On an Obamacare alternative


Senator Orrin Hatch, the ranking Republican member of the US Senate Finance Committee, refers to a Washington Post article awarding the Obama administration "four Pinocchios" as he questions Health and Human Services Secretary Kathleen Sebelius during a Finance Committee hearing on "Health Insurance Exchanges: An Update from the Administration" on Capitol Hill in Washington November 6, 2013.

Article Highlights

  • Both parts of that strike us as off base.

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  • Cross-national measures of actual health outcomes are notoriously problematic even among developed nations

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  • Cross-national comparisons of health costs, meanwhile, are if anything even more problematic.

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  • The idea that the American system is a model of capitalist health care is surely wrong.

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On his blog yesterday, Andrew Sullivan several times devoted thoughtful attention to our call for a Republican alternative to Obamacare. He expressed sympathy for the general approach we pointed to, but raised some concerns about it. We’re grateful for both, and wanted briefly to take up those concerns.

First, he pointed to a critique of high-risk pools by Adrianna McIntyre, who notes that, to work, such pools would need to be adequately funded and who asks for more details about that part of the proposal. In our Wall Street Journal piece, we argued that Republicans should indeed fund such risk pools, so to say precursors have not been funded isn’t quite a critique of what we wrote. As for how they would work, we have in mind, as McIntyre correctly suggested, an approach along the lines of what James Capretta has proposed. Capretta and Tom Miller laid out the pre-existing conditions and risk-pool elements of the proposal in some detail in this separate essay devoted to the subject. They also offer a sense of the cost of such a proposal, even if it would need to involve as many as four million people, as McIntyre writes, though they note that is likely to be a significant overestimation of the number of people who would actually need and use high-risk pools. Our own view is that the need for these pools would diminish over time because the other proposals we outlined would make it possible for nearly everyone to maintain continuous coverage going forward.

In a separate post, Sullivan then argues (using a new report from the Commonwealth Fund) that foreign health systems outperform ours on cost and outcomes, and concludes “I’m all for markets, but the facts seem to me to reveal that in healthcare, they are toxic to most people’s actual, you know, health. In what other area does socialism work so much better than capitalism?”

Both parts of that strike us as off base. The Commonwealth Fund report notes that Americans are more sparing in their use of the health-care system and that Americans have higher out-of-pocket costs than residents of some other developed nations. These points are of course related to one another, and are not indicators of poor health, or of a failure of the health-care system. This particular report doesn’t claim to describe health effects (it is entitled “Access, Affordability, and Insurance Complexity Are Often Worse in the United States Compared to 10 Other Countries”). Cross-national measures of actual health outcomes are notoriously problematic even among developed nations, particularly when it comes to isolating the effects of the health-care system itself (as opposed to major differences in lifestyle, economic factors, and preferences). Some attempts to isolate the effects of the health-care system suggest the United States does not particularly stand out for poor or for great quality (here is one good discussion of this problem of isolating health effects and some efforts to address it; here is another).

Cross-national comparisons of health costs, meanwhile, are if anything even more problematic, because different countries account for health spending differently and no advanced country allows health care to be really priced in markets. To compare the cost of different countries’ health-care systems, therefore, you’d have to compare the opportunity costs of the resources used in the health-care system, which is no easy feat. The National Center for Policy Analysis has done some excellent work in that direction, and it suggests that the United States does not compare unfavorably, or particularly favorably, with other developed nations in terms of real health-care costs.

Even if you do just look at measured spending, though, the growth of health spending in America, which is the real problem when it comes to cost, is very much in line with that of other developed nations. After declining in the last decade, American health inflation has been steady in this one and is now expected (even by the Obama administration’s actuaries) to grow quite a bit starting next year thanks to Obamacare’s implementation and to remain high thanks to the nation’s changing demographics. (To be clear: even declining and steady health inflation have still meant costs were growing swiftly, just that the annual rate of growth was not as high as in the past.) But other developed nations don’t really offer outstanding models on that front either. The latest OECD figures show that over the past decade health-cost growth in the US has been right at the OECD average—lower than cost growth in Britain, Canada, the Netherlands, and Spain, for instance, but higher than cost growth in France, Germany, Austria, and Belgium. The patterns are awfully similar. Even if we could perfectly mimic the health-care systems of other developed nations (which, needless to say, we could not, and Americans would not want to do) our problem would not be solved.

More importantly, though, the idea that the American system is a model of capitalist health care is surely wrong. This was in fact a key point of our Wall Street Journal op-ed. We wrote:

The biggest Republican misconception about health care is that the system before ObamaCare was a free-market paradise. On the contrary: It has consisted chiefly of massive and inefficient entitlements that threaten to bankrupt the nation; the lopsided tax treatment of employer-provided coverage that creates incentives for waste and overspending; and an underdeveloped individual market struggling to fill the gaps. Exploding health-care costs and millions left needlessly uninsured are a result of misguided federal policies. Solutions require targeted reforms to those policies.

To which we would add that the chief liberal misconception about the system before Obamacare is that it was a free-market dystopia. The federal government has long been massively involved in American health care. It spent about $750 billion on Medicare and Medicaid last year, and another $200 billion or so in tax expenditures (especially the tax exclusion for employer-provided coverage, a huge health entitlement for the middle class and the wealthy). We are suggesting that these massive flows of funds should be redirected so that rather than encourage cost inflation, as they now powerfully do, they might be made more compatible with efficiency and business-model innovation among insurers and providers. That would be a little more like capitalism, though to be sure it would still be a massive public subsidization of insurance coverage.

And that gets to Sullivan’s third point. In another post he quotes a web comment from an NRO reader who says that the essence of the conservative approach to health care is a “dedication to the proposition that the healthcare market is just like all other markets; that a decision about healthcare follows the same logic and has the same degrees of freedom as do decisions such as whether to buy a new TV, or broccoli.” What we propose, however, is a system in which the government would provide a generous tax benefit to all Americans to enable them to purchase at least catastrophic insurance coverage, and further policies to provide access to coverage for the sick and the poor. We are not aware of similar mechanisms in the TV or broccoli markets. Of course health care is different, but we do believe that Americans are capable of considering different insurance options and choosing the most attractive.

The idea that the health arena as a whole simply is not amenable to market economics of any sort is a deeply rooted dogma for some on the left, based especially on the work of Kenneth Arrow in the 1960s and his successors, but we believe it is simply not justified. (We recommend this thoughtful reflection on the question, and on Arrow’s work, from Avik Roy.) Insurance is a financial product, decisions about coverage and care answer to discernible incentives and motives, and health care constitutes an enormous portion of both public and private spending in America. Clearly economic thinking is one of the ways of thinking we have to apply to health care. Pointing out that health care is not like consumer electronics is just too abstract a point to have much to say to our particular proposals. Similarly, the claim that health care is not like other economic goods would not constitute a sound argument for a single-payer health-care system over Obamacare (the latter being at least superficially a more market-friendly arrangement).

Finally, Sullivan builds on the reader’s comment to express his own concern about our proposal: that, compared to Obamacare, “a more bare bones insurance regime which does not have to include the basic needs of most lives, and skimps on preventative care, is a false economy.” We suspect this remark rests on a misunderstanding of our proposal that was also evident in McIntyre’s post about it. We are not proposing a regime of universal catastrophic-only policies, with perhaps some supplementary coverage packages on top of that. (There have been some proposals of that sort by others.) We propose, rather, to build on today’s insurance market, in which most people get tax-preferred coverage through an employer while other people get non-tax-preferred coverage on their own, by allowing those other people to have the same benefit provided through a credit they could use to help them buy insurance.

The credit would be sufficient to pay the premium of catastrophic-coverage policies (more or less by default; if you put a huge amount of money on the table in, say, $5,000 increments that can only be used for insurance, insurers will rush to offer coverage with $5,000 premiums and adjust co-pays and deductibles accordingly). So people who now pay no premium costs and therefore have no insurance could pay no premium costs and have catastrophic coverage. Nobody would have any economic reason to forego such coverage, while the economic reason to pursue it (to gain some protection from extreme unexpected costs) would remain in force. Protection from catastrophic costs is the core benefit that health insurance offers, and this would be a way to make it available to all. But people who now buy more comprehensive coverage in the individual market, or who would like to, would see its cost to them decline by the amount of the credit, and so could purchase it far more easily, while most people would presumably continue to receive employer-provided coverage as they do now. There is no clear reason to think people would skimp on preventive care in such a system. People tend to value preventive care, and we’re just saying they should be better enabled to choose insurance options that provide what they value, and that this should be done in a way that encourages insurers and providers to seek the most efficient and appealing means of running a health care and insurance system.

It seems to us that there is good reason to think that these proposals could provide coverage more broadly and effectively than either Obamacare or the previous health-care system, and that it would achieve these results in part because it takes better account of the way people respond to incentives than either of those more-socialized, and perversely socialized, systems.

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