A Quietly Revolutionary Replacement For ObamaCare

In “’How to Replace ObamaCare” (The American Spectator, July/August 2012), Stephen Moore and Peter Ferrara present a conservative alternative to state-centered health care.  Though published before the announcement of the Supreme Court’s surprising ruling on the constitutionality of ObamaCare, the Moore/Ferrara piece is made all the more timely by that ruling:  suddenly one hears calls from every corner of the Republican Party that Gov. Romney must move beyond a promise to repeal the reviled Affordable Care Act and tell us whether – and with what – he would replace it.  Moore/Ferrara is on the mark in several respects, though one might have preferred that it consider the Medicare-reform plans authored by Rep. Paul Ryan – most recently, in The Path To Prosperity:  A Blueprint for American Renewal, the House Budget Committee’s Fiscal Year 2013 Budget Resolution (the “Ryan Plan”).   Had certain elements of Moore/Ferrara been put together with certain elements of the Ryan Plan, the result would have been a truly remarkable and revolutionary product.

The point of this piece is to show how the Ryan Plan and Moore/Ferrara, together, contain virtually all the ingredients for a successful reformation of all elements of American healthcare for both the old and the not-old.  The healthcare-related mission of the Ryan Plan is focused solely upon reforming Medicare and does not address the sorry state of healthcare in America for younger people.  Moore/Ferrara, on the other hand, is focused primarily upon healthcare as a whole and addresses Medicare only once – though that one instance constitutes an extremely valuable proposal.   Put the two plans together, and three key proposals emerge:  expanded use of Health Savings Accounts, which are favored by Moore/Ferrara; an enhanced version of the “premium support” model that is advanced by the Ryan Plan as a replacement for Medicare’s fee-for-service model; and a redacted version of the “insurance exchanges” model (also advanced by the Ryan Plan), utilizing most of the reforms that Ryan builds into the exchanges – but dumping the exchanges themselves.  The following is the “best of” Moore/Ferrara and the Ryan Plan.

Health Savings Accounts

Moore/Ferrara is obsessed with Health Savings Accounts (HSAs), and with good reason.  HSAs are tax-favored savings accounts funded by employer- or employee-contributions that are used to pay for healthcare insurance and healthcare services.  Moore/Ferrara proposes changes in the law to encourage wider usage of HSAs.   The virtues of HSAs are: (i) they bring to individual policies approximately the same tax advantages as already exist for employer-sponsored policies; (ii) by requiring high deductibles, they accomplish the goal of giving the patient/consumer an incentive to compete more effectively in the market for healthcare services; (iii) because they are individual policies, they are portable – the individual does not lose his policy if he loses or leaves his job.   Moore/Ferrara also argues that there is a kind of economic magic to HSAs in that “such high deductibles reduce the cost of the insurance so much that the savings should mostly cover the deductible in the first year . . .” and that, if the insured elects to skip or defer any healthcare services in order to save the money and stockpile it in the HSA, it is the insured’s money to accumulate and use in the future – almost like a free lunch.   In reality, that lunch is not free; the customer’s savings on premiums should, as a matter of actuarial and accounting science, be just about the same as the customer’s added cost for the higher deductible (subject to adjustment for the insurer’s profit).   Nevertheless, the bigger picture is that many people will find a sweet spot in which they hold down their healthcare expenses so as to spend less than what their employer contributes to their HSA, and then they pocket the difference, which in turn would have a salutary effect upon prices in the healthcare and insurance industries as a whole.   Reduce demand, and prices go down.  If employers caught on, and lowered their contributions, so be it; that kind of a downward cycle would be a dream scenario for reducing our overall healthcare costs.

The whole idea is so good, and so universally applicable, that Moore/Ferrara, in its one nod to Medicare, makes the excellent suggestion that seniors be permitted to choose HSAs for their Medicare coverage. (They make the same recommendation for low-income people for their Medicaid coverage.)  Of course, the key reform is not the HSAs in and of themselves; the same outcomes as to tax treatment, portability of policies, and implementation of high deductibles could be accomplished by other legislative action and without dependency or focus upon HSAs.  The implicit Moore/Ferrara point, which has merit, is that HSAs are a known – and popular – commodity already, so fewer legal and political steps would be needed in order to achieve the necessary beefing-up of the HSA model and the public marketing of it.

Beyond its creative burst in support of the HSA/high-deductible concept, Moore/Ferrara is pretty conventional, touching the standard (conservative) bases:  contributing to the emergent bipartisan consensus in favor of “ensuring that no one will suffer lack of essential healthcare” because of financial hardship; block grants to the states for Medicaid, in lieu of micro-management of Medicaid by the feds; tort reform; elimination of bans on interstate offering of healthcare insurance; etc.  The only wrong-turn by Moore/Ferrara is in its call for continuation and “modernization” of existing laws that address social policy – in other words, those laws that go beyond mere financial aid for the needy, and subsidize those who have higher risk-profiles (and who, accordingly, have higher costs for insurance that is not subsidized in their favor).  In doing so, Moore/Ferrara steps on a potential landmine, because US healthcare is already saturated with (and made highly reform-resistant by) a vast array of overt and covert subsidies and cross-subsidies of those whose risk profiles make it more expensive to insure them, which is a bad thing.  For reasons outlined below, true reform requires the identification of such subsidies and the  disentanglement of them from the provision and pricing of healthcare services and insurance, not the further extension of subsidies and the further bundling of them into the pricing of the services and insurance.

Insurance Exchanges

Insurance exchanges are the central idea of the Ryan Plan.   Insurance exchanges are intended to induce insurance companies to compete in offering healthcare-insurance, a competition that Rep. Ryan thinks would lead the insurers to be more aggressive in negotiating lower prices from the healthcare providers so that the providers could pass the savings on to their customers in the form of lower prices for their insurance products.  Unfortunately, the insurance exchanges are a bad idea, for two reasons.  The first problem is with the proposition that increased competition in the market for insurance would lead to increased competition among the insurance companies in trying to negotiate better prices from healthcare providers; that premise is not convincing, as it seems too tenuous, too indirect.  The second problem is a bigger one: Rep. Ryan was outfoxed by Sen. Wyden when the two came up with the “Wyden/Ryan Plan” (which was carried forward into the latest iteration of the Ryan Plan), in which Ryan acceded  to Wyden’s demand that the Feds, via Medicare, be permitted to join the exchanges as a competing insurer – a concession that could doom the exchanges to eventual domination by the Feds and to continuation of the fatally-flawed fee-for-service system that led us to feel the need to propose all of these reforms in the first place.  Short of a complex, truly un-conservative set of micro-managing rules to prevent Medicare from exploiting the unlimited funding-capability and other powers of the federal government, there would be little to stop Medicare either from utilizing predatory pricing and other strong-arm tactics that would drive the other exchange members into irrelevancy, or from perpetuating the fatally-flawed model that got us into all of these difficulties.  Not only that, it would be far easier for a Democrat-controlled Congress to reverse those anti-Medicare rules than it would be for it to reverse an entire Moore/Ferrara/Ryan reform package that took Old Medicare completely out of the loop right from the start.

 

The good news about the insurance-exchange model is that it prompted Rep. Ryan to put forward three additional – and quite revolutionary – concepts,  each of which could be implemented successfully  without the need for insurance exchanges and could be applied to everyone, not just people on Medicare or Medicaid:  (i) “premium support,” which nearly everyone (including Rep. Ryan) seems to consider his real coup;  (ii) risk-based pricing of healthcare insurance (as distinct from pricing that has financial support and subsidies baked-into the numbers that the customer sees); and (iii) an overall annual cap on the total amount expended by the federal government on premium support.

 

Premium Support, Risk-Based Pricing, and The Cap

In the Ryan Plan model, premium support, risk-based pricing, and the cap are integrated concepts.

  • Premium Support is the easiest of the concepts to grasp:  it means financial support, provided directly by government to the consumer, that can be used to pay medical bills and insurance premiums.  In other words, instead of having the government pay the consumer’s medical bills, the government pays the consumer and the consumer pays his own bills.  Rep. Ryan promotes premium support because he, like Moore and Ferrara, believes that incentives in the healthcare market are strongest when placed with the consumer, especially if the consumer’s insurance policy has high deductibles.  While neither the Ryan Plan nor Moore/Ferrara expressly eliminates the disastrous model of having the government pay the provider “in behalf of” the patient, the Ryan model, by specifying that premium support is paid to the patient rather than the healthcare provider, is a step in the right direction – at least the patient negotiates with the insurer, and the insurer negotiates with the provider, and you no longer have  the government  negotiating with the healthcare provider.   The more significant virtue of the Ryan Plan is that Premium Support, as a payment made directly by government to the consumer, is easily and appropriately convertible into a vehicle for the delivery of every kind of federal-government healthcare-assistance other than Medicaid-funding  – not just “entitlements” such as a baseline level of support for all Medicare enrollees (as the primary replacement for the present model of “free” insurance) and the block grants to states for Medicaid assistance, but additional financial support for those not old enough  to qualify for Medicare and those of any age who, despite whatever support they get from Medicare and/or Medicaid, find that, because of their risk-profiles, they still cannot afford healthcare and healthcare insurance.

 

Of course, one might reasonably ask, why provide subsidies for higher-risk people when we already have such a plethora of governmentally-mandated subsidies already in existence – for example, all of those provisions in HIPAA, ACA, and many individual states that purport to address the problem of people who cannot find insurance because of a pre-existing condition?  There are two reasons for the Feds to take over the subsidies business:  (i) some of those federal and state laws are limited (or overlapping and inconsistent) – for example, they might ban the carriers from denying or terminating coverage on the basis of minor flaws in the customer’s original insurance application, but they might not prevent the carrier from raising future premiums as a way of covering its exposure; and (ii) those laws tend to create hidden cross-subsidies that are built into the premium structure in ways that make negotiation of prices of healthcare and insurance, and reform of our overall healthcare system, much more complex and difficult.

 

  • Risk-Based Pricing is shorthand for an innocuous – but truly revolutionary – set of rules in the Ryan Plan that beautifully complement the Premium Support model and that, while ostensibly directed only at the Medicare markets, could be applied with equally powerful and beneficial effect in the general markets for the not-so-old.   These provisions from the Ryan Plan are a masterpiece of concise, rather subtle, drafting; they propose a revolution, disguised by simple, plain language.    Indeed, the drafting is so innocuous that each of the central provisions merits its own, separate, explanation.  Here are some key provisions from risk-based pricing components of the Ryan Plan, with translations into plain English:

(a)  “Health plans that participate . . .  in the Medicare Exchange would be required to offer insurance to all seniors regardless of age and health status – thereby preventing insurers from cherry-picking only the healthiest seniors for coverage under their plans . .  The proposal requires all plans on the Exchange to include guaranteed issue (i.e., they cannot deny coverage based on pre-existing conditions) and community rating (i.e., they cannot impose prohibitively disparate costs on seniors) . . . “  Translation:  No one can be turned down for a healthcare insurance policy, no matter how old, sick, or poor, and regardless of how expensive it might be for the carrier to insure the applicant.  Problem:  ambiguous reference to community rating – if literally means a sick 85-year-old pays the same premium as a healthy 68-year-old, we are back to cross-subsidies rather than risk-based pricing; have to hope Rep. Ryan did not mean that, and will assume he did not.

(b)   “Payments to plans would be risk-adjusted and geographically rated . . . “  Translation:  The carrier must set the premium at exactly the level warranted by the risk profile of the applicant – for example, if the applicant is so old and sick (and perhaps lives in a city where healthcare costs are so high)  that the actuarially correct annual premium charged to the applicant should be $100,000, so be it!  The applicant gets the policy and then looks to the government for “premium support.   That means, premiums are based on risk, rather than subsidization, just like conventional life insurance.   This is the proposal that eliminates the need for the controversial Individual Mandate, because, as with life insurance,  it creates a significant incentive to buy healthcare insurance while you are young – before you are felled (and your future savings and financial security are jeopardized) by a serious injury or disabling disease or condition.

(c) “The federal contribution to seniors’ health plans would be risk-adjusted so that the sickest seniors are protected from high premiums as well as adverse selection from insurers . . .  proper risk adjustment would ensure that seniors with the highest health costs would still be able to find an affordable plan.  Federal contributions would be increase to account for a senior’s health status and age . . . ”  Translation:  Yes, indeed, the government is then obligated to step in – not by forcing the carrier to reduce the premium (and thereby subsidize the applicant, at the expense of the carrier’s other customers or, ultimately, the government), but by writing a check every month to the applicant  (premium support) in such amount as is appropriate based upon the financial need of the applicant – in other words, if the applicant is really poor, the government picks up the whole $100,000 annual tab, but if the applicant is really rich, the government contributes NOTHING beyond an unspecified baseline (as to which, see below).   That means the subsidy is in premium support, rather than hidden within the premiums.

(d) “CMS would also conduct an annual risk review audit of all insurance plans participating in the Medicare Exchange.  Insurance plans covering a higher-than-average number of low-risk seniors would pay a fee.  Conversely, insurance covering a higher-than-average number of high-risk seniors would receive an incentive payment. . .  Translation:  the government will also step in to help – or punish – any carrier that, as a result of luck-of-the draw (rather than prohibited acts of discrimination) ends up with an unusually high – or low – proportion of high-risk or low-risk customers.

Because they facilitate the separation of the true insurance function from the social-policy function of healthcare insurance, these provisions on risk-based pricing are far more powerful and significant than they may appear to be.

  • The Cap refers to the part of the Ryan Plan that imposes an overall ceiling on the amount the federal government would be permitted to spend on healthcare – i.e., on Premium Support.  This is the most self-evident – and hence the most controversial – of the reforms proposed by either Moore/Ferrara or the Ryan Plan.  The beauty of the cap is that, by virtue of the concept of risk-based-pricing, the cap becomes easy to administer and easy for everyone to identify and understand; no more scurrying around to identify and calculate the costs of the myriad subsidies and cross-subsidies and other disguised healthcare-costs.

 

What the cap would also do is to put into relief the most fundamental impact of the Moore/Ferrara/Ryan reforms:

  • No further prospect of the rationing of healthcare.  Henceforth, the only thing rationed would be government subsidies and financial assistance; the government would ration money, not healthcare.  Of course, to many on the Left, the prospect of rationing money is deeply disturbing; to the Right, it is a fundamental principle of financial survival.  Eventually, we shall have to confront our priorities – do we provide unlimited financial support for the old, the poor, those with special needs, those with greater remaining potential for productivity?  There is no rational way to address these issues without beginning from the pocketbook before the heart; look where the opposite approach has gotten us.
  • Many would consider these reforms to represent the end of Medicare as an extended safety net in the event of catastrophic illness or injury, and they would worry that they might face major assaults upon their “nest egg” in such an event and be driven to applying for additional premium support.  Of course, Medicare has always had limits on its catastrophic coverage, so the affluent are already accustomed to paying extra for supplemental coverage, and the only real effect might be to broaden the market for that kind of coverage.

So, there you have it.  In a single stroke, you have universal access to healthcare insurance that no one can be denied for any reason, all subsidies (overt or covert) are removed from the pricing of healthcare insurance and all policies are priced solely on the basis of risk-profile, and, if the result is that a lot of people cannot afford to buy their policy at its risk-based price, the government steps in, to provide premium support.    And there is absolutely no reason (other than political reasons) why this entire package could not be applied to ALL healthcare insurance, not just Medicare.   With the removal of all embedded subsidies, whether mandated by the Feds or the states or instituted voluntarily by insurers in responses to their perceptions of the market, the market for healthcare insurance policies would instantly become a more rational, information-based market – and hence a more competitive and effective one.  The consumer, for the first time in decades, would be king.

Additional Issues

There would be some details to address:

  • As mentioned, everything about the Ryan Plan except for the insurance exchanges should be implemented; the exchanges should not be implemented at all, and even if they were, Medicare itself should never be allowed to participate.   Indeed, with Medicare having been stripped of its role in the insurance exchanges and having its fee-for-service bureaucracy rendered superfluous by the reimbursement model, Medicare should cease to exist, except as the calculator and administrator of premium support and as the manager of the phase-out of Old Medicare for the benefit of people who are already on it or within a few years of eligibility and who prefer it to the regular insurance market.  The cutoff age for this option should be 62, not 55 (as suggested by the Ryan Plan), so as to eliminate Medicare’s harmful influence as quickly as possible.)
  • The notion of premium support being based upon financial need, with contributions being higher in cases where premiums are higher because of the health-status or age of the insured, raises this question: Should there be a minimum, baseline level of support that is provided to enrollees without regard to the enrollee’s current financial circumstances or history of Medicare contributions?  In its present version, Medicare  is a form of insurance that is free of charge in the sense that most enrollees pay nothing for it (other than a means-adjusted charge for Part B coverage), regardless of age, health, and other risk-profile elements – in other words, the feds deliver (by paying healthcare-providers directly) an overall annual benefit to every enrollee, and that benefit, by virtue of NOT taking risk-profile into account, represents an indirect subsidy in favor of the older and/or less-healthy enrollees.   (It is also an indirect subsidy based inversely upon prior contributions to Medicare – for example, an enrollee whose lifetime income was 10 times the lifetime income of another enrollee, does not get 10 times the level of healthcare in return for his “contributions” to Medicare.  But the innocuous conversion of Medicare contributions into mere income tax payments rather than contributions into a retirement fund, is a topic for another day.)  It is suggested that the answer is, yes, there should be a substantial, minimum baseline for everyone, based upon their contributions into Medicare; it would be politically, and perhaps morally, inappropriate to give nothing back to seniors who have spent a lifetime making “contributions” into Medicare but are today being lectured that their contributions were never really anything more than additional income taxes.
  • While there is a good chance that the modified Moore/Ferrara/Ryan reforms would eventually drive group policies out of the market, it would be wise to legislate group policies out of existence immediately, along with Old Medicare, so as to drain all subsidies and cross-subsidies and differing tax-treatments out of the markets quickly and to thereby expedite the achievement of the cost savings that would result from the full and universal implementation of all of the reforms.
  • The fee-for-service, pay-on-behalf-of-the-patient model of insurance should also be legislated out of existence, along with group policies and Old Medicare, so as to complete re restoration of the true insurance model, with cost-cutting incentives restored to the consumer/patient.
  • Consistently with the Ryan philosophy of driving all the subsidies out of the pricing of healthcare and healthcare services, Emergency Rooms should be compelled to require that every conscious adult seeking admission to the ER present proof of healthcare insurance or sign up at the admissions desk to purchase such insurance; premium support would come into play if the individual proved to be in need of it.  This provision, alone, would eliminate the last of the possible reasons for retaining the notorious Individual Mandate:  the “free-loaders” problem that inspired the drafters of RomneyCare to adopt the original version of the Mandate.

 

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