How to Replace Obamacare

Ever since the Republican Party failed to repeal and replace Obamacare during President Trump’s first term, healthcare reform has slipped off the GOP’s agenda. However, Obamacare’s problems continue to fester, with Americans in the individual health insurance market facing high costs and restricted choices. If the GOP intends to deliver on its pledge to help middle-class families—and especially the young voters who swung to Trump—it must finally honor its broken promise to repeal and replace Obamacare. In doing so, the GOP could look to countries like Australia, Chile, and Germany on how to restructure the individual market.

The U.S. individual market is characterized by a combination of high premiums, high deductibles, restricted provider networks, and poor out-of-network coverage. For instance, Illinois’ Blue Cross Blue Shield PPO plan, with an $8,600 deductible, costs $583 per month for a 45-year-old, while only covering 50% of the costs exceeding the deductible at out-of-network providers like the Cleveland or Mayo clinics. These problems are rooted in Obamacare’s guaranteed-issue and community-rating regulations, which have effectively converted the individual insurance market into what might be called “socialized medicine in corporatist drag.” While Obamacare’s regulations were justified as helping Americans with pre-existing conditions who lost or left their jobs, an issue largely created by long-standing federal tax policies favoring an employer-based healthcare system, its effect has been to degrade the individual market.

Under Obamacare, healthy people with incomes too high to qualify for subsidies have little incentive to proactively buy coverage, since it is possible to enroll in any plan every year during a two-and-a-half-month open enrollment window. As a result, premiums must be set at extortionate levels to cover the costs of the sicker remaining pool. While Obamacare’s individual mandate was intended to curb this effect, it proved ineffective and was repealed by the GOP in 2017.

This principle of adverse selection also works between plans, making those with generous cost-sharing much more expensive, often driving plans including the best providers or offering broad out-of-network coverage out of the market entirely; those expensive plans that cover out-of-network care generally only do so at a 50% reimbursement rate, rather than the 80% rate common among employer PPOs. As such, health care economist John C. Goodman has aptly described individual market plans under Obamacare as “Medicaid with a high deductible.” Ironically, for a nation that is often regarded as a paragon of free enterprise, many self-employed Americans are worse off than in countries with socialized healthcare systems, where coverage providing access to the best private providers can be purchased on the free market.

Ideally, the employer-based health insurance system that led to this mess would be replaced with guaranteed-renewable and nationally portable individual health insurance policies and Health Savings Accounts (HSAs), borrowing features from Singapore’s and Switzerland’s systems in particular. Means-tested tax credits and tax-free HSA contributions would allow and encourage Americans to buy insurance and save for their health care expenses. Individuals with pre-existing conditions would be covered through federally funded high-risk pools. Those who wait to get sick before enrolling in a high-risk pool could be subject to a premium penalty and a waiting period for coverage to commence; in the interim, they would be required to potentially go bankrupt and rely on Medicaid or state, local, or private safety-net care. In addition to solving the pre-existing conditions issue and allowing for more personal choice and stability than the employer-based system, a model based heavily on HSAs would also have other advantages, including cutting managerial bloat, encouraging healthier lifestyles, and allowing people to balance health care against other goods, including leaving a legacy for their family.

However, unwinding the employer-based system at once would create major instability. Therefore, the GOP should seek to revitalize the individual market before attempting fundamental reforms to the health care system that would move it closer to the theoretical ideal.

Free Markets, Healthy Families

The first, more radical, option would be to pass a version of the “Consumer Freedom Act” proposed by Senators Ted Cruz and Mike Lee in 2017. This would allow Americans to purchase the best or cheapest health insurance plan they could find on the free market while preserving the Obamacare exchanges as de facto high-risk pools, with income-based premiums after accounting for subsidies. While there’s a risk of individuals buying skimpy plans and then entering the exchanges after getting sick, it’s already possible not to buy any health insurance at all, and this concern could be addressed by instituting, say, an additional one-year waiting period after open enrollment for coverage to commence, exempting those entering the exchanges from Medicaid or their employers’ or parents’ plans.  

In the long term, a revived individual market could be paired with liberalization of the “Health Reimbursement Accounts” introduced by the first Trump Administration, through which companies can satisfy Obamacare’s employer mandate by transferring funds to their employees to purchase their own coverage. Instead of mandating that workers whose employers offer HRAs purchase ACA-compliant plans, they would also be permitted to buy Consumer Freedom Act policies or transfer the funds to their HSA and pay providers directly. In tandem, these two reforms could move the American health insurance market much closer to the theoretical ideal.

Such a reform would in many ways structurally resemble Germany’s system, in which members of certain classes (workers earning more than around $80,000, the self-employed, and civil servants) are free to opt out of their ACA/Medicare-Advantage-like system of “social” health insurers with mostly homogeneous benefits and wage-based premiums and buy underwritten lifetime individual coverage offering faster access to the best providers (indeed, prior to 2009, these Germans didn’t even face an individual mandate). Even accounting for lower German salaries, these plans are highly affordable by American standards (especially considering that they extend past age 65), with Germany’s largest insurer offering a $460 per month premium and $1,600 deductible for a healthy individual entering his premier plan at 22 (premiums can only subsequently be raised based on the cost of health care, not individual age or health status). A Consumer Freedom Act-established system would differ from Germany’s by offering this option to every American.

If such a plan would be too radical (although it should be embarrassing that many Americans would have better free-market health insurance options if they lived in Germany), then the GOP should take lessons from how individual health insurance markets work in countries with community-rating regulations. In Australia, private health insurance, which offers access to private hospitals and other benefits not covered by the universal public “Medicare” plan, is subject to many of the same regulations as Obamacare. However, enrollees are subject to a more substantial waiting period (usually 12 months) for purchasing and upgrading plans.

Chile’s “ISAPRE” private health insurance plans, to which employees can send their health care payroll tax payments in lieu of the universal public system, and thereby gain access to the best private providers, work similarly. While ISAPREs are required to community-rate their premiums (except based on the age at which a member first joins the system), they are also allowed to impose a waiting period of up to 18 months to cover pre-existing conditions. Although the ISAPRE system has been increasingly overregulated, a lifetime PPO-style individual plan covering at least 80% of patient costs at Chile’s best private providers costs about $280 per month for an individual entering the plan at age 22.

In the American context, a new statutory rule might stipulate that health insurers could impose a 12-month waiting period after open enrollment when a customer upgrades to a plan with a higher metal tier (representing the percentage of expenses that the plan will cover) or more expansive coverage, such as from an HMO to a PPO or between PPOs to a plan with a higher reimbursement rate for out-of-network care. Enrollees with a gap in continuous coverage (that is, not transitioning from an employer-based or public plan or reaching the age of majority) could be subject to this waiting period for any individual plan. This would curb opportunistic behavior and allow plans with generous cost-sharing and provider access to be financially viable. Additionally, the limit for age-based premium rating should be allowed to increase to entice younger people to buy into the market and bring down average premiums. At a minimum, states should be permitted to experiment with such policies.

Of course, conservative efforts to rein in healthcare costs and increase quality must go beyond fixing the insurance market. Expanding the supply of medical care through policies such as reforming professional licensing and FDA approvals, and compelling wealthy countries with government-controlled pharmaceutical pricing to fairly contribute to the fixed costs of innovation, are key to increasing the value delivered by the health care system in the long run. However, the first step is for the GOP to lift a heavy burden on middle-class families, especially the young, by making good on its broken promise to replace Obamacare.

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