Getting Health Care Right Means Giving Patients More Control

President Barack Obama sold his health care plan to the American people in 2009 with three key promises:

  1. Americans who liked their health care plans would be able keep their health care plans.
  2. It would not increase taxes for anybody making less than $250,000 per year.
  3. The plan would reduce health insurance premiums dramatically.

Seven years after Obamacare became law, each one turned out to be false.

The National Center for Health Statistics says that about 20 million people have become newly insured under Obamacare. But that expansion has come at a very high cost in the form of higher taxes, higher premiums, and less health care choice for many millions more.

Over the next 10 years, Obamacare taxes will cost taxpayers an estimated $832 billion. Many of the tax provisions in Obamacare—such as taxes on insurance, drugs, and medical devices—are, in fact taxes passed on to the middle class.

The individual market has been hardest hit by the premium increases. For 2017, the government actuaries have already projected an average increase nationwide of 25 percent. These big annual premium increases have been a pattern.For example, in 2014, the first year of full implementation of the law, in 11 states 27-year-olds enrolled in the exchanges saw their premiums more than double. Today, individuals enrolled in the individual market are paying an average of 99 percent more, while families are paying 140 percent more today compared to 2013, according to the health insurance portal, eHealth.

Today, individuals enrolled in the individual market are paying an average of 99 percent more, while families are paying 140 percent more today compared to 2013.

Likewise, deductibles in the individual market have been shocking. For the standard silver plan, the average deductible is $3,572 for single coverage and $7,474 for family coverage. For the lowest cost “bronze plans,” deductibles average $6,092 for single coverage and $12,393 for family coverage. As Health Pocket observes:

A recent Bankrate survey found that only 37% of Americans had $500 to $1,000 in savings to cover an unexpected emergency bill. Against that fiscal reality, the average bronze plan deductible of $6,092 and silver plan deductible of $3,572 blur the lines between being insured and uninsured.

It is not surprising that younger and healthier persons avoid enrolling in Obamacare plans, leaving the insurance pools disproportionately populated by older and sicker persons and driving up costs even higher. But Obamacare regulations have aggravated the cost problem. The age rating rules, which say that plans can’t charge a 64-year-old any more than three times the rate of a 21-year-old, means that younger persons are faced with artificially higher premiums, thus dissuading them from enrolling in these plans. And another cost driver has been Obamacare’s comprehensive benefit mandates that force individuals and families to buy more expensive plans than many typically purchased before Obamacare became law. In effect, the law forces persons to buy benefits and medical treatments and procedures that they don’t want or need. According to a tally by the Associated Press, 4.7 million people lost their insurance coverage in 2014, the first year of implementation, because they were in plans that failed to meet the government’s regulatory requirements.

The standardization of plans has been accompanied by a narrowing of insurer options. In his critique of the health insurance markets, Obama was correct to note the absence of robust competition in the health insurance markets; a previously bad situation that the law has since made dangerously worse. Today, about 70 percent of U.S. counties have only one or two health insurance options. The attempt to impose standardized federal regulation on radically diverse state health insurance markets has proven to be a costly and painful experiment.

Meanwhile, of the 20 million people who gained coverage because of Obamacare, the overwhelming majority are enrolled in Medicaid. Medicaid pays doctors and other medical professionals poorly; and, as a result, many Medicaid recipients do not have good access to high quality care. Indeed, the professional literature shows that their medical outcomes, in key areas such as cancer and heart disease, are substandard compared to persons enrolled in private insurance. Yet, Medicaid will cost federal and state taxpayers an estimated $854 billion by 2022. It’s a program that needs to be reformed, not expanded.

Now, Congress and President Donald Trump must solve these problems, while liberating American citizens from historically unprecedented federal restrictions on their personal and economic freedom. The new president and the new Congress need to start over again, and do it right.

Many Republicans campaigned on the promise to “repeal and replace” Obamacare. What it means to repeal a law is clear enough, but with what should Obamacare be replaced?

Four Big Policy Changes

Replacement is not merely eliminating titles, sections, and subsections of this sprawling law, but rather changing the underlying federal health policy. Replacement really means literally replacing one policy with another policy; reversing course, or changing direction; it means moving from today’s system of centralized federal control to a new system where states can reclaim authority over health insurance markets, and where individuals and families will exercise more direct control over health care dollars and decisions. Four major policy shifts are in order:

Policy Change #1: Establish personal control over health care dollars and decisions. Overwhelmingly, health care today is financed through insurance. Individuals have little control, however, over health insurance policies the way they have control over the terms and conditions of their auto, life, or homeowners’ insurance. Under current law, portability of health plans is almost impossible for most Americans, since they cannot take it from job to job without a significant tax or regulatory penalty. But the central driver of today’s flawed health care market is the federal tax treatment of health insurance: Higher health care costs, the overconsumption of health care, the absence of continuous and secure coverage, a lack of transparency in health care financing, the tendency of group plans to favor the interests of high-income workers over those of low-income workers, and the creation of an un-level playing field between group and individual health insurance, all have their roots in a tax code that subsidizes employer-provided insurance.

Under Obamacare (AKA, the Affordable Care Act), federal officials make almost all of the key decisions over health plans and benefits previously made by employers, insurers, or state officials. Concerning tax policy, the national health law largely maintains the status quo ante, but then imposes a whole series of new federal taxes and fees on health insurance plans, merely as revenue raisers to finance its expansive provisions. The so-called “Cadillac Tax”—the 40 percent excise tax on “high value” health plans to be implemented in 2020—would indeed discourage employers from offering high cost coverage and thus slow cost growth, but that would not constitute a needed structural reform of the underlying tax treatment of health insurance itself.

Members of Congress should work to secure neutrality in the federal tax treatment of health insurance. They can start by repealing the so-called “Cadillac Tax,” and replacing it with a cap on the federal tax exclusion of employer-based health insurance. This would not only contribute to cost control, as the Congressional Budget Office and others have determined, but it would generate more revenue to allow for the creation of more equitable provision of individual tax relief for health insurance, particularly for those who do not or cannot get health insurance through the place of work. Persons could choose whether they wished their tax relief for insurance to come in the form of the tax exclusion or a tax credit, and the indexed cap would gradually bring the two options into parity over time. This key policy change would allow persons to exercise control over their dollars, enabling them to buy, own, and control their portable health insurance policies.

Congress can also transform health savings accounts (HSAs) into “free-standing” savings accounts, separate and apart from high-deductible health plans. Congress should liberalize contributions into the account, allowing the maximum contribution to match a person’s out-of-pocket expenses, including direct payments to doctors and other medical professionals. Congress should also allow the accounts to be used as a mechanism to pay health insurance premiums or receive deposits from either public or private defined contribution health programs.

Policy Change #2: Reward personal responsibility while protecting persons with pre-existing medical conditions. Prior to the enactment of Obamacare, federal law already ensured that people enrolled in employer group health insurance could not be denied coverage, or be subjected to pre-existing-condition exclusions, or be charged higher premiums based on their health status when switching to another group health plan (with the same or a different employer).

In the group market, pre-existing-condition exclusions could only be applied to those without prior coverage, or to those who wait until they need medical care to enroll in their employer’s plan. Furthermore, there were limits even in those cases. Such individuals could still obtain the group coverage, and any pre-existing medical condition could not be excluded from that coverage for more than 12 months.

Thus, under these rules, individuals who get and keep coverage are rewarded, while individuals who wait until they are sick to enroll in coverage are penalized, but the penalties are neither unreasonable nor severe.

The problem, however, is that the same kind of rules did not apply to the individual market. Thus, an individual could have purchased non-group health insurance for many years, and still be denied coverage or face pre-existing-condition exclusions when he needed or wanted to pick a different plan. Not only was that unfair to those individuals who had bought insurance while they were healthy, it also did little to encourage other healthy individuals to purchase coverage before they needed it.

The obvious, modest, and sensible reform would be to apply a set of rules to the individual health insurance market similar to the ones that already govern the employer-group coverage market. To make sure that no one falls “through the cracks,” a goal articulated by President Trump, Congress could also fund state-based high risk pools for a limited duration.

Policy Change #3: Give low-income individuals better choices by reforming the Medicaid program and mainstreaming the majority of its enrollees into private health insurance. Medicaid is the federal-state program for the poor and the indigent. The Affordable Care Act attempted to threaten the states with a complete loss of Medicaid funding unless they expanded eligibility up to 138 percent of the federal poverty level. The Supreme Court struck down the law’s coercive provision but left in place the inducement of addition federal funding for expansion. For states that agreed to the expansion, federal taxpayers financed 100 percent of the additional cost until 2016, but afterwards Medicaid expansion costs are to be progressively borne by the taxpayers of the states. With federal taxpayers initially bearing 100 percent of the Medicaid expansion costs, it is no surprise that more than eight out of ten newly insured persons under the Affordable Care Act are enrolled in Medicaid.

Medicaid, however, is a poorly performing program, particularly when it comes to access to care, physician participation, and medical outcomes. Rather than maintaining the Medicaid status quo, Congress should put the program on a budget and treat radically different Medicaid populations differently and fund them separately. For those who are young and able bodied, Congress could create a Medicaid part A program, a defined contribution or “premium support” program—direct financial assistance in the form of a per capita payment—that would enable these beneficiaries to enroll in a private plan of their choice. This would have two immediate effects. First, it would enable these persons to get superior access to the plans and the doctors and other medical professionals used by their fellow citizens in the private market, broadening their access to quality care and improving their medical outcomes. Second, the influx of younger and healthier (though poorer) persons into the private insurance pools would improve their demographic profile and thus lower the average claims costs—a general benefit to policyholders in the health insurance markets.

For disabled and long-term care beneficiaries, Congress could create a Medicaid Part B, and per capita “block grant” funding, with clear stipulations to the states for the care and management of these populations. While the states would be given much greater flexibility for the management of these populations, they would also be held accountable for their use of federal taxpayers’ dollars and achieving expected results in care delivery.

States can be powerful engines of policy innovation in the financing and delivery of care in safety net programs. State innovation can be particularly fruitful in meeting the most difficult challenges: how best to handle the sickest and the poorest persons who have the greatest difficulty in securing high quality health care.

Policy Change #4: Fix Medicare’s finances to ensure the program can serve tomorrow’s retirees. The first wave of the huge baby boomer generation, 77 million strong, is already retiring. Medicare’s enrollment will grow from 57 million today to more than 80 million beneficiaries by 2030, while the ratio of workers to beneficiaries will decrease from almost four workers to each retiree to a little more than two workers to each retiree. Under the most realistic official estimate, over the next 75 years, Medicare promises benefits to current and future retirees worth approximately $44 trillion that are not financed either by dedicated revenues or beneficiary premiums. Americans’ fiscal future is thus darkened by the prospect of dangerous debt or massive tax increases to sustain Medicare or, alternatively, the possibility of savage benefit cuts.

Under the most realistic official estimate, over the next 75 years, Medicare promises benefits to current and future retirees worth approximately $44 trillion that are not financed either by dedicated revenues or beneficiary premiums.

Remarkably, even though Obamacare authorizes new delivery reforms (with mixed results thus far) and imposes over $800 billion in Medicare payment reductions over the next 10 years, there is little indication yet that these measures, even if they were politically sustainable, would much alter the program’s long-term trajectory.

For Congress, the very first order of business should be to sequester the hundreds of billions of dollars of Medicare savings generated under the ACA in a special account as savings for Medicare, and not the financing of other health care entitlement expansions. Then, Congress must not only begin a series of policy changes to control costs in traditional Medicare, but also build upon the program’s most promising feature: the defined-contribution financing that governs the popular and successful Medicare Advantage and Medicare Part D (drug) programs.

For the traditional Medicare program, Congress should, first, gradually raise (over 10 years) the normal age of eligibility for Medicare enrollment to 68, and index it to life expectancy. Second, Congress should further reduce taxpayers’ subsidies for the wealthiest seniors, approximately 10 percent of the Medicare population. Third, Congress should combine Parts A and B into a single plan, and replace traditional Medicare’s complex and confusing set of different cost-sharing arrangements with a unified deductible, coinsurance rate and add catastrophic protection. A solid Medicare catastrophic benefit, similar to that originally proposed by President Ronald Reagan in 1986, would help reduce the huge number—roughly 90 percent of enrollees—who rely on supplemental health insurance arrangements. Because they often provide first-dollar coverage, these plans drive excess utilization and thus impose (through the back door, so to speak) even higher Part B premium costs on beneficiaries. Finally, Congress should repeal the 1997 statutory restriction on the ability of doctors and patients to contract privately, if they wish to do so, while also allowing Medicare beneficiaries to buy a health savings account plan.

Congress can also expand the defined-contribution financing by building on the best features of Medicare Advantage and Medicare Part D. By expanding defined-contribution financing to the entire program, Congress would guarantee Medicare beneficiaries greater choice and control over the flow of Medicare dollars. If a beneficiary chose a health plan that was more expensive than the standard government payment, the beneficiary would pay more in the form of an additional premium. If a beneficiary chose a health plan that was less expensive than the government payment, then the beneficiary could take the savings either in the form of a cash rebate or a deposit in a health savings account.

In moving toward such a program, Congress would maintain and improve Medicare’s consumer protection provisions, such as fair marketing rules, plain English requirements in the formatting and presentation of plan information, and tough fiscal solvency and reserve requirements. Any plan meeting basic statutory requirements for benefits and consumer protection would be free to compete for the per capita government contribution: Medicare Advantage plans; Federal Employee Health Benefit Plans; state employee plans; small employer group plans; and individual, high deductible or health savings account plans licensed in any state. No person should have to give up the health plan they have or like merely because they reach the normal retirement age.

All four of these policy changes would result in a fundamental transformation of American health care; a major transformation that would make individuals and families the key decision-makers in an open, dynamic, innovative, and affordable system.

Mr. Moffitt is a senior fellow at The Heritage Foundation’s Center for Health Policy Studies.