How Republicans Think About Health Care: Three Parallel Universes

By John C. Goodman

Originally posted at Forbes, June 2017

Here is the one public policy question I am asked more than all others put together: What’s wrong with the Republicans? Today I will give the answer.

For the past seven years, Republicans have condemned Obamacare in virtually every speech. They have voted to repeal all or parts of it on 60 occasions. They have promised their own voters an alternative – again and again. But when their turn came – with Republicans in charge of both Houses of Congress and a Republican president – they weren’t ready.

It’s worse than that. In seven years, they have not held a single hearing on the matter. They have called no witnesses. They have conducted not a single seminar or briefing worthy of the name. They have neglected to reach out to the think tank community and health policy scholars for suggestions and advice.

Why is that?

To understand the answer, you must be aware of three parallel universes. Republicans in any one of these rarely interact with their colleagues in the other two. And when they do, the effects are not long lasting.

Let’s take a closer look.

Universe One: The Cafeteria Reformers. Until recently, the vast majority of Republican office holders believed that replacing Obamacare would be easy. We’ll simply keep the features we like and discard those we don’t like, they thought. For example, the individual and employer mandates are out. Protection of pre-existing conditions is in. The Obamacare taxes are out, but tax relief for people who buy their own insurance needs to stay.

Such picking and choosing seems so easy, who needs a hearing? Who needs witnesses? What requires more than a few seconds thought?

And indeed, the entire House Republican debate last spring was completely one dimensional: how much of Obamacare is to be kept and how much is to be jettisoned? There was really nothing more to it than that.

The problem with the cafeteria approach is that these choices are not independent of each other. For example, if insurers are not allowed to charge more for a pre-existing condition and people face no penalty for being uninsured, healthy people will stay uninsured until they get sick. Premiums will soar and the whole market will go into a death spiral. Suppose there is a tax subsidy in the individual market that is not available for people in the group market and there is no employer mandate. Then, employers of low-wage workers will have an incentive to drop their coverage, pay higher wages instead and let their employees buy individual insurance whenever the need arises. If you repeal all the Obamacare taxes, there will be a lot less money to fund tax relief for individual purchasers.

Health care is an unbelievably complex system. As I explained in Priceless, change one part of it and there will likely be unintended and unwanted consequences somewhere else.

Most Republicans on Capitol Hill were surprised when the Congressional Budget Office predicted that their plan will cause the number of uninsured to shoot through the roof. Although one can quibble about the exact number (24 million is the latest estimate), any decent health economist would have predicted bad results at the drop of a hat.

The vast majority of Republican office holders belong to the cafeteria reformer universe precisely because they don’t know anything about health economics. To be fair, most Democrats don’t know anything about it either.

Universe Two: The Luddite Reformers. Unlike the cafeteria reformers, Republicans in the luddite universe understand that health policy is complex. If there is to be tax relief for people who buy their own insurance, what kind of tax relief? Should it be a deduction? Or a credit? If a credit, how would it work? Should it be refundable? Advanceable? Transferable? And should the credit be available only in the individual market? Or should it also be available to those who get insurance at work?

If people are not going to be allowed to game the system, what penalty should be faced by those who wait to insure until after they get sick? Should it be the same as the penalties in Medicare Part B and D or in the Medigap market? Or something else?

Readers may be surprised to learn that, even though the luddite universe is small it has spawned vigorous debates over these issues – stretching back for three decades. The debates seem to recur in cycles. Every time it appears these issues are settled, we have only to wait another ten years (with a new crop of staffers) and they emerge all over again.

About the time of Hillary Care, just about every Republican senator agreed to a proposal that contained a refundable tax credit for health insurance. Then, a decade later, tax credits became a matter of intense internal debate within the George W. Bush Administration. The issue seemed to have been settled again when John McCain proposed a universal health tax credit in his presidential campaign against Barrack Obama. The case was closed for just about every Republican candidate running for office that year. But the debate emerged all over again when it came time to replace Obamacare.

A similar roller coaster of preference occurred within the think tank community. If you check out the first few pages of my book Patient Power (Cato: 1992), you will find that virtually every right-of-center think tank had a scholar who signed on to the tax credit approach. Under the auspices of the Consensus Group, this continued to be the think tank consensus throughout the 1990s. But today, that consensus has vanished. For example, there is serious opposition to tax credits at the Hoover Institution (a prior home for me!) and the Cato institute (which published my book!). Even the Heritage Foundation seems to be waffling.

For the moment, these debates have been stifled because Paul Ryan has come down forcefully on the side of tax credits. To help with that effort, Jim Capretta has been instrumental in designing a tax credit for a number of Republican proposals. He argues that the credits should vary by age. Avik Roy, in The New York Times, argues that tax credits should vary by income. Yet, it’s hard for these ideas to get a proper hearing in a party dominated by cafeteria reformers who think these distinctions are largely unimportant.

So, why are they luddites? Because every problem is seen through the lens of the past and every solution is drawn from the past. Luddites are naturally resistant to any idea they haven’t heard several times before. And there is one idea the luddites latched onto years ago.

No matter how they come down on tax credits or any of the attributes of tax credits, the entire conservative health policy community, with very few exceptions, has brought into the managed competition model, hook line and sinker. Think of the luddites as fellow travelers.

Because the vision of the conservative health policy community is the same as the vision of Obamacare, some have called their proposals “Obamacare lite.” That may be unfair. What is fair is this: In so far as they do anything at all, every proposal in the luddite universe has the same aim — to make what Obamacare started work better. Aside from Medicaid block grants (an old idea), they don’t do anything more than that.

Universe Three: The Visionary Reformers. These are the folks who really believe in health care reform – and there are only three or four of them in the entire Congress. Instead of focusing on the problems and solutions of the past, Republicans in this universe begin by envisioning an ideal health care system and then asking how we can get there. Not surprisingly, the tools needed are totally different from the tool kit in the luddite universe.

For example, in an ideal world people would choose between third-party insurance and individual self-insurance on a level playing field under the tax law. The appropriate amount of each should be determined by individual choice and competition in the marketplace, not by the tax writing committees of the US Congress. In a 1995 Health Affairs article, Mark Pauly and I showed that to achieve that goal we need to match a health tax credit with a Roth account. Yet two decades later, the idea of a Roth Health Saving Account has still not penetrated the luddite universe.

In an ideal world, chronic patients who manage their own care would be able to manage the money that pays for that care, without tax penalty. HSAs for the chronically ill is an idea I proposed many years ago and it has been a reality for home bound, disabled Medicaid patients for two decades or more. Yet, luddites can’t seem to grasp it – even though virtually every luddite health reform has called for a liberalization of HSAs.

In an ideal world, centers of excellence would specialize in the treatment of cancer, heart disease, AIDS, diabetes and other costly health conditions. They would reach out to patients with these conditions through print, broadcast and social media and in other ways. Instead of running away from the sick — with narrow networks and high out-of-pocket drug charges – the way plans in the Obamacare exchanges are doing — these plans would compete for patients based on price, quality and access to care. To make that work we need a new type of risk adjustment, made possible by Health Status Insurance – something that would have happened naturally had the free market not been completely suppressed. Yet, this is a concept the luddites have never heard of.

If health insurance is to meet family needs rather than special interest needs, we need a new type of insurance for young, healthy families. Linda Gorman and I call it Limited Benefit Insurance in a post at Forbes. This is another idea that has yet to penetrate the luddite world view.

The role of the employer in an ideal world should be determined in the marketplace – with employers providing insurance only if they can offer a better deal than individuals can get on their own. A level playing field requires treating individual insurance and group insurance the same under the tax law. Also in an ideal world, employers and employees would be able to choose individually owned portable insurance rather than non-portable group insurance, without tax penalty.  Yet, these additional ideas are missing in every luddite health proposal.

In an ideal insurance system, group insurers (with 94% of the market) would not be allowed to dump their sickest, most costly enrollees onto non-group insurers (with 6% of the market). As long as individuals have the freedom to work or not work and as long as we have a prohibition on discriminating against pre-existing conditions for the previously insured, group insurance must pay a small premium tax in order to fund the external costs it creates when its high-cost enrollees transition to the individual market. (You can think of this as a government imposed extension of Health Status Insurance – something else that would have happened naturally, had the private market been left alone.) Although the luddites have endorsed risk pools (another old idea), they seem to have no understanding of what their purpose is or where the funding should come from or why.

An ideal system does not blithely assume that if everyone is offered a tax credit for health insurance, there will be no need for a safety net. To the contrary, there will always be people who turn down the offer and remain uninsured. Some portion of these unclaimed tax credits should be available to safety net institutions and money should follow people. The more uninsured there are in a community, the greater should be the level of safety net funding. Yet the idea of integrating tax credits and safety funding has been completely ignored in every single luddite proposal.

Finally, an ideal system does not trap low-income families into inferior health insurance with rationing by waiting. Instead, these families should be able to use their Medicaid dollars to buy into any plan available in the private marketplace. As their income rises and falls, and as eligibility comes and goes, there is no reason for anyone to be forcibly ejected from a plan that meets their needs.

A new type of insurance, a new type of HSA, a new type of risk adjustment, a new type of tax treatment for employer plans, integrating tax credits into a workable safety net, integrating Medicaid into the private insurance system, protecting the individual market against unreasonable “dumping” by the group market – these ideas (essential to an ideal system) are foreign to both the cafeteria reformers and the luddite reformers. That’s why they are nowhere to be found in the House Republican health plan.

If Republicans are not careful, they won’t be in the Senate plan either.

This article was originally posted at Forbes on June 5, 2017.