A Conservative Alternative to Obamacare

Uwe E. Reinhardt is an economics professor at Princeton. He has some financial interests in the health care field.

“Escape From Obamacare” was the headline on The Wall Street Journal’s lead editorial on Nov. 14.

Anticipating, or hoping, that the Affordable Care Act will collapse under the weight of its own architecture and the lack of managerial competence with which it is being put in place, The Journal exhorts Republicans to “revitalize and improve the old individual insurance market” as an alternative to the new system.

For decades that “old individual insurance market” was widely viewed as dysfunctional â€" the source of countless pitiable vignettes in the news media of sky-high premiums quoted to sick applicants, skimpy coverage, denials of coverage and rescissions of policies after insured people fell ill. It is precisely these problems that Title 1 of the new law has sought to address.

So it is fair to ask precisely what improvements in that dysfunctional market The Journal has in mind. As is well known, in health reform the angels and the devils live in the details.

Within the limits of an editorial, The Wall Street Journal could, of course, only hint at what such improvements might be. A somewhat fuller specification was offered in an accompanying op-ed piece, “A Conservative Alternative to Obamacare” by Ramesh Ponnuru and Yuval Levin.

These authors also leave many details of their plan unsaid. But I see in it a close cousin of a much more fully developed plan, published by eight distinguished health economists as a monograph commissioned by the American Enterprise Institute.

Details of that plan are available in the monograph, “Best of Both Worlds: Uniting Universal Coverage and Personal Choice in Health Care,” and in a video of a news briefing on the plan, including critical comments by Nina Owcharenko of the Heritage Foundation and Henry Aaron of the Brookings Institution.

Basically, the authors want to get away from redistributing income from the relatively healthy (regardless of their income) to the relatively sick (regardless of their income) through health insurance premiums, as is the case under the community-rated premiums called for under the Affordable Care Act.

The authors propose instead a plan under which health insurers would be free to base their premiums on the individual applicant’s health status, gender, age and family history, as has been the practice in the old individual market.

Redistribution of income would then take place outside of the pricing of health insurance.

It is impossible to do justice to the plan within the confines of this post, which is why I urge readers to pore over it carefully themselves. But in a nutshell, as I understand it, the plan calls for the following:

1. The current tax preference now accorded employment-based health insurance, under which employer-paid health insurance premiums are a tax-deductible business expense but do not count as taxable compensation of employees, would be abolished and, with it, probably much employment-based coverage.

2. Congress would annually specify a basic package of benefits (the “basic plan”) to be offered by all private health insurers choosing to offer that basic plan and any other, more generous policies they may wish to offer on a new, private national health insurance exchange. The contents of the basic plan could fluctuate over time as Congress addresses the nation’s fiscal situation.

3. All insurers participating in the exchange would have to quote each individual applying for coverage a premium for that basic plan, with the premium based on that applicant’s own medical history and that of the applicant’s family.

4. The federal government would provide the individual applicant support toward the premium for the basic plan if that premium exceeded a certain percentage of the applicant’s adjusted gross income.

5. These federal premium support payments would be determined for each individual applicant on the basis of the lowest or second-lowest premium that individual was quoted for the basic plan.

6. Individuals would be free to purchase more generous coverage than the basic plan, at premiums also based on their own and their families’ medical histories.

7. The federal-state Medicaid program would be abolished. Medicaid beneficiaries would be channeled to the new, private national exchange on which they would receive, at no cost to them, coverage for the basic benefit package. That coverage probably would be much leaner than Medicaid’s current fairly comprehensive benefit package.

8. All Americans would pay a small safety-net tax to cover emergency care for individuals who are uninsured at the time of their emergency.

9. Funds now spent on Medicaid ($332 billion in 2011) and tax revenue gained by abolishing the current tax preference for employment-based insurance (about $300 billion a year) would be used to finance the federal premium-support payments.

The authors emphasize that theirs is only a broad sketch of the concept, leaving much flexibility for specifics.

To illustrate their concept, the authors develop a version under which the deductible for the basic plan rises with household income and according to whether the household is “extremely burdened” with health spending. An “extremely burdened” household would be one with income below 600 percent of the federal poverty level and whose medical expenditures in a year are greater than spending by 80 percent of all households in America. Table 3 of the monograph shows these deductibles and other co-payments.

To illustrate, for a family of four with an income of 150 percent of the federal poverty level ($33,525) and “not extremely burdened,” the deductible would be 15 percent of household income ($5,029). The family would also face a 10 percent coinsurance rate on all medical bills. If that household were deemed “extremely burdened,” the deductible would be zero, but the coinsurance rate would still be 10 percent.

By contrast, for a family of four with a household income of 700 percent of the federal poverty level ($156,450), the deductible would be 70 percent of income ($109,515) and the coinsurance rate 20 percent, whether or not the family were “extremely burdened” by medical bills.

At a household income of $223,500 and above, the deductible for this family would be equal to household income and the coinsurance rate would be 20 percent.

Families with high deductibles on the basic plan could, of course, purchase coverage with much lower deductibles, at premiums pegged to their health status and family medical history. Presumably, insurers could deny applicants such coverage, as they can now. Furthermore, it appears that insurers could also rescind policies in force if the applicant had submitted inaccurate health-status data as traditionally they have been able to do.

I salute the eight economists for sketching out for us a plan that seeks to combine premiums pegged on the health status of individuals with income redistribution outside of premium-setting.

The political appeal of such a complicated plan is for each reader to determine.

I also leave it to the reader to imagine the architecture of the new, private national health insurance exchange required by this scheme. It would be even more challenging than is Healthcare.gov under Obamacare.

Like Healthcare.gov, the new private insurance exchange would have to link to the Internal Revenue Service to verify income and to perform the complex calculations for premium support, if any.

That exchange would have to feature a plethora of premium quotes for the basic plan and for all more generous plans likely to be offered on the exchange, which might run into the hundreds.

Finally, to facilitate risk-based, individualized premium setting, that exchange would have to elicit from every applicant information in great detail on the applicant’s medical history and that of his or her family. That intimate information would then be broadcast by the exchange to all private health insurers competing on the exchange.

Is this what a “new, improved old individual health insurance market” might look like?