system that exists only in theory. When President Obama won reelection in 2012, it became inevitable that some version of the law would get implemented starting this year. And it was also a pretty good bet that, despite the law’s internal contradictions and problems, it would not, as some had surmised, collapse on the launch pad. Massive federal spending authority can prop up many a teetering edifice. The surprise is not that some 6 million people or so eligible for nearly free insurance under Obamacare took advantage of the offer; the surprise is that many millions more who were eligible declined to take it.

Some of the law’s opponents are reacting to these developments with something close to resignation. One prominent proposal would leave much of Obamacare’s government-centric architecture in place on the theory that it can be reformed and made to serve genuine market-oriented purposes. The law’s state and federal “exchanges,” which are the focal points of Obamacare’s expanded federal control over the health system, would be enlarged under this plan with millions of new enrollees from Medicaid. Future Medicare beneficiaries would also be forced to get their coverage through this mechanism.

It is true that exchanges are not, by definition, anti-market. Indeed, in concept, they could facilitate transparency and thus modestly improve consumer choice. But the Obamacare exchanges were built to assert increasing federal regulatory control over the nation’s health system. It is very rare for deregulation efforts to remove all such authority from an agency of government. Even if a deregulation effort partially succeeds in the short run, over the long run, federal regulatory agencies gain power by cleverly creating vested interests in the protection and expansion of that power. It is a very risky bet to place the future of American health care at the mercy of a new and improved system of Obamacare exchanges.

And there is no need to do so. The reality of Obamacare implementation in 2014 does not mean the law is no longer replaceable with something better. It still can be displaced by an appealing conservative alternative if a newly elected president chooses to make repeal and replace a top priority in 2017. But plans to replace Obamacare must now take into account the changes that the law has brought about this year, and stands to deliver over the next few years.

The president and the law’s supporters may pay a heavy political price this November for breaking their repeated promises not to needlessly disrupt pre-Obama-care insurance arrangements or doctor-patient relationships. The law’s opponents must avoid making the same mistake in their plans to replace Obamacare: They should refrain both from promising that all disruption can be avoided and from causing avoidable disruption. A replacement will need to include a transition—a bridge from Obamacare’s broken architecture to a working health financing system.

The nature of such a bridge depends in part on the particulars of the alternative. The best of the replacement plans so far proposed by conservatives are those that address the problems that existed in the health system before Obamacare was enacted without the horrendously misguided government-centered architecture of Obamacare that has made those problems worse. For instance, the reform plan introduced by Republican senators Richard Burr, Tom Coburn, and Orrin Hatch would dramatically expand insurance coverage, control costs with a functioning marketplace, and allow people with expensive health conditions to get affordable and stable insurance—without the high costs and overbearing federal regulatory control of Obamacare. The reform plan developed by the 2017 Project—an organization dedicated to developing a conservative reform agenda—has many key features in common with the Burr-Coburn-Hatch plan, and would also broaden insurance coverage and provide stable insurance for the sick without Obamacare’s excesses. We assume that some synthesis of these plans will form the starting point for replacing Obamacare.

The transition from Obamacare to programs like these would be a move from a more prescribed and regulated to a less prescribed and regulated health system, and therefore would increase rather than reduce the range of options available to Americans. This would make such a transition dramatically different from, and far easier than, the transition to Obamacare that we are now witnessing. Adding options, rather than subtracting them, can make it possible to enable even those people who are most entangled in Obamacare’s new mechanisms to gradually make their way into the new and more functional market-based alternative.

Indeed, for most Americans the transition would not be much of an issue and the new system would offer major benefits. About 160 million Americans receive health coverage through their employers, and in these early stages of Obamacare implementation, that system has remained largely as it was.

The repeal and replacement of Obamacare would reduce some burdens now faced by the employer system—by lifting the threat of the employer mandate and reducing tax and regulatory pressures that have undermined employment. And it would relieve employers of the coming “Cadillac” tax, scheduled to take effect in 2018, and offer a more plausible and less painful way to inject some cost discipline into employer coverage.

The Cadillac tax is a 40 percent excise tax on employer-plan premiums in excess of an upper threshold, set at $27,500 for family coverage in 2018 (the tax also applies to expensive policies sold directly by insurers to consumers). It requires employers to pay the same tax for high-paid and low-paid workers, and since employers would pass on the cost in the form of compensation adjustments, it would particularly harm lower-paid employees of firms with generous plans. A better approach, included in both the Burr-Coburn-Hatch plan and in the 2017 Project proposal, is to place an upper limit on the amount of employer-paid premiums that is tax-free income to workers. Premium costs paid by firms above the threshold would then be taxable income for employees, but higher-salaried employees would pay more because their salaries put them in higher marginal income-tax brackets. Most Americans would never confront the tax, and those who did would be far better positioned to deal with it, or to change their coverage to avoid it.

The transition from Obamacare’s crude regulatory distortions of the insurance market to a system that creates protections for people with preexisting conditions without outlawing insurance could also be made quite smooth for the same reason: People would find themselves with more options and no less protection.

Obamacare outlaws using health status in setting premiums and bans exclusions of pre-existing conditions, which provides an incentive to consumers to delay insurance enrollment until they need it. The law tries to counteract this perverse incentive by imposing a new tax on the uninsured—the so-called individual mandate. The emerging alternative plans take a different approach: They require that anyone who has stayed continuously insured be shielded from higher premiums based on their health status. This would include anyone who needed to move from an employer plan to the individual insurance market. The replacements would thus eliminate the individual mandate immediately, but the protection for those who stay insured would provide at least as strong an incentive to stay covered as the mandate while enabling the creation of a competitive market in coverage.

Some other insurance rules in Obamacare would need to be addressed with explicit transition provisions. For instance, Obamacare limits the allowable premium difference between older and younger consumers in the individual market to a 3 to 1 ratio, which is much narrower than the practice in many states before Obamacare was enacted. If this provision were to be repealed, as it ought to be along with the rest of the law, premiums would likely rise for older insurance enrollees and fall for younger consumers. To address this, a replacement plan should explicitly require states to provide for a brief transition period (of, say, three or four years) from Obamacare rules to the new system. A transition of this length would minimize disruption for consumers.

The challenges of transition are of course greater in the case of the two populations that receive direct benefits under Obamacare—those covered under the Medicaid expansion in their states and those who receive premium subsidies for the purchase of coverage through the exchanges. These individuals are most directly and materially entangled in Obamacare’s architecture, and smoothing for them the transition to a better system would require some special care.

The emerging alternative to Obamacare would help those who do not have access to an employer plan by providing them with tax credits for purchasing health insurance. The value of these tax credits would be roughly equal to the value of the tax preference for employer-paid plans, and thus would undo the unfairness of providing a tax benefit just to those in employer plans (the Burr-Coburn-Hatch plan limits the credits to households with incomes below three times the federal poverty line). Medicaid would then be transformed into a flexible, state-administered program of additional premium and cost-sharing support for low-income families. States would use the funding to supplement the federal tax credits and allow program participants to use the combined support to pick a coverage option from among competing insurance plans.

In both the case of Medicaid-eligible individuals and people without access to employer coverage, therefore, the conservative alternative to Obamacare would provide subsidized access to coverage, though through a different mechanism intended to help people enter a robust and competitive market in coverage that enables them to choose from among affordable options and allows their choices to make the underlying health system more efficient and accessible. This means that people receiving coverage under Obamacare’s Medicaid expansion and those receiving subsidies through the Obamacare exchanges would have to be given a bridge to the new system with as little disruption as possible.

The best way to transition those in the Medicaid program is through a grandfathering exemption. No one enrolled in Medicaid would be pushed out of the program. People could stay enrolled as long as they remained eligible under the old Obamacare rules, and as long as their states elected to keep the old program structure in place for them. But all new applicants would go into the reformed Medicaid program, and all participants in the old program could voluntarily elect to switch into the reformed Medicaid program.

A great many Medicaid beneficiaries would choose to make that transition as they would be given new choices and the ability to enroll in the same types of mainstream insurance plans available to the middle class—often with significantly greater access to care than they now have in Medicaid. The states would also have an incentive to make it more appealing, smoother, and easier for people to choose the new Medicaid alternative, since the new system would be significantly less costly for state governments. Given these incentives, and the fact that turnover in Medicaid has always been very high, the full transition to the new Medicaid alternative could occur fairly rapidly, yet could be experienced by the people affected as a choice, not a disruption.

The transition to the new health insurance tax credits for those currently receiving subsidized coverage in Obamacare’s exchanges would not be as straightforward, but could follow the same general principle. Current enrollees (say, through the beginning of the year in which the alternative is enacted) in plans bought through the Obamacare exchanges could stay in those plans and continue to receive premium credits based on the Obamacare rules, though those credits would not grow year over year as they do under Obamacare. New applicants would instead receive the new tax credit and select from insurance plans in the new, more functional market.

The limited population of existing, subsidized enrollees could choose at any time to transition to new coverage using the new tax credits instead of their Obamacare plans. The new system would be able to offer them lower-cost plans (including catastrophic coverage that could be purchased for a premium equal to the value of the tax credit, and therefore involve no out-of-pocket premium costs at all), and the credits would help offset their costs if they chose more comprehensive options. Some individuals would find themselves better off remaining in their Obamacare-purchased coverage for a time, and they could do so, but the new system would grow more attractive each year as it brought down costs while the relative value of the Obamacare subsidies declined.

Under the emerging plans to replace Obamacare, HealthCare.gov and the state-based exchange websites would not be necessary, though states could choose to keep theirs or build other exchange mechanisms if they wanted. But the federal tax credits would not be tied to purchasing plans through an exchange, and they would not be used to enforce federal insurance rules.

Of course, not all of Obamacare would require transition rules. The tax increases, the Independent Payment Advisory Board, the blunt and ill-advised Medicare cuts, the various intrusions by the federal government into the practice of medicine, the strict and counterproductive definition of insurance, and much else could be safely repealed, effective immediately, and the only consequence would be a better health care system.

But the insurance provisions of Obamacare have now moved millions of people into new coverage arrangements. Granted, many of those who have switched to new insurance plans did so because they concluded they had no other choice, and they would welcome a law that freed them up to get the kind of insurance they would prefer. For these people, the transition could be swift. But Obamacare also provides massive new subsidies to a relatively small portion of the population, and undoing those arrangements abruptly would be both unfair and unwise. Obamacare’s opponents should not make the same mistake its champions made in designing and implementing it.

Building in an adequate transition will not undermine the ultimate effectiveness of an Obamacare replacement plan. The goal is a functioning marketplace where consumers decide how to allocate resources, where all Americans have access to stable insurance, where quality care and medical innovation are rewarded, and where federal support for insurance enrollment is affordable for taxpayers. These are goals that are critically important for the long-term strength and vitality of the country, and they are goals that are more likely to be reached if Obamacare’s opponents wisely design short-term transition provisions to defuse opposition to a full replacement plan.

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James C. Capretta is a senior fellow at the Ethics and Public Policy Center and a visiting fellow at the American Enterprise Institute. Yuval Levin, also a fellow at EPPC, is the editor of National Affairs and a contributing editor to The Weekly Standard.