The Senate Bill Doesn’t Repeal Obamacare. Here’s Why It Should.

Chris Medrano & Luke Robson

On Thursday, June 22nd, Senate Republicans released their version of the American Health Care Act (AHCA). In terms of popularity, not much has changed since the House released their version of the bill. Very few Americans like it.

We are among them, but for different reasons. From our point of view, the Senate bill is bad because it does not actually repeal the Affordable Care Act (Obamacare) regulations.

It’s important to realize how Obamacare has impacted our healthcare system. Repealing it is not just about keeping a campaign promise, it’s about creating an environment where healthcare providers are incentivized to meet the needs of millions of patients.

The following “mondoblog” is divided into 5 parts that explore different aspects of Obamacare.

  1. Why Obamacare’s three-pronged structure is unsustainable
  2. Obamacare’s regulations are what have driven prices up
  3. Alternatives to the mandates for pre-existing conditions
  4. Medicaid should not be the future of healthcare
  5. A vision for true market reforms

We include links to other relevant articles throughout the blog. Some things we don’t address are the effects of Essential Health Benefits (EHBs) mandates, Obamacare’s taxes, or the methodology behind the Congressional Budget Office’s (CBO) estimates. We also don’t address single-payer healthcare and how to compare complex systems with vastly different populations.

Whatever side you are on, we hope this blog offers fresh perspective on what is perhaps the most important domestic policy debate of the century.

Part 1: Obamacare’s structure is unsustainable.

Before we abolish Obamacare, it is worth exploring what Obamacare was originally meant to do. Obamacare is a system designed to give health insurance to people with preexisting conditions.

The law is commonly referred to by its architects as a three-legged stool because it has three main components.

  • Leg #1: Mandates to cover preexisting conditions-The mandates to get coverage to people with preexisting conditions are known as community rating (prohibition on charging sick people more money) and guaranteed issue (insurance companies must give people insurance).
  • Leg #2: Individual mandate-According to the law, every person is required to buy health insurance or face a penalty. This mandate was made to prevent adverse selection, which can lead to a death spiral in the insurance market (more on that later).
  • Leg #3: Subsidies and Medicaid expansion for low-income people-If you’re going to be forced to buy something, you should at least have the means to do so. That is why Obamacare gives subsidies for those who can’t afford the market price of insurance, and the law also expanded Medicaid so more people could have coverage too.

This structure is very problematic because prices were always going to skyrocket from the outset.

First, community rating and guaranteed issue generally mean higher prices for insurance pools. The Daily Signal reports a recent study by Milliman shows that just those two regulations have raised premiums by 15-30 percent and 19-35 percent respectively. Prices went up because insurers base prices on risk factors. By forcing more sick people into insurance pools, these two regulations forced insurers to charge higher premiums on everyone.

Second, the pre-existing conditions mandates created perverse incentives for the insurance model and affected the viability of Obamacare’s second leg, the individual mandate.

Because the price of insurance is so high, healthy people have chosen to forego insurance and pay the penalty for violating the individual mandate. Likewise, Obamacare’s mandates for preexisting conditions have resulted in people waiting until they are sick to get insurance.

This dynamic is dangerous. When healthy people leave the insurance pool, the pool becomes riskier. In response to the increased risk, insurers have to raise prices again. This creates an adverse selection cycle, which can eventually lead to a phenomenon in the insurance market called a death spiral, in which all the insurers leave and stop selling plans.

Currently, Obamacare’s exchanges are being sustained by billions of dollars in corporate welfare in order to keep them from entering a death spiral. That would be disastrous for millions of people. We’re already starting to see insurers drop out of the market, leaving tens of thousands without coverage.

Part 2: The effect of Obamacare’s regulations on prices and quality of coverage.

President Obama made specific promises about Obamacare. He promised that healthcare costs would go down, and that no one would lose their plans or their doctors. Both have proven to be false. Obamacare’s structure has caused premiums to skyrocket, deductibles to go up, and provider networks to narrow.  While the law did increase raw coverage numbers and certainly helped some people, it made access to actual care more expensive and limited.

This leads to a broader point about healthcare policy: Anyone can hand out pieces of plastic insurance cards and increase the number of insured people. But coverage does not equal care. Delivering quality healthcare requires the right incentives on the part of both the providers and consumers.

Premiums

As we mentioned before, Obamacare has caused premiums to go up. But how much of the increases were Obamacare’s fault? The data reveals the impact was severe. Robert Book writes in Forbes on data from EHealth:

It turns out that across the board, for all ages and family sizes, for HMO, PPO, and POS plans, premium increases averaged about 60 percent from 2013, the last year before ACA reforms took effect, to 2017. In same length of time preceding that, all groups experienced premium increases of less than 10 percent, and most age groups actually experienced premium decreases, on average.

These price increases were clearly foreseeable. Obamacare forced more inputs into every insurance plan. Of course their prices were going to rise.

Deductibles

Along with premiums, deductibles have also risen. The Kaiser Family Foundation found that the average deductible for a worker with single coverage was $1,478 in 2016, up $486 (49 percent) since 2011. In 2017 alone, the average deductibles for the cheapest plan for individuals and the bronze plan for families are $6,000 and $12,393, respectively.

As a result of these high deductibles, even those who are covered by Obamacare often can’t afford to get sick for fear of paying thousands in out-of-pocket costs. This problem is very widespread. A Commonwealth Fund study found that 4 out of 10 adults who are covered under the exchanges are not confident they can afford care. It’s not wonder, then, that one New York Times article declared Obamacare coverage “all but useless.”

Smaller Networks

Another unfortunate problem with Obamacare is the limited networks. To save money from an increased demand of sick patients, insurance companies turned to creating more narrow networks of health providers. In November of 2015, one headline of U.S. News read “Doctors, Hospitals Say ‘No’ to Obamacare Plans.” The article reads:

Doctors or hospitals may be left out of insurance networks for many reasons; the decision is usually up to the insurance company, not the provider, but it usually comes down to reimbursement, which can be lower through plans obtained via the Obamacare marketplace.

Another health provider told CNN “the Affordable Care Act has negatively affected [doctors’] reimbursements,…added non-clinical duties and paperwork, and [doctors have] to see more patients to keep up with expenses.”

It is a tragedy when private, non-group insurance patients face the same problem of low reimbursement as Medicaid patients.

It is also important to mention the market-wide impact of Obamacare on networks. Because of the instability caused by Obamacare’s regulations, insurers are dropping out of the exchanges like flies.  Axios has created a map which shows just how many insurers have dropped out since 2014. The Kaiser Family Foundation reports even more are expected to drop out next year.

Part 3: Alternative to Community Rating and Guaranteed Issue.

Obamacare’s pre-existing mandates are the most popular part of the law, which is why Republicans don’t want to repeal them. But just because a solution is popular doesn’t mean it’s right or the only way to fix a problem.

The public must understand the following: Insuring people for preexisting conditions makes zero sense. The whole point of insurance is to mitigate the risk of future ailments. If someone has a preexisting condition, they don’t need insurance, they need immediate care and treatment. Community rating and guaranteed issue essentially force insurers to abdicate their role as insurers and take up the role of subsidizers.

The good news is that there are other, better ways to treat people with preexisting conditions that lead to lower costs and don’t compromise insurance incentives.

The government would do better by simply providing subsidies to sick people rather than tying the entire system down through community rating. High-risk pools, which isolate the cost of pre-existing conditions, are the best structure to do this. While high-risk pools are not a perfect solution, they are certainly better than community rating, which has caused prices to skyrocket for everyone.

Healthcare economists Joel Allumbaugh, Tarren Bragdon, and Josh Archambault offer a better way to administer high-risk pools than they way they have traditionally been run. In Health Affairs Blog, they recount how Maine also faced the problem of skyrocketing premiums due to community rating and guaranteed issue.

In 1993, Maine policymakers imposed guaranteed issue and community rating requirements on all individual insurance plans…[The] net result of Maine’s changes was a perverse incentive for individuals to wait until they were sick to purchase coverage. As average claims increased, premiums and deductibles for everyone skyrocketed…Insurers fled the market, and premiums more than doubled between 1995 and 2001 as the market deteriorated.

Just like under Obamacare, community rating and guaranteed issue hurt Maine’s markets. Today, the U.S. should follow Maine’s example and abandon these mandates.

Instead of doling more taxpayer money, Maine changed their system by allowing insurance companies to charge high-risk patients more and forming invisible high-risk pools. Their risk pools were different than normal risk pools in that they kept high-risk individuals in the market so they could pay market price. 

Maine then took care of the preexisting conditions through a system of reinsurance. These risk pools allowed the government to direct funds to address the most costly diseases. So instead of raising rates on everybody and incentivizing healthy people to leave, the new system began to allow the government to shoulder costs.

The results in Maine speak for themselves.

As a result of these changes, individuals in their early 20s were able to see premium savings of nearly $5000 per year, while applicants in their 60s saw savings of more than $7000. As premiums dropped, more young and healthy applicants entered the market, total enrollment increased for the primary insurer in the market, and the individual market’s multi-year death spiral was finally reversed.

States should be free to adopt successful policies like these. Allumbaugh, Bragdon and Archambault emphasize that there needs to be more flexible federal policy towards how states regulate markets. This is something that Speaker Paul Ryan has stressed and that Congress ought to pursue.

Another important change that would help people with preexisting conditions would be to disconnect insurance from employment so that sick people don’t lose their insurance when they lose their job. This concept is called portability, and can be accomplished through Health Savings Accounts (HSA’s) and changing the tax code (more on that later). 

However elected officials decide to treat people with preexisting conditions, we need to understand that the best way to help them is to reform the system to lower costs.

Part 4: Obamacare made Medicaid the status quo

Subsidies and the Medicaid expansion are what make up the third leg of Obamacare. This leg is the area where there can be the most compromise. There are different proposals to make sure people aren’t suddenly dropped.Whatever happens, the program needs to be put on a sustainable course for the future.

It has been well-documented that Medicaid has significantly worse care, more fraud, and patients experience worse health outcomes than those who have private insurance. Instead of working to make private health insurance more affordable, Obamacare made Medicaid the status quo. This diverted the program’s resources away from the most vulnerable who need it.

To be clear, we don’t want to abolish the safety net, but we believe it should be reserved for the most vulnerable. Medicaid was meant for pregnant women, disabled people, and those who simply can’t afford care. Obamacare expanded Medicaid to include working-age, childless adults above the poverty line.

Expanding Medicaid expands one of the least efficient sections of our nation’s healthcare system. Instead of pushing everyone into a bad system, Congress should reform the current system so that the outrageous price trajectory of healthcare will go down.

Medicaid is significantly worse than private insurance.

In 2011, Dr. Donald Berwick, the official in charge of Medicare and Medicaid, spoke out against waste in the medical system. Dr. Berwick estimated that 20 to 30 percent of expenditures in Medicare and Medicaid were avoidable.

Berwick narrowed the reasons for waste down to five key offenders: overtreatment of patients, failure to coordinate care, administrative complexity, burdensome rules, and fraud. There is plenty of room to hide needless costs and charges in the healthcare system due to the complexity of the regulations imposed by the federal government on healthcare officials.

As a result, those receiving aid from Medicaid are facing real problems. 37 percent of Medicaid recipients reported that they had trouble getting their health insurance to pay for care, or faced problems with finding insurance providers willing to accept coverage. 46 percent of those covered by Medicaid also reported having to delay care to the cost it would incur. A 2012 federal study found that only 40 percent of New Jersey doctors would accept new Medicaid patients. These doctors are turning patients away due to low payment rates among that group.

Study after study shows that Medicaid has significantly worse outcomes than private insurance. An overview of these studies has been compiled by health analyst Avik Roy in his book How Medicaid Fails the Poor and that he went into depth in a Forbes piece.

Here are just a couple studies that show Medicaid has inferior care:

One study from 2013 published in the New England Journal of Medicine showed that Oregon’s expansion of Medicaid “generated no significant improvements in measured physical health outcomes in the first 2 years.”

Another study showed that Medicaid patients who underwent surgery, adjusted for external factors, had increased risk of mortality.

Medicaid Expansion hurts the most vulnerable.

One of the unfortunate consequences of expanding Medicaid is that those who need it the most were pushed aside to accommodate working-age, childless adults above the poverty line. Today, over 600,000 disabled people are on waiting lists for care. One of them is a girl from Arkansas, Skyler Overman,. She has been on a waiting list her whole life for a neurological condition. After Obamacare was passed, she dropped 100 spaces on the list.

Christopher Jacobs gives further examples across the country. He writes,

Illinois cut medication funding for special needs-children on the same day it voted to expand Medicaid under Obamacare, and Ohio Gov. John Kasich cut eligibility for 34,000 individuals with disabilities, even while expanding the Medicaid program to the able-bodied.

Again, we are not saying Medicaid has no value at all. We are saying that it was a grave mistake to force millions of people onto an already inferior program reserved for the least fortunate. Instead, our government should have addressed the root problem of skyrocketing costs in our system.

Medicaid costs are unsustainable

Recently, Democrat lawmakers in Oregon told the media they are considering cutting their Medicaid expansion. The HealthPayer Intelligence reports that “The Oregon state legislature is considering a retraction of Medicaid expansion and benefits to address an anticipated $1.8 billion budget shortfall between 2017 and 2019.”

Indeed, states around the country are beginning to realize that expanding Medicaid to cover more people came at a significant cost. The cost of Medicaid expansion per enrollee has increased by 49 percent more than expected.

Talking about money and healthcare is not inhumane, it’s moral. Healthcare, like other goods and services, is subject to the force of supply, demand, and scarcity. As Charles Blahous writes in his piece “Medicaid Scare Tactics Are Irresponsible”,

Medicaid serves a sympathetic low-income population.  This purpose, however, does not lessen the necessity of placing the program on a financially sustainable course.  Nor does it eliminate lawmakers’ obligation to prioritize how Medicaid dollars are best spent.

Currently, the Senate bill makes modest cuts to Medicaid similar to those other states have already made, and which Democrats have advocated for in the past. This effort to empower states to make better decisions ought to be commended. But Congress shouldn’t stop there. We need to address the root problem of high costs that is plaguing healthcare, so people don’t have to resort to Medicaid.

People will die (?)

The Senate’s current bill cuts the rate of growth of medicaid spending and incentivizes states to try more cost-effective structures and pilot programs. Democratic lawmakers once advocated for similar reforms to rein in costs.

Unfortunately, many politicians and interests groups with a different agenda have put forth outlandish rhetoric that Republicans want to kill people. Studies that purport this are based on faulty assumptions about the effect of Medicaid and insurance coverage on mortality, as well as unrealistic expectations of who will have insurance in the future under Obamacare.

For further reading, Oren Cass of the Manhattan institute has written a great report on the subject. Also, click here to read about the CBO’s faulty scoring of the AHCA and why their score of the number of people who will lose insurance in the future is wrong.

If you are interested, also check out Remy Munasifi’s hilarious video for Reason which puts the rhetoric in context. Aside from being humorous, his examples are actually pretty fair when you compare the numbers.

Part 5: A vision for better healthcare.

We are not anarchists. We believe the government has a role in upholding contracts and the safety net plays an important function. But we would do better with much less government in healthcare.

The free market is the best system known to man to increase choice and competition and bring prices down. As Arthur Brooks of the American Enterprise Institute has noted, free enterprise and capitalism are proven to increase quality and have helped billions of people escape grinding poverty. This is widely accepted, and even President Obama acknowledged that choice and competition are key to lowering prices.

While U.S. healthcare is more market-based than single-payer countries, it is significantly less free than countries like Switzerland, the Netherlands, or Singapore. The U.S. government plays a heavy role in regulating the industry. As of 2015, 85 percent of the country got their healthcare from the government or their employer due to special tax incentive.

There are many ill-conceived regulations at the state and federal level that need to change. The biggest distortion, however, is the tax exclusion for employer-provided healthcare, commonly referred to as the “original sin” of American healthcare. This antiquated policy has kept a real market from working by making employers a sort of middleman, or third party.

In 2008, John McCain ran on a platform of equalizing the tax code. Then-candidate Barack Obama lambasted him for this, and mischaracterized his plan as “taxing health benefits for the first time ever.” This foolish rhetoric has prevented real reform.

We need to change our third-party system and create a true market where providers get ahead by serving patients.

Consumer-Driven Healthcare Success

One major objection to consumer-driven healthcare is that patients don’t have the knowledge to make decisions. This argument first came from Stanford economist Kenneth Arrow in 1963. Since Arrow made this argument, however, many things have changed in the healthcare industry and new evidence shows his points were grossly overstated..

There is ample evidence that consumer-driven healthcare leads to less spending and does not adversely affect health outcomes. In his book, Priceless, economist and healthcare expert John Goodman (no, not the actor) recounts that over 30 years ago, a study by the RAND corporation concluded that patients who controlled their own healthcare spending through HSAs spent less and experienced no negative impact on their health.

Since that study, there have been many experiments in consumer-driven healthcare in Singapore, South Africa, as well as pilot programs in the United States.

Goodman writes:

Virtually every serious study of consumer-directed healthcare has reached conclusions similar to the original RAND research. One of the most comprehensive of these (though not as comprehensive as the original) was conducted by RAND itself. The new study concludes that people with high-deductible plans and HSAs spend about 30 percent less on healthcare than those with conventional coverage, with no apparent effects on health.

The new RAND study found that the same was true for low-income and high risk patients.  These studies show that consumer-driven healthcare can work.

Real results

There are also plenty of anecdotal examples of markets working to lower prices on quality care. One example is the Oklahoma Surgery Center (OSC), a free-market loving hospital that posts its prices online. By exposing its costs and allowing patients to choose which services they will use, the OSC has lowered surgery costs exponentially.

Matthew Gang was facing a $30,000 bill for his knee surgery in his home state of California. At OSC, that bill was reduced to $5,700, a reduction of 81%.

In order to perform these surgeries at such a low cost, the OSC has been forced to become a cash-only business. Despite these runarounds, the OSC has remained successful. It has only had to adjust its price list twice, to lower the prices.

This trend in cost reduction is also seen in areas of healthcare where there is little government involvement and price transparency. Healthcare procedures like LASIK and cosmetic surgery, where the government isn’t nearly as involved, have seen prices go down compared to the rest of the healthcare industry in which prices far outpace the consumer price index.

Contrary to those who advocate more government intervention in healthcare, patients can make decisions as consumers and save money in the process. Moreover, many health wonks on the left still hold 2017 to the standard of 1920’s insurance models. But insurance has changed and structures exist to mitigate the harm that providers will profit by hurting sick people. It is government intervention that has made these models less accessible. Taking away patients’ decision rights and clouding the market with third parties has only given providers and insurance companies more leverage to raise prices.

Conclusion:

For people who believe that market-centered reforms can fix our healthcare system, the current situation is frustrating. The Senate’s bill keeps most of Obamacare’s worst parts and does not move our system in a direction that puts patients first.

Part of the problem is political. But a wider problem is that the Senate is not working from a place of concrete theory. Reason’s Peter Suderman describes their attitude in the following way: “We don’t have a theory of our own, we just don’t like [Obamacare] so we are going to do less of it.” Unfortunately, the executive branch seems much less interested in casting a concrete vision for healthcare than the legislative branch.

Going forward, it is unlikely that Obamacare will actually be repealed. Nonetheless, it is important for everyone to think critically about the issue and look at the facts, costs and benefits of different policies.

To the people who may not agree with the position presented in this blog post, thank you for reading this. Part of the problem with politics is that neither side takes the time to look at what the other side has to say.  We appreciate that you are exploring opposing ideas.

In the meantime, please subscribe to 3rd Law’s email list for our monthly newsletter to read future content.

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