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Thursday, December 8, 2016

How to Repeal and Replace Obamacare

Tom Price is in a unique position to affect positive change in the healthcare industry.

President-elect Donald Trump has chosen a leading critic of the Affordable Care Act to lead the Health and Human Services department. “Tom Price is perhaps the person best prepared to oversee the repeal and replacement of Obamacare,” according to the Washington Examiner’s Tim Carney.

In the US, health care costs nearly double what the rest of the developed world is paying per person.

As House Budget Committee chair, Price submitted “one of the most comprehensive Obamacare replacement plans” according to Politico. His team’s Balanced Budget for a Stronger America states clearly: “This budget repeals Obamacare in its entirety – including all of the tax increases, regulations, subsidies, and mandates.” In 2015 Price also submitted an Obamacare replacement plan called the Empowering Patients First Act. This proposal, writes the New York Times, “would take health care in a fundamentally different direction, away from mandated coverage and care and toward a free-market approach, with fewer consumer protections and more freedoms for doctors.”

Vice President-elect Mike Pence recently described Price to Fox News as “someone who literally, for the last half a dozen years, has been in the forefront of efforts, not only to repeal Obamacare, but put forward common sense, free-market solutions that will lower the cost of health insurance, without growing the size of government.”

Jason Miller, Communications Director for the Trump transition team, told the San Francisco Gate that replacing the ACA is “one of the things he’s going to lead the charge on as secretary of HHS.”

Lowering the Cost of Care

Evidence is scant that Obamacare did anything to help with the biggest problem facing the American healthcare system: the cost of care. According to Consumer Reports, health care spending is at $3 trillion, making it alone the world’s fifth-largest economy. In the US, health care costs nearly double what the rest of the developed world is paying per person.

One reason healthcare in America is so expensive is that there are no more actual health insurance companies in this country. Instead, insurance companies have become cost-pools.

Consumer Reports sums it up nicely: “If you have health insurance, you may think [the cost of care] doesn’t matter because someone else is paying the bill.”

Insurance is a smart way to protect yourself financially. Cost-pooling is just a way to pay for your healthcare with other people’s money.

Health care works nothing like other market transactions. As a consumer, you are a bystander to the real action, which takes place between providers—hospitals, doctors, labs, drug companies, and device manufacturers—and the private and governmental entities that pay them. Those same providers are also pushing Americans into newer and more expensive treatments, even when there’s no evidence they’re any better.

Insurance pays for few catastrophic, unforeseen costs out of many small, regular contributions. Cost-pooling pays for all costs for a small group of people out of a larger group of people. That bigger group subsidizes the smaller group’s spending. As should be obvious, insurance is a smart way to protect yourself financially. Cost-pooling is just a way to pay for your healthcare with other people’s money.

“What currently passes for health insurance in America is really just prepaid health care — on a kind of all-you-can-consume buffet card,” San Jose State University Economics instructor Warren C. Gibson wrote. “There is no price transparency. The resulting overconsumption makes premiums skyrocket, and health resources get misallocated relative to genuine wants and needs.”

“There is no such thing as a legitimate price for anything in healthcare,” according to George Halvorson, former chairman of Kaiser Permanente, the giant health maintenance organization based in California. “Prices are made up depending on who the payer is.”

1. Separating employment and health insurance

By killing the requirement that larger employers provide health insurance, the Empowering Patients First Act helps to sever the tie between employment and health insurance. Another method for severing that tie in the bill is a provision that limits how much tax-free health insurance coverage businesses can offer their employees. Individual employee could only get $8,000 worth of tax-free health insurance, and families $20,000, adjusted for inflation.

This means companies are no longer incentivized through the tax code, or required by law, to provide part of an employee compensation through health insurance. This, of course, disincentivizes cost-pooling as employees can spend their paychecks on their healthcare or elsewhere.

It will also raise incomes. Today wages barely keep pace with inflation. Insurance premiums have more than doubled since 2000. In that year, the average family health plan cost companies $6,438 per staffer in 2000. By 2013 it was $16,351. That’s ten grand that would have gone into your paycheck if your employer hadn’t spent it on your health insurance.

2. Incentivizing smart choices

Up to 30% of Americans’ medical care is unnecessary, according to the Congressional Budget Office. This is a natural result of the fee-for-service payment model. It means that a doctor who innovates a way to do with one CT scan what used to require three, is discouraged from implementing the new practice because it means the hospital loses money.

The ACA outlawed catastrophic care plans.

Another example is the $2 million robotic prostate cancer surgery machine. Between its introduction in 2001 and 2014 it went from being used in 6% of prostatectomies in 2004 to 83% in 2014. Yet in that time very little evidence has accrued to indicate that it’s any better than cheaper types of surgery.

The Empowering Patients First Act reduces unnecessary tests and procedures by making people aware of the costs of their care and empowered to make smarter choices.

It does this by subsidizing health savings accounts. With a health savings account, you pay for your care yourself. This means you’ll start caring whether your doctor recommends a treatment that requires one or three CT scans. Because if you pay for three CT scans today, you can’t get lasik surgery tomorrow. Or if you go with robotic surgery, you won’t be able to afford high-end dental fillings.

In this way tax breaks for health savings accounts help attack the cost of care by reducing overconsumption.

3. Re-legalizing low-cost catastrophic care plans

The ACA outlawed catastrophic care plans. By forcing insurers to cover a variety of treatments and procedures of varying necessity, the ACA made low-cost plans illegal.

It also exacerbated the cost-pooling problem by forcing every customer to pay collectively for treatments and procedures that individuals used to pay for.

Even before the ACA many states had outlawed such plans, and the federal government outlawed purchasing low-cost insurance across state lines to support state coverage requirements that include everything from mammograms to maternity stays to well child care.

Unsurprisingly, these new plans are much more expensive and are a big part of why millions of Americans lost their insurance and were forced to buy more expensive plans after the ACA and premiums increased by thousands of dollars in 2014. This rule hit younger, healthier, poorer Americans hardest. Which further guaranteed its failure since younger, healthier, poorer Americans were key to the ACA’s success.

President-elect Donald Trump has promised to make it legal to purchase plans across state lines again. The Empowering Patients First Act also legalizes buying health insurance across state lines. This move could actually lower the cost of care by effectively re-legalizing low-cost plans. Low-cost plans could be attractive to young, healthy people who don’t need cost-pooling, but need actual insurance.

“Community Rating” and “Guaranteed Issue”

Ending the ACA requires gutting “community rating” and “guaranteed issue.”

Community rating is the part of the law that makes it illegal for insurance companies to stick sick people with higher premiums. Politico reports that the Empowering Patients First Act would end community rating.

Right now buyers in many areas have only two choices.

Guaranteed issue forces health insurance companies to accept anyone who applies.

The problem with guaranteed issue and community rating is that they incentivize poorer, healthier people to delay purchasing health insurance until they need it.

The ACA’s tax penalties for not buying coverage were supposed to correct for this problem, but haven’t worked so far. The Empowering Patients First Act eliminates the tax penalty. Instead, it only guarantees that people who already have health insurance can buy a new plan.

The Empowering Patients First Act also eliminates the federal health insurance exchange.

The Death Spiral

It’s important to remember that Tom Price isn’t the biggest threat to the ACA. That honor belongs to the “death spiral.”

Obamacare gives health insurance companies handouts to participate in state-based exchanges. Unfortunately, for the most part only very sick people have signed up. Which means those subsidies aren’t high enough to make participation profitable. Insurance companies’ shareholder obligations leave them with two options: Raise premiums significantly or dump most of their 850,000 exchange customers.

They’re mostly going with the latter. Health insurance company Aetna stopped offering insurance through Obamacare exchanges in most states. After announcing a $300 million loss, the company joins UnitedHealth Group Inc. and Humana Inc. which also lost hundreds of millions of dollars by participating in Obamacare exchanges. Anthem and Cigna have also complained about losses from participation.

Nearly a million people will have to buy a new plan next year because their insurer left the market. Likely more the year after next. But they’re not going to have many options to choose from. Right now buyers in many areas have only two choices. In a growing number of counties, there is no alternative. In 2017 residents of 664 counties will get to choose between one insurer according to a Kaiser Family Foundation report. That’s up from 225 counties in 2016. And that’s before Aetna dropping out. One county, Arizona’s Pinal County, has no insurers.

Unfortunately, a death spiral scenario would lead to millions of American losing their health insurance.

Tom Price is likely to be confirmed to lead Health and Human Services. If confirmed, the former orthopedic surgeon and six-term House member from suburban Atlanta will be the first physician to head the agency since 1993. The American Medical Association (AMA) and Association of American Medical Colleges (AAMC) and the the Association of American Physicians and Surgeons have expressed strong support for his nomination.

But whether he’ll be able to implement the ideas outlined in the Empowering Patients First Act is less certain. Unfortunately for him, popular support for community rating and guaranteed issue is high. Less than a week after winning the election, Trump told reporters he wants to keep the prohibition against insurers denying coverage based on pre-existing conditions.

Rather than letting the death spiral happen, it would be better for Congress to approve measures to break the employer-insurance tie, reveal the cost of care, and legalize actual insurance. These kinds of market-based measures could actually do something about the cost of care, something Obamacare was never going to be able to do.

  • Cathy Reisenwitz is a D.C.-based writer. She is Editor-in-Chief of Sex and the State and her writing has appeared in The Week, Forbes, the Chicago Tribune, The Daily Beast, VICE Motherboard, Reason magazine, Talking Points Memo and other publications.