Saturday, February 4, 2017

Obamacare Replacement: How to Succeed in Three Simple Steps

A Ferrari is a superb automobile (…or so I’m told!), but if you drive one off a cliff you’ll quickly find it makes a horrible airplane.  Similarly, our government is designed to do a few public sector things well, but when we ask it to do private sector things it’s like asking a car to fly.

That’s what happened with Obamacare.  Democrats strapped some wings on a car, and then drove it off a cliff with all of us onboard.  Republicans will ultimately fail if their fix is merely an improvement on that flying-car model.

Instead, Republicans and Democrats should scrap the flying-car model entirely and perform a complete separation of car stuff from airplane stuff.  Then they should allow the people who design and build the best cars to do their job and allow their counterparts in the airplane business to do theirs. 

I’m not suggesting Boeing or GM be involved in replacing Obamacare.  The point is there are some things the public sector should do, and there are others the private sector should do.

Healthcare, being a dynamic, complex, service-oriented market, is precisely the kind of thing governments are ill equipped to micro-manage.  Like an airplane, healthcare markets are moving at breakneck speed, must be able to change course instantaneously, and are operating in turbulent three-dimensional space.

Conversely, providing a safety net, which is essential in healthcare, is precisely the kind of thing the public sector must do.  But like a car designed by committee, the public sector is perennially underpowered, overweight, low on fuel, and operates on a one-way dirt road that only allows direction changes every four years.  Public sectors work best if they keep things simple, realistic, and have a clearly defined mission.

For a long time, even preceding Obamacare, we were using the flying-car model and our designs were poor for both functions.

For an airplane to fly well there must be an instantaneous response from the controls to the flight surfaces.  Similarly, for free markets to function there must be an instantaneous response from buyers to sellers.  In both cases a direct linkage is essential.  Nothing like that has existed in healthcare for decades. 

Since WWII there has been a huge tax advantage for employers to provide health insurance to their employees.  As a result, for the vast majority of Americans covered by private health insurance, there are two thick layers of bureaucracy between buyers (patients) and sellers (doctors, hospitals, etc.).  

All told about 95% of Americans get their health insurance from either government (federal, state, or local) or their employer.  Obamacare has only made it worse.  That leaves only about 5% of the population that actually buys their own health insurance.

Unless and until health care and health insurance become consumer products, something the vast majority of Americans pay for on their own, there will never be a true functioning free market.  As long as there are two levels of bureaucracy between buyers and sellers, price, quality, speed, access, and satisfaction will all suffer.

The idea of direct linkage applies to cars as well. 

When the federal government provides a safety net there is a critical break in the linkage between buyers and sellers.  The reason is, the federal government has access to what appears to be free money.  Having access to the world’s reserve currency makes borrowing and printing dollars deceptively easy.  Politicians can over-promise and under-fund without negative short-term consequences. This is an illusion that will inevitably backfire on our descendants.

To avoid this problem states must be the safety net providers.  By definition states are forced to be more realistic, more practical, and more skilled when providing safety nets.  They are closer to the facts on the ground and cannot access money without repercussions. If states want to provide a high-cost safety net, they must be willing to tax their citizens a commensurate amount.  That forces a discipline that the feds can too easily cheat their way around. 

Ronald Reagan used to say, “There are simple solutions - just not easy ones.” By that he meant that the solutions to seemingly complex government problems can often be quite simple, but implementing them is another matter in a divided government with checks and balances.

The following three specific proposals are not meant to be what’s easy, just what’s simple: 

1.  Separation of public and private functions
·      Government should not be in the business of providing healthcare or insurance, but instead must be there to provide a safety net in the form of vouchers or cash.
·      This should be how Medicaid, Medicare, subsidies, insurance for pre-existing conditions, etc. all should be handled.
·      The private sector free market should provide all healthcare and health insurance.
·      Thus, the private sector handles all the services and products, and the public sector provides money for the safety net. 

2.  Linkage of buyers and sellers
·      All Individuals, whether self-sufficient or in the safety net, should be the buyers of their own healthcare and health insurance.
·      Tax policy should change to favor individuals over employers.
·      One possible tax change would be to dis-allow health insurance deductions for employers, and at the same time increase wages and lower payroll taxes by a commensurate amount to transfer the tax advantage and premium dollars to individuals. This would result in no net changes to anyone, but it would shift the market to individuals.  
·      Individuals should be free to form groups (marathon runners, vegans, non-smokers, etc.) to help them save on premiums. 
·      Individuals should be able to take their plans with them wherever they go.  (see below regarding McCarran Ferguson)
·      Medical providers and insurers should be free to advertise, disclose prices, and compete openly.
·      The government safety net should be voucher or cash based so that recipient individuals can make their own choices. 

3. Safety net by the States
·      There should be a transition to state funding of the safety net by starting with closed-end block grants, as some current GOP proposals seek to do with Medicaid. (Medicaid is currently managed by the states but funded in large measure by the feds with an open-ended commitment.  This creates a situation whereby states have no incentive to eliminate waste, fraud, and abuse because the feds will always kick in the necessary cash.  This has made Medicaid a runaway train-wreck of inefficiency.  If the states fund and run their own safety nets, it will eliminate this problem.)
·      Federal taxes would plummet and state taxes would rise commensurately, but there would be a net savings in improved efficiency since states are better run overall than the federal government. 
·      The safety nets should provide for the essential needs of the poor, the sick (pre-existing conditions), and the incompetent.
·      Each state should be free do what’s best for their population in terms of how they structure their safety net.

4. (optional)
·      Overturn McCarran Ferguson. 

(One of the issues we hear a lot about is the inability of health insurance companies to sell policies across state lines.  This is because of an old law called McCarran Ferguson that exempts insurance from federal regulation and the commerce clause.  As a result, insurers cannot sell across state lines, must maintain separate corporations in every state, and must answer to fifty state regulators. 

Without McCarran Ferguson insurance would be portable, national, and cheaper.  

But McCarran Ferguson is not a deal-breaker. That law also covers auto insurers who appear to compete just fine.  The reason is, unlike health insurance, 95% of the auto insurance market is individual.  That’s why you cannot go a day without seeing a GEICO or Progressive ad.  So yes, it would help to get rid of this outdated law, but the individual market is the real key.) 

Those are the simple things we can do.  The problem is that we have two parties and two incompatible visions for the future of healthcare. 

Democrats have been dreaming of a federal government healthcare takeover for over a century.  Republicans tend to prefer a free market with a safety net. That impasse is how we’ve ended-up with the worst of both worlds - the flying-car healthcare system.

It’s time to be honest and separate the two functions.  Let the free market function in healthcare, and let state governments transparently tax and spend to provide a proper safety net.  Let planes be planes, and let cars be cars.

I never said it would be easy, but it really is quite simple.

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