A Time for Governing

Policy Solutions from the Pages of National Affairs

Yuval Levin, Meghan Clyne

• Publisher: Encounter Books
• Year: 2012
• Print ISBN: 9781594036576
• eBook ISBN: 9781594036583
• Topic: Politics & International Relations
• Subtopic: American Government
• Index: Politics & International Relations

America finds itself in a moment of profound and complex governing challenges. A crushing recession followed by a feeble recovery have shaken the foundations of our financial and economic system. We are struggling with the exploding costs of health-care and entitlement spending, and fiscal disaster looms as our society ages. American families are anxious about wage stagnation, barriers to social mobility, and the nation’s competitiveness in an era of globalization. Meanwhile, our large governing institutions — most of them designed several decades ago — are showing signs of strain and decay, calling out for serious reform. National Affairs, a quarterly journal of essays on domestic policy and political economy, was launched in 2009 to help Americans think more clearly about these problems and to develop promising solutions. This book is a collection of some of the most timely and concrete policy proposals published in the journal’s pages, offering ideas for reforming our welfare state, our tax system, financial regulation, monetary policy, education, state finances, and more. Each essay was written by a prominent expert in the field—the authors are all notable right-leaning academics, policy experts, former government officials, or think tank scholars with national reputations. The book thus comprises a ready-made domestic policy agenda for conservative policymakers (including a Republican president, should one be elected in 2012), based on the latest and best thinking from the world of conservative policy intellectuals. It will be the only resource of its kind in this election year—a one-stop-shop for conservative policy ideas.

II. REFORMING THE WELFARE STATE

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How to Replace Obamacare

James C. Capretta and Robert E. Moffit

SPRING 2012

WHEN THE PATIENT PROTECTION AND AFFORDABLE CARE ACT (commonly known as “Obamacare”) was signed into law in the spring of 2010, congressional opponents vowed that the fight was not over. The most disastrous features of the new law would not take effect until 2014, leaving time for a concerted campaign to avert catastrophe. The way to spend that time, these opponents argued, was working to “repeal and replace” the law that Congress had just enacted.

The “repeal and replace” formulation quickly caught on, but it was not without its critics. That Obamacare should be “repealed” was obvious, given how strenuously conservatives and many independents objected to the new law. But “replace”? Hammering out the details of a new health-care law might easily stir controversy and sow discord, thereby undermining the push for “repeal.”

This concern is not unfounded. But repeal will not be enough, for a simple reason: Although Obamacare would worsen many of the problems with our system of health-care financing, that system clearly does call out for serious reform. Despite the widespread public antipathy toward the new health-care law, simply reverting to the pre-Obamacare status quo would be viewed by many Americans, perhaps even most, as unacceptable. After all, a repeal-only approach would leave many of the most grievous flaws in our system of financing health care unaddressed. Chief among them would be steadily rising health-care costs, driven by the same misguided government policies that so evidently demand reform.

JAMES C. CAPRETTA is a visiting fellow at the American Enterprise Institute and a fellow at the Ethics and Public Policy Center.

ROBERT E. MOFFIT is a senior fellow in the Center for Policy Innovation at the Heritage Foundation.

If the problems that are today obvious to the public had been addressed by market-oriented policies over the past few decades, there would have been no political opening through which to ram Obamacare. Instead, these problems were allowed to fester; by 2009, they had become so acute that there was strong sentiment, even among some business-oriented conservatives, that “something had to be done.” And as the 2010 congressional debate over Obamacare reached its climax, this sentiment — that some action, even an imperfect one, would be better than nothing — likely played a large role in enabling the health-care law to pass.

This history suggests that, now that Obamacare is with us, the law cannot be reversed without a credible proposal for what should take its place. Those reforms must account for both the strengths and the weaknesses of our health-care system, and must solve the problems that contributed to the demand for Obamacare in the first place. There is room for debate about the particulars of these reforms, and different components of our health-care system will call for different kinds of fixes. What any effective solution must involve, however, is the creation of a true market in health coverage — one that drives efficiency through competition, and places health-care decisions in the hands of consumers and taxpayers, where they belong.

WHAT NEEDS FIXING

America’s health-care system has important strengths that must not be overlooked. Most notable among these are an openness to medical innovation that is absent from more centrally planned systems and a network of clinics and hospitals capable of offering the most advanced care found anywhere in the world. The vast majority of Americans (almost 80%) have ready access to this high level of care through third-party insurance arrangements, obtaining coverage from their employers or from federal programs like Medicare and Medicaid. Another 10% have individually purchased coverage.

But for all its considerable strengths, the system suffers from pervasive weaknesses as well. The most serious of these is rapidly rising costs. According to the Congressional Budget Office, between 1975 and 2005, annual per-person health spending in the United States rose, on average, 2 percentage points faster than per-person economic growth. In other words, the escalation of health costs has far outpaced the rise in our national income. This has left more and more people unable to afford insurance, and it now poses significant problems for government budgets : Both federal and state governments spend an enormous amount on health care, but government’s revenue base for taxation grows along with the economy, not with health-care costs. So as government spending on health care has surged, tax collection has not kept pace — yielding the primary driver of today’s deficits and mounting debt.

Of course, government health-care programs and policies are largely responsible for these rising costs in the first place. To begin, the design of Medicare is terribly flawed: Because the program pays providers of care based on the volume of their services, it creates a massive incentive for inefficiency and overuse. And because Medicare is the biggest payer in most health-care markets in America, that incentive badly distorts the economics of the entire sector. Furthermore, the Medicaid program inflates costs by (among other policies) having states control how the program is run while the federal government pays most of the bills. The result is that neither party has both the incentive and ability to keep costs in check.

The third driver is the tax exclusion for employer-provided insurance: The federal government does not count the amount that employers spend on health insurance for their employees toward workers’ taxable income. This tax exclusion inflates costs by effectively rewarding higher-premium plans and by encouraging employer-purchased insurance, thereby preventing a real consumer market in coverage. The people who use the insurance (workers) are not the people who buy it (employers); many Americans thus have no idea how much is spent for the health care they receive. As a result, there is no clear relationship between cost and value, without which there can be no real prices, no real incentives for efficiency and quality, and thus no limitations on the growth of costs.

But while the cost explosion is clearly the greatest problem with America’s health-care system (and the cause of most of its other problems), costs are not always the focus of the public debate. The most politically salient problem is often the lack of secure insurance coverage for many millions of Americans, and the related problem of insuring Americans with pre-existing and expensive medical conditions. This concern — that if these Americans lost their insurance they might not be able to find affordable coverage again — is of course related to the high cost of care, which has made it more difficult to provide affordable coverage for everyone, including the sickest among us. But the problem of providing stable insurance to people with pre-existing conditions is also driven by factors unrelated to costs. Foremost among these is the heavy reliance on employer-sponsored insurance that is not owned by workers, and therefore not portable when workers move from job to job or leave the work force.

Proponents of Obamacare like to create the impression that there are tens of millions of Americans trapped by their pre-existing conditions, sick and stuck with lousy insurance and no options. In truth, the vast majority of working Americans have good and secure coverage today, including many millions of people with expensive health conditions. Thanks in part to protections enacted into federal law in 1996 (through the Health Insurance Portability and Accountability Act, or HIPAA), a person who remains continuously insured as he moves from job to job is protected against inflated premiums and coverage exclusions stemming from a health condition. Thus only a very small percentage of Americans face the pre-existing condition dilemma.

But a small percentage of our large population is still a lot of people. There is no denying that cracks in the system exist, and that many Americans fall through them. This is particularly true of people who need to move from job-based coverage into the individual market. Here the 1996 law is entirely inadequate: People who leave the work force and need to buy insurance on their own can face sky-high premiums for weak coverage just because they happen to suffer from a health condition over which they often have little control. Though the number of families in such circumstances is relatively small, it is large enough that many Americans are personally acquainted with people facing these unpleasant realities. This experience is enough to shape public opinion; surveys show that roughly four out of five Americans support provisions in Obamacare that require insurers to sell their products to all comers at the same rates without regard to health status.

The Obama administration is trying to channel this desire to fix the problem of covering pre-existing conditions into a case for retaining the entire Obamacare edifice. Starting in the middle of 2009, the president and his top aides took to calling their plan “insurance reform,” as if the law’s most important elements were simply new rules designed to protect hapless consumers from unscrupulous insurance companies.

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This is, of course, a gross mischaracterization of what Obamacare actually does. Among other features, the law implements a massive expansion of taxpayer obligations. It adds two new entitlement programs at an expense of at least $1 trillion over a decade. In that same period, it raises taxes by more than $500 billion. It cuts Medicare payments to those providing medical services by roughly $500 billion, and sets up an unaccountable board — the Independent Payment Advisory Board — to enforce new caps on future Medicare growth through specific payment cuts to Medicare providers. Most egregiously, it puts the federal government in command of the health sector, giving bureaucrats immense new power to decide matters ranging from what services must be covered in every American’s insurance plan to how doctors and hospitals organize themselves and do business.

Obamacare is thus far more than “insurance reform.” But it is revealing that this is how the administration hopes the law will be perceived by average Americans. Obamacare’s opponents should take note of the appeal of this idea: Our nation does need real insurance reform, but it can be implemented in ways that address the problems with our health-care system instead of exacerbating them.

PILLARS OF REFORM

To be credible, the replacement for Obamacare must address in a plausible way the genuine problems with our system of financing health care. Pre-eminent among these are the explosion in costs, the rising numbers of uninsured, and the challenge of covering Americans with pre-existing conditions.

The good news for Obamacare opponents is that much of the work of building such a plan has already been done. A small but persistent band of reformers and economists has spent many years promoting and refining the elements of a market-based approach to remedying what ails American health care. These ideas have animated scores of plans released by various organizations, including some proposed after Obamacare’s enactment. And while these plans differ in their details, they share a core set of seven principles that should form the basis of any proposal for replacing Obamacare.

The first crucial component of any serious reform must be a “defined contribution” approach to the public financing of health care — the essential prerequisite for a functioning marketplace that imposes cost and quality discipline. In most sectors of our economy, the normal dynamics of supply and demand keep costs in check and reward suppliers that find innovative ways to deliver more for less. As described above, however, this is not the case in the health-care sector, principally because the federal government has completely distorted consumer incentives.

For market forces to work, consumers must be cost-conscious. Those who decide to consume goods or services must face tradeoffs that require them to prioritize the various uses of their money. In the health sector, there is virtually no cost consciousness on the part of consumers: The vast majority of Americans get their insurance through their employers or through Medicare or Medicaid. In each case, as noted above, the federal subsidy grows as the cost of insurance grows, thereby undermining the incentive to keep costs low. When an employer decides to provide a more generous health-benefit plan to his employees, the U.S. Treasury pays for a good portion of the added costs, because health insurance is a tax-free fringe benefit for workers. When a doctor orders more tests or procedures of dubious clinical value for a patient enrolled in Medicare, it is mainly taxpayers who pick up the tab. And when states pile more people into Medicaid, it is again taxpayers — federal and state — who shoulder the cost. With this kind of subsidy structure, it is not at all surprising that cost escalation throughout the health system has been rapid.

A replacement program for Obamacare must therefore move American health care away from open-ended government subsidies and tax breaks, and toward a defined-contribution system. Under this approach, health coverage would be provided through competing insurance plans; government’s involvement would come through the provision of a fixed financial contribution toward the purchase of insurance by each beneficiary. That subsidy would not vary based on a person’s insurance plan, giving Americans every incentive to shop for good value in their health coverage and to get the most for their defined-contribution dollars.

In the context of employer plans, this approach would mean moving away from the unlimited tax break that is conferred on employer-paid premiums, and instead providing directly to workers a fixed tax credit that would offset the cost of enrollment in the private insurance plans of their choice. Workers selecting more expensive insurance plans would pay for the added premiums out of their own pockets. Those choosing low-premium, high-value plans would pocket the savings, enabling them to offset additional health expenses if they wished to do so. This system would not only be more efficient: It would also be a far more equitable way to provide health benefits through the tax code. American taxpayers would get a break for health coverage as individuals, irrespective of their employment status or the generosity of the health plan provided by their employers.

In the context of Medicare and Medicaid, meanwhile, the government would similarly provide a fixed (though of course far more generous) level of support, sometimes called “premium support,” that would guarantee insurance coverage to beneficiaries but would allow them to choose among competing options and encourage them to seek out the best value for their money (as discussed at greater length below).

The second pillar of reform should be personal responsibility and continuous-coverage protection. Obamacare attempts to address the challenge of covering people with pre-existing conditions with heavy-handed mandates, especially the requirement that all Americans enroll in government-approved insurance plans (the so-called “individual mandate”). A replacement program for Obamacare should come at the problem from the opposite direction, with government forsaking coercion and instead extending a new commitment to the American people: If you stay continuously enrolled in health insurance, with at least catastrophic coverage, you will never again face the prospect of high premiums associated with developing a costly health condition.

For this commitment to become a reality, some changes would have to be made to both federal law and state insurance regulation. (These proposed changes are discussed in more detail in the next chapter.) To begin, the federal government would need to close the gaps in protection that emerge when people move from employer-sponsored plans to the individual market regulated by the states. This problem could be remedied by amending the 1996 HIPAA law to allow workers to move directly from group to individual insurance without first having to pay out of pocket for the (lengthy) extension of their employer-based plans through so-called “COBRA” coverage. In 1985, the Consolidated Omnibus Budget Reconciliation Act (or COBRA) allowed workers who lose their jobs to remain on their employers’ health-insurance plans for months, provided they pay the full premium cost themselves (usually a significant expense). HIPAA then required workers eligible for this COBRA option to exercise it before they could be given any protection in the individual insurance markets regulated by the states. Since hardly any workers follow this prescribed course, they enter the individual market with no protections from pre-existing condition exclusions. That would change if workers were protected when they moved directly from group to individual insurance plans.

Next, states would need to amend their regulations of the individual and small-business insurance markets to require insurers to sell coverage to customers who have remained continuously covered. These new regulations would also have to require that such coverage be made available at standard rates — that is, at rates that apply without regard to differences in health status (age and geographic adjustments would be permitted).

Because some workers who leave job-based plans for the individual market could be quite sick, a credible Obamacare replacement plan would also need to include a new approach to covering the high insurance costs for these Americans. Different proposals have offered different mechanisms, but all would move the burden away from the sick patients themselves to a larger and broader pool of people, either through regulation or through a direct government program such as a high-risk pool. For people who have not been continuously insured, these protections generally would not apply. States could continue to allow insurers to charge higher premiums to these individuals based on their respective health risks. There would thus be a very strong incentive for all Americans to remain continuously covered. (At the time of enactment, it would make sense to give those Americans who were not in continuous coverage the opportunity to come into the new system without penalty and to secure this new protection.)

This approach would achieve the goal of providing realistic and affordable options for people with pre-existing conditions, but without imposing the misguided, overbearing, and counter-productive architecture of Obamacare — and in a way that encourages a competitive insurance market and an innovative health sector rather than undermining them.

The third pillar of reform must be a genuine partnership with the states. Under Obamacare, states are treated as mere functionaries in a new centrally planned and federally managed system. The law gives state officials a take-it-or-leave-it choice: They can implement and administer the new policies under Obamacare — such as state-level insurance exchanges — to the letter, without any deviation or adjustment, incurring the extra costs of these new programs along ...

Table of contents

• Title Page
• Introduction
• I. AMERICA’S CHALLENGE
• II. REFORMING THE WELFARE STATE
• III. TAX REFORM
• IV. FINANCIAL AND MONETARY REFORM
• V. EDUCATION REFORM
• VI. REFORMING STATE FINANCES
• Copyright Page