The Obamacare Alternatives, Redistribution, and Free Markets in Healthcare

by Sam Halabi — Tuesday, Feb. 28, 2017

Following Nick’s insightful post and in light of both President Trump’s speech this evening as well as House GOP defections from the leaked bill, it’s worth surveying the alternatives to Obamacare GOP legislators have floated so far and what might end up getting stitched together to form the outline of a unifying GOP plan.

On January 23, Senators Susan Collins and Bill Cassidy introduced the Patient Freedom Act, which would let states that had opted into Obamacare keep their expansion dollars or, alternatively, offer subsidies for states to create an autoenrollment system for catastrophic coverage plans with bare bones preventative services also covered. Federal subsidies would be based strictly on enrollment, not income, and states could use federal subsidies to prefund health savings accounts that would cover some (no one knows how much) of the gap between out-of-pocket costs and the point catastrophic coverage applied. People could, of course, opt out of coverage.

On January 25, Senator Rand Paul introduced his Obamacare Replacement Act which would provide tax credits for health savings accounts, repeal the individual mandate and minimum coverage conditions, and loosen Obamacare’s already existing mechanism for “selling insurance across state lines.”   Rand’s vision, consistent with his libertarian outlook, is to liberalize the individual insurance market so that consumers can purchase policies tailored to their needs or that consumer or other affiliated groups may leverage bargaining power through negotiations with insurance providers.

On February 10, a leaked version of a House bill (apparently without a catchy title), would repeal the individual mandate, subsidies based on people’s income, and all of the Obamacare taxes. It would reduce Medicaid spending and give states money to create high-risk pools for certain categories of people with pre-existing conditions.   Starting in 2020, the federal government would extend tax credits based on age, not income. Insurers would be allowed to charge much more to cover older versus younger persons. Like Paul’s plan, it would eliminate minimum coverage requirements and, of course, defund Planned Parenthood. It would be paid for by limiting the tax deduction for generous group healthcare plans. Analogously to the individual mandate, it would provide a penalty for failing to maintain continuous coverage.

There are bits and pieces elsewhere, like Paul Ryan’s white paper and Tom Price’s Empowering Patients First Act.

Some proposals are lacking critical details while others contain somewhat contradictory provisions. All assert that they are more aligned with free market principles.

Before turning to free markets and healthcare, however, it is worth noting at the outset the ways, sometimes extraordinarily so, that current GOP proposals redistribute wealth from the poor to the rich or from historically disadvantaged groups to the traditionally privileged.

One of Obamacare’s targets was the pervasive and enduring disparities between men and women with respect to both cost of and access to healthcare. Obamacare’s minimum coverage requirements were specifically tailored to address the historically higher prices women had to pay for preventative services. Before the Medicaid expansion, low-income women had little or no source of routine health care before or between pregnancies, or after their childbearing concluded.  They therefore forewent both regular preventive care and acute care for serious illness or catastrophic injury.   This, of course, affected not only their health but the welfare of their children for whom they were often primary caretakers. The ACA bridged the gap between non-pregnancy aspects of health for low-income women (at least in states that expanded).

The redistribution also moves wealth from poor to rich. Health savings accounts by their nature favor the healthy and the wealthy who may save (on a tax favored basis) for catastrophic illness or injury. While they are touted as encouraging their holders to shop around for the best price and quality of service, (with a corresponding competitive restraint on prices) there is no telling what their effect might be on aggregate prices in the healthcare sector as providers seek to charge as much as they can against burgeoning HSA balances held by the healthy. To subsidize them through tax credits is even more regressive (House GOP defections from tax credits are more attributable to their entitlement-ness than there regressiveness). Similarly, limiting the tax deduction for employer coverage – as Nick notes – would impose a disproportionate burden on key middle class populations.

And, of course, there is little evidence in support of the proposition that markets will function the way these bills’ proponents want. Paul Krugman rephrased Kenneth Arrow’s arguments about market failure in healthcare better than I, but it’s worth noting at least two reasons that current proposals won’t work the way their sponsors say they will. First, consumers can’t or won’t shop for healthcare like they shop for laundry detergent – what an MRI is, what it’s used for, how many people it takes to use one or generate results cannot be reduced to inexpensive signals from which consumers can or will make market shaping decisions (especially because those decisions are often made when the person is ill, affecting decision-making variables). Second, health insurers—like other insurers — make their money by not paying for claims. Under the pre-Obamacare market, this was achieved through exclusions based on preexisting conditions, annual, and lifetime caps, among other practices. Current proposals offer little in terms of financial incentives or legal constraints that would address the coverage-limiting tactics insurers would inevitably adopt (although there are strong implications that states would play this role).

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About Sam Halabi

Professor Halabi is a scholar of national and global health law with a specialization in health services, pharmaceutical and agrifood business organizations. He serves as a Scholar at the O'Neill Institute for National and Global Health Law at Georgetown University, where he has also served as a special advisor to the Lancet-Georgetown University Commission on Global Health and Law. His work is published in the American Journal of Law and Medicine, the Harvard International Law Journal, the Journal of Law, Medicine, and Ethics, the Lancet, and the Journal of the American Medical Association (JAMA). He has also published volumes on pharmaceutical regulation and global management of infectious disease with Oxford University Press and Elsevier Academic Press. Before earning his J.D. from Harvard Law School, Professor Halabi was awarded a British Marshall scholarship to study in the United Kingdom where he earned an M.Phil in International Relations from the University of Oxford (St. Antony’s College). During the 2003-04 academic year, he served as a Rotary International Ambassadorial Scholar at the American University of Beirut.

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