By John C. Goodman
Originally posted at Forbes, May 2017
Obamacare envisioned a major role for the state governments, often trying to force them to do what they didn’t want to do and harming their citizens in the process. An Obamacare replacement plan will also require considerable implementation at the state level – although this facet of reform has received almost no attention in Congress or in the press coverage of the repeal and replace effort. The difference: Assuming the American Health Care Act (the Ryan bill) is appropriately amended, the additional reforms envisioned here will liberate the states. If they enact these reforms successfully:
- Average premiums in the individual market will be no higher than they were before Obamacare.
- People will be able to purchase insurance that is appropriate for their income and health status, rather than insurance that was designed by hospitals and other special interests.
- For the first time, millions of people will have access to insurance that is truly portable – traveling with them from job to job and in and out of the labor market.
- There will be a vigorously competitive market for cancer care, diabetes and other chronic conditions, in which health plans compete on price, quality and access to care.
- People will have a one-time opportunity to enter the system, without regard to health status; beyond that, people will reap the full benefits and pay the full costs of every subsequent decision.
- People will no longer be trapped in Medicaid and penalized if they opt for private insurance instead.
- Safety net institutions will receive federal funding based on need (number of uninsured) and not based on arbitrary formulas.
Changes needed to prevent the group market from dumping costs onto the individual market. In order to have an individual market that is stable, states must be allowed to keep group plans and other outside sources from imposing unreasonable costs on it. That requires changing federal laws in three important ways.
First, the states should be allowed to impose a small premium tax on all group plans – public and private — including self-insured plans (which under current federal law cannot be subjected to such a tax). The purpose of the tax would be to fund a risk pool or an “invisible risk pool” or a reinsurance system to offset the expense of high-cost individuals who migrate from the group market to the individual market.
Second, the states should be allowed to impose a temporary, small premium tax on all insurance plans, including plans sold in the individual market, for the purpose of offsetting the expense of high-cost individuals who have migrated to the individual market from state risks pools, the federal risk pools and uninsured status.
Third, the states should be allowed to assess public and private sponsors of post-retirement health plans who end their plans and send the enrollees to the individual market. Alternatively, the states should have the authority to allow insurers to charge higher premiums to such enrollees to reflect their average health status.
Changes needed to make risk pools, invisible risk pools and reinsurance work. By itself, a risk pool will not lower the average premium, because it doesn’t lower total costs. Cost reduction requires an outside source of revenue, such as the three changes described above. Also, risk pools weaken incentives for cost control without the additional changes. described below.
The states should have the authority to create a market for risk pool enrollees, where firms can specialize in, say, cancer care, heart care, diabetes, etc., and compete for patients based on cost, quality and access. Health plans should be able to ask health questions, require medical tests, advertise to recruit patients with specific medical conditions and limit enrollment based on health status for the express purpose of getting each patient into the plan that is best for them.
Changes needed to make the individual market work better. Right now, health plans in the Obamacare exchanges are engaged in a race to the bottom in which they are trying to attract the healthy and avoid the sick. After enrollment, the plans face terrible economic incentives: to overprovide to the healthy (to keep the ones they have and attract more of them) and underprovide to the sick (to encourage the exodus of the ones they have and discourage the enrollment of any more of them). Here is how that can change.
States should be able to create a risk adjustment system under which risk payments are based on the health status of individual patients who move from plan to plan, rather than on the finances of insurance companies. For example, if an above-average-cost enrollee moves from Plan A to Plan B, A would be required to pay an extra premium in order to make B’s total compensation actuarially fair. The plans should be free to negotiate the extra payments and set terms and conditions and in other ways engage in privately negotiated, “free market risk adjustment” to replace bureaucratic risk adjustment.
Health plans that participate in such a system should be able to ask health questions, require medical tests in some cases, advertise to recruit patients with specific medical conditions and limit enrollment based on health status for the express purpose of getting each patient into the plan that is best for them. When an individual switches health plans, all medical records and all billing records should automatically travel with the patient unless the patient opts out.
Health plans should also be able to charge higher premiums to people who have been willfully uninsured before enrollment. At a minimum, Medicare Part B and D penalties should apply. States should also be allowed to revert to full underwriting, as is done in the Medigap market.
Under this reform, anyone who has been continuously insured may enter any health plan for the community rated premium paid by every other enrollee. However, if enrollees later choose to upgrade or downgrade they will bear the full actuarial cost and realize the full actuarial benefits of such choices.
Changes needed to make insurance attractive to people with modest means. Obamacare tries to force low-income, healthy families to buy insurance that is inappropriate for their income level and health status. To make health insurance suitable and attractive for these families, three changes are needed.
First, individuals on their own or through an employer should be able to obtain Limited Benefit Insurance with a maximum monetary benefit. The insured’s income and assets will be fully shielded from all medical claims up to that limit.
Second, in every individual market, at least one plan should be available for a premium no greater than the buyer’s federal tax credit. To facilitate this goal, the Secretary should have the authority to override any-willing-provider laws, health insurance mandates, laws limiting drug formularies, all price controls, medical practice regulations, restrictions on telemedicine, restrictions on the corporate practice of medicine and any Stark-like restrictions on doctor ownership of facilities that interfere with this goal.
Finally, employers, tax preparers, medical providers, employees administering entitlement benefits and others should be able to automatically enroll people in minimum coverage plans and federal/state entitlement programs can require enrollment as a condition of receipt of benefits.
Changes needed to integrate the individual and group markets. Obamacare establishes wildly differ subsidies in the individual and group markets and for that reason tries to erect a firewall between the two sectors. Such a barrier distorts economic incentives and makes it almost impossible for markets to solve the problem of pre-existing conditions. In an ideal system, the government subsidy would be universal (at least for people at the same income level) and with that foundation in place, we should strive to promote integration rather than separation.
Specifically, employers should be able to purchase individually owned insurance for their employees (as small business can now do under the 21st Century Cures Act) with pre-tax or after-tax dollars. Employers should also be able to offer their employees a fixed sum contribution to portable health insurance, that is owned by the employee and that is purchased by the employee in the individual market.
Changes needed to integrate Medicaid and private insurance. A very high percent of people who live near the poverty line find that they are eligible and then ineligible for Medicaid many times over the span of only a few years. To promote continuous coverage as well as better coverage, health reform should encourage private insurance wherever possible.
For example, states should be able to use their share of Medicaid funding to supplement the federal health insurance tax credit – both for individual plans and for employer-sponsored plans. In addition, Medicaid contractors that administer benefits for Medicaid patients should be able to offer the same plan to non-Medicaid enrollees in the individual market. Further, as the enrollee’s income rises and falls – above and below Medicaid eligibility – individuals shall be able to remain in their health plan, even though the level of federal subsidy varies.