ObamaCare: a Simpler Alternative

Which of the following is true?

  1. ObamaCare is a bunch of big government socialism.
  2. ObamaCare will increase the number of capitalists and weaken the chains of wage serfdom.
  3. ObamaCare is needlessly complicated and could be greatly simplified.

The answer is: all of the above!

ObamaCare is Big Government Meddling

Yes, healthcare.gov and the state exchanges are laughable examples of socialist thinking. They could have saved hundreds of millions of dollars by simply making a link to ehealthinsurance.com. Duh! Or for a mere $60 million, they could have linked to the participating health insurers for each state.

And if you are running a health insurance company, your business has been converted into public utility. You have some grounds for whining about Big Government.

Then again, the health insurance industry would be a small fraction of its size if it hadn’t been subsidized by the tax code for over a half century. Pay your doctor directly, and you pay with after tax money. Hire a health insurance company to pay your doctor, and you pay with pre tax money. For those in the 25% tax bracket or above (($36K for a single wage earner, twice that for a married couple), this is no small difference. In a free market people would buy mostly catastrophic coverage and pay most doctor bills directly.

Moreover, the health insurance industry has been employing armies of bureaucrats to meddle in the affairs of doctors and hospitals. As someone who prefers markets to meddling, my sympathies are limited. (A question for the doctors and hospital administrators in the audience: is the latest round of government meddling better or worse than the meddling by the insurance companies pre ObamaCare? Please comment here.)

ObamaCare Weakens Wage Serfdom

In one very major respect ObamaCare is a huge step towards more capitalism. Surprise!

Actually, you shouldn’t be too surprised. The core of ObamaCare, including the individual mandate, is the brainchild of the conservative Heritage Foundation.

The health insurance market pre Obama was nowhere close to a free market. Back during World War II, the government imposed wage and price controls in an attempt to quell wartime inflation. Employers started paying in perks instead of additional wages in order to attract quality workers. One of those perks was health insurance. In a completely extra legal move, the IRS ruled that this particular perk was not a taxable part of wages, but it was a deductible expense for the corporation providing the perk.

The ruling remained after the war, later backed up with legislation. Buy health insurance as part of an employer provided group plan and you save on taxes. Buy insurance directly, and you not only pay with after tax money, you also still have to pay for the group plan that your employer provides, whether you want to or not. This weakened the individual health insurance market. We developed no health equivalent to term and whole life. Changing jobs or launching a new business became financially precarious for middle aged worker units with families, especially those with health conditions.

Community rating makes it much easier to leave The Organization and launch a new business. You can now readily buy individual and family coverage regardless of your medical history. You don’t have to fill out reams of forms documenting your history in order to get insurance. For free agents, red tape has been cut.

This may seem a small matter for young nerds launching a .com business straight out of college. They could simply gamble and not buy any insurance. Or, they could buy cheap catastrophic coverage and just not worry about the tax break. But for the middled aged with families to support and wear and tear on the body, health insurance is a big deal. And setting up a group plan at the start of launching a new business is a major bit of overhead, and a distraction from the core of the business at hand.

Yes, ObamaCare does have an employer mandate in order to keep all employers from dropping their group plans. But this mandate doesn’t cut in until your business reaches 50 full time employees.

Small business has been simplified.

Now, let’s see if we can simplify ObamaCare. To start with, let’s look at why it’s so hard to have a proper market in medicine in the first place.

Making a Healthcare Market

You’ve been hit by a bus. Blood is leaking out. Consciousness is fading. It’s time to shop for one of the most expensive purchases of your life: intensive medical care.

Houston we have a problem. Emergency medicine is not like other services. Some sort of price controls are in order, whether they be through insurance companies, socialized medicine, charity funded hospitals, or some government control over a private system. Simplistic Randian economics does not work.

However, the emergency scenario above is a much smaller fraction of the healthcare market than described by the advocates of socialized medicine. For most medical services people do have time to shop. A huge chunk of healthcare spending is on chronic conditions, ailments that last for years or decades.

Alas, many of the people who have these conditions don’t have the money to shop. They rely on insurance company payouts, welfare, or charity. Making a market is thus difficult.

But we need a market if insurance companies or the government are to have some basis for negotiation. Otherwise, the industry sets prices with expensive haggling. Were I a modern-day Pinochet, brutally enforcing a utilitarian market ideal, I would outlaw health insurance for the rich.

On the other hand, we want the lower working class to be well insured. They could shop for the basics, but for the big stuff it has to be insurance payouts, charity, or welfare – or going without. This latter option is not viable in a wealthy democracy, so you micro government advocates in the audience need to build a floating island to live that dream.

But you smaller government advocates can rightfully neener-dance on this: the pre-ObamaCare system had it backwards, and made the system worse than the free market. The old system subsidized health insurance through the tax code. The more you made, the more valuable the subsidy. A firm hiring engineers, lawyers, accountants or other high paid professionals had an incentive to pay a greater fraction of wages in the form of health insurance in order to save on taxes. A firm hiring burger flippers or tomato pickers had more incentive to pay workers in cash to the greatest degree possible.

The well off had too much insurance to shop, while the lower classes went bankrupt upon getting very sick. The United States thus suffered from high prices, and a high welfare case load for medicine. We made socialized medicine look surprisingly good.

ObamaCare keeps the tax subsidy, but corrects it with some surcharges and subsidies for the lower classes. It is a 900+ page book of Band Aids on top of a bad system. Let’s start from scratch.

A Simpler Subsidy

Since the government is the insurer of last resort, it pays the government if more people have private insurance. A subsidy is in order. On the other hand we don’t want to encourage people to over insure, since that drives up medical costs since no one is shopping for medical services.

Here is the simplest subsidy of all: get rid of the special tax status for employer provided health insurance (and the employer mandate!) and just give every U.S. citizen a government-funded coupon towards their health insurance premiums. This could be revenue neutral: take the money now given as a tax break for employer provided health insurance and divide up the money equally. With such a coupon we could probably get some people off Medicaid as well.

As a rough guess as to what that amount would be, I’ll take my own circumstance and extrapolate. When I was employed, I was paying about $1800/month to insure my family of three. I was in the 25% tax bracket. The average benefit for each family member was thus .25 * 12 * $1800/3 = $1800/person/year. Why not just give every a citizen a coupon for that amount, and scrub the whole issue from the tax code?

For the young, this would probably enough to pay for catastrophic coverage or even more with nothing out of pocket for premiums. The young would thus get in the habit of buying insurance before they realize they need it. We can (and should) keep ObamaCare’s elimination of pre-existing condition exclusions without sending the insurance industry in a death spiral. This coupon would require additional money for the middled aged, but by then the customers would realize the value of health insurance.

Note how this fixed subsidy encourages people to shop for insurance. While the subsidy reduces the average cost of buying health insurance, the marginal cost of additional coverage is the same as for no subsidy. You want a low deductible, or coverage for afternoon backrubs? You pay for it yourself. Few people would buy “Cadillac plans.”

This simplified subsidy eliminates the headaches of:

And yes, such a system would not need a healthcare.gov web site. The market is pretty good at advertising and selling. (Indeed, the expensive healthcare.gov site isn’t really needed even if we kept the rest of ObamaCare. It is truly needless socialism in action.)

Alas, the government does need to have a definition of health insurance if it is to give out coupons. Otherwise, there would be plenty of ways to game the system and redeem the coupons while leaving the government as the insurer of last resort. Dental insurance today is a prime example. It is not truly insurance in any plan that I have seen. It is prepaid service for the common situations with the unusual circumstances covered out of pocket – the exact opposite of insurance. The purpose of insurance is to mitigate bad luck, not pay for what is likely. The question is: can we define insurance in less than 900 pages?

Here is my simple definition of insurance: the copay percentage has to stay flat or go down as the expenses go up. If it is a 30% copay for a runny nose, it is a 30% copay or less for a heart attack. This prevents insurance companies from selectively targeting the healthy by offering plans with low copays for mundane doctor visits while capping coverage for those who truly need it. Unlike ObamaCare, this rule does not set a max out of pocket, nor does it legislate deductibles. The market could decide these matters.

This simple definition does still require a definition of what constitutes health insurance. We don’t want the government to be subsidizing facelift only policies. We need a list of recognized conditions and therapies, and this is a rather long list. But we could define it outside of our substitute for ObamaCare bill. The rule could be: if the government covers it via either Medicare or Medicaid, then a health insurance policy must cover it to qualify for the coupon. Insurance companies would be free to add to this list as they see fit.

Some Possible Tweaks

ObamaCare includes various attempts at price controls. Most of these could go. Insurers should be allowed to fully price according to age, for instance. On the other hand, might want to keep some of the caps on price gouging and high copays at emergency rooms. This is a service for which shopping is not feasible.

We might, however, wish to adjust the coupon amount based on age. If insurance for the middle aged is too expensive for the lower working class, then we should adjust the subsidy, not impose price controls. We might also throw in a subsidy for those who have dire chronic conditions which are clearly measureable. If you have Down’s Syndrome or some such, you get a check from the government which can be applied towards the ballooning copays.

ObamaCare’s maximum out of pocket mandates are problematic. On the one hand, they keep the truly ill from going bankrupt. On the other hand, they prevent people from shopping for the higher end services. Once possible tweak would be to allow people to buy higher out of pocket (and thus cheaper) insurance if they have adequate savings.

The preventative care requirement in ObamaCare is also problematic. On the one hand, some of the required zero copay services do have a big bang per buck. On the other hand, if there is no copay, there is no shopping save by insurance companies. There is a good argument for zero copay for vaccines: vaccination is a public health issue as much as a private health issue. Herd immunity is important, especially in these days where some people believe that vaccines cause autism. Vaccination is pretty cheap, even if we inflate the cost by a factor of three. (And inflated costs might incent the pharmaceutical companies to do more research into new vaccines; this could be useful.)

The mental health mandate should stay. State governments have been closing down insane asylums left and right. Jail and homeless shelters have taken their place for many of the mentally ill. And if we treat berserkers-to-be before they shoot up a school or movie theater, we are more likely to retain our rights under the Second Amendment. Conservatives take note.

Conservatives should also favor keeping the childbirth coverage mandate as well. Healthy babies are less likely to grow up to be welfare recipients. Covered mothers to be are less likely to opt for abortion.

The birth control mandate also has these properties: both reducing the number of future welfare recipients and the number of abortions. ObamaCare is the biggest piece of anti abortion legislation in half a century! Then again, some people believe that the Pill is a form of abortion. I leave this as an exercise to the readers on the Right whether the birth control mandate should remain.

Feel free to discuss on the associated blog post.