By John C. Goodman
Originally posted at Forbes, February 2016
On more than one occasion, President Obama has said that the core idea behind Obamacare came from the Heritage Foundation and Politifact rates the claim as “mostly true.” More than one left-of-center commentator has made the same charge, often tracing the lineage from the Heritage building in Washington, DC to Mitt Romney’s health reform in Massachusetts to the Obama administration. Most recently, John Aravosis writing at the America Blog claimed that the core idea behind Obamacare (the individual mandate) comes from a 1989 lecture by Stuart Butler, then a health economist at Heritage. The same notion is almost as common on the right as it is on the left.
There is just one problem. This is all malarkey.
What is ObamaCare? If you sift through the hundreds of pages of legislation, the thousands of pages of regulations and all of the ridiculous complexity you will find that Obamacare in its essence is a bastardized form of what health economists call “managed competition.” Far from being a strange and scary idea, managed competition is the name we give to the health benefits program for federal employees and to similar systems for the employees of most state governments and most state universities.
It is the way Republicans decided to make private, Medicare Advantage health plans available to seniors and it is the way Republicans organized drug coverage under Medicare Part D. It is the way many Medicaid enrollees enter private health plans (which contain about two thirds of the Medicaid population) and it was used in pioneering Medicaid reforms in Florida when Jeb Bush was governor. It is the way private health insurance is provided to the entire population in such countries as Switzerland and the Netherlands.
Now, the Heritage Foundation often boasts that it is influential. And it is. But hey folks, it’s not that influential. The think tank was uniquely involved in Mitt Romney’s health reform. But I am confident that all the other examples I cited above (including Obamacare) would have emerged even if the Heritage Foundation had never existed.
So what is managed competition? There are three elements:
- Insurers compete for enrollees, but must charge community rated premiums (no discrimination based on health status).
- There are strict limits on who can buy and when they can buy and the buyers usually receive a hefty premium subsidy from a third party (employer or government).
- There is a manager (employer, government or insurance company) that is responsible for regulating the market.
Take the first bullet. It means that everybody in the system – every buyer and every seller – is facing the wrong price in every transaction. And that means that every single participant in the market faces perverse incentives.
On the buyer side, everyone potentially will end up with the wrong kind of insurance. Since healthy buyers are over-charged, their incentive is to under-insure. Since less healthy buyers are under-charged, their incentive is to over-insure. On the seller side, the incentive is to attract the healthy and avoid the sick. Once people have enrolled, the perverse incentives don’t go away. The temptation will be to over-provide to the healthy (to keep the ones they have and attract more of them) and to under-provide to the sick (to encourage the exodus of the ones they have and discourage entry by any more of them). See this early analysis by Gerry Musgrave and me, my later testimony on Capitol Hill and my WSJ editorial.
Now let’s turn to the second bullet. These are some of the ways the system limits the ability to act on the perverse incentives it creates on the buyer side. If you are on the outside and you happen to get sick, you can’t enter the federal employee health benefits system and buy cheap insurance unless you are a federal employee. You can’t get into a Medicare Advantage plan or buy Part D drug insurance unless you are already in Medicare. Conversely, if healthy federal enrollees are tempted to go outside the system and buy less expensive insurance elsewhere, the federal government (as employer) will withhold its 72% average contribution to the insurance premium. If healthy Medicare enrollees are tempted to go outside the system for insurance, they will lose out on Medicare’s very large premium subsidy.
Also, to limit the ability of enrollees to game the system by buying a cheaper plan when healthy and then switching to a more generous plan after they get sick, all these systems limit switching to a once-a-year open enrollment period.
That leads to the third bullet. The primary way in which these systems prevent perverse outcomes on the seller side of the market is by a management entity that restricts who can sell in the market and what kind of products they can sell. Often this means promoting a kind of stodgy competition between not very aggressive insurers, including such old line insurers as Blue Cross/Blue Shield.
Even with all these restrictions, we are still left with an artificial market in which everyone’s incentives are distorted. That’s why you need an active manager – whose role is to act preemptively to prevent the worst abuses from occurring. Remember, regulation works best when it nudges people to do what they are inclined to do anyway. Regulation has a very tough hill to climb if it creates economic incentives for people to do perverse things and then tries to keep that from happening.
Compare the employee benefits program with the Obamacare exchanges. In the minds of most observers, the federal employee program works reasonably well. But many of the Obamacare exchanges are approaching unmitigated disaster – probably headed toward a death spiral. Why the difference?
The federal employee system has been around since 1959 – plenty of time for the Office of Personnel Management (which regulates it) to learn by doing. Obamacare, by contrast was designed by Democrats who tend to discount the importance of economic incentives. Perhaps for that reason, the restrictions in bullet two are very weak. Millions of people are able to stay on the outside and enter (just about any time of year) after they get sick. On the seller side, the Obama administration has encouraged dog-eat-dog competition, with almost no management oversight. The result: a race to the bottom in which enrollees face ridiculously high deductibles and narrow networks – as insurers are clearly trying to attract the healthy (with low premiums) and avoid the sick (the only ones who pay attention to networks).
Notice I haven’t said anything so far about a mandate. That is because you can have a mandate without managed completion and you can have managed competition without a mandate.
In Medicare, for example, there is no discrimination on the basis of health status, but no one is required to join. To prevent people from gaming Medicare, seniors who do not join Part B or Part D when they are first eligible are charged an extra premium and the premium penalty grows the longer they wait. If people do not buy Medigap insurance when they are first eligible, they can be underwritten when they eventually apply. Most Republican proposals for replacing Obamacare would work the same way. They implicitly endorse managed competition, however weakly, but they have no mandate.
In his 1989 speech (the one everyone points to), Stuart Butler said everybody should be required to have health insurance. But he did not endorse managed competition. In fact he explicitly rejected the idea, pointing out correctly that special subsidies for those with pre-existing conditions (risk pools) are far more progressive than community rating. Butler said:
Using subsidized risk pools allows high-risk individuals to be subsidized by taxpayers in general. An alternative strategy – mandating insurance coverage without regard to risk – is attractive to some analysts, but it has the defect of pushing up rates for all insured individuals. Thus the cost of protecting the high-risk group is shouldered equally by all insured families. This is far more regressive than using the general tax code to cover these individuals.
It wasn’t until three years later (as far as I can tell) that Butler reversed course and unveiled the Heritage Consumer Choice Health Plan, in which he wrote:
Many of the key features of a consumer-based health care system already exist in the Federal Employee Health Benefit Program (FEHBP).
One more thing. Although Butler often compared the health insurance mandate which he advocated to state laws that mandate auto liability insurance and require seat belt use, that comparison is not quite accurate. If you drive without liability insurance, a judge may take your driver’s license away from you and prevent you from driving at all. Ditto for repeated violations of the seat belt law. However, every health insurance mandate I have ever heard about punishes uninsurance by a simple fine – with the amount specified in law and known in advance.
So if you insure, your taxes will be lower and if you don’t your taxes will be higher. As Chief Justice John Roberts might say, that is no different in principle from what we have been doing for the last 75 years. Since World War II, people who got health insurance from an employer (instead of higher wages) paid lower taxes. If they did not get health insurance, their taxes were higher. Throughout almost all that time the federal government never told the employers what specific benefits they had to include. As long as the insurance was creditable (not a scam) just about anything was permitted. (Some, by the way, call this a “financial mandate.”)
What Obamacare did that was new was increase the tax penalty for being uninsured, increase the tax subsidy for a great many, add tons of regulations about what the insurance had to cover and outlaw insurance that didn’t conform to its mandated benefits and its guaranteed issue rules. However, one could argue (and the administration’s lawyers before the Supreme Court did argue) that Obamacare’s departure from the past represented a difference of degree, not of kind.
Heritage now says it is against a mandate. The think tank even filed an amicus curiae brief asserting that the Obamacare mandate was unconstitutional. But let’s hope they don’t throw the baby out with the bath water.
There is much to commend in the bold approach to health policy that Butler outlined more than 25 years ago. Conservatives should be in favor of using the tax system to encourage private insurance. They should further support an integration of our tax and spending to make sure that taken together they do not encourage uninsurance (and reliance on charity care) rather than insurance, and that they do not encourage public insurance (mainly Medicaid) rather than private insurance. Also, we should take care to make sure everyone gets the same help from the government in obtaining private health insurance, regardless of where the insurance is obtained – at work, in the marketplace or in an exchange. (See the “Do No Harm” approach to health policy and Characteristics of an Ideal Health Care System.)
Back to our original question: where did the idea for managed competition come from? It came from Stanford professor Alain Enthoven, who in 1978 proposed using the federal employee benefits program as a model for a national health care program in a two-part article in the New England Journal of Medicine (see here and here) and then in a subsequent book. Ironically, Enthoven also called his proposal the Consumer Choice Heath Plan, but he did it 14 years earlier than Stuart Butler did.
The Heritage plan is a reincarnation of the Enthoven plan. But whereas Heritage scholars were advising Senate Republicans on a health reform bill in the early 1990s, Enthoven was advising Hillary Clinton. He later renounced HillaryCare as being too much shaped by left wing thinking. But here is what is interesting. Had Hillary Clinton endorsed the Heritage bill, she would have gotten about 80% of everything she wanted from health reform. In fact, the only thing that has really divided the left and the right about health reform for the past 20 years is: How much government regulation should there be?
Bottom line: Heritage has gotten a raw deal from commentators who have misunderstood both history and health economics. Heritage didn’t invent the idea of managed competition and that idea has been a mainstay of Republican health reform for several decades.
Still, my friends at Heritage would have been less susceptible to criticism had they been more willing to listen to others in the health policy community (especially moi). The goals of managed competition can be better reached by a free market approach which gets the incentives right. A bill being introduced by Rep. Pete Sessions and Sen. Bill Cassidy in the next few weeks will do exactly that.