Right now the Republican program to repeal and replace ObamaCare looks as though it will be effectively thwarted by dissent with the party’s own ranks.

Moderate Republicans are unhappy about dismantling the entire Affordable Care Act. Conservative Republicans are unhappy that too much of this ill-conceived statute will remain in place, given the Medicaid explosion, and the near collapse of the individual exchanges.  Democrats will of course give no aid and comfort to the enemy, so it looks as though the current delay on the vote until early July may not be the last one.

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What to do?  First, develop a modest sense of humility.  It is a lot harder to dismantle a bad system than to put it in place. The new beneficiaries treat their newfound largesse as an eternal entitlement.  Hence efforts to return to the status quo ante of 2010 is treated like a cruel and heartless return to the dark ages.

The trick for success is to abandon the Republican playbook insofar as it tries to solve the healthcare problem with one large bill. Instead the Republicans should look to significant, but incremental, reforms to alter the system that will keep its coalition intact and bring some Democrats back to the table.

The best point of entry is to fix some of the glaring defects of current healthcare exchanges. That is only possible if both parties recognize that weird restrictions on competition within these exchanges will doom them to failure. The side constraints will strangle markets. The first order of business is to loosen that regulatory noose, one regulatory knot at a time. Here is a four-part program.

The current law establishes a medical loss ratio that limits administrative expenses for large insurers to 15 percent of total costs. Nuts. ObamaCare defenders are deluded into thinking that regulators know how to allocate a firm’s budget, but in truth this artificial constraint prevents their efficient deployment of revenues. One unintended consequence of this cap is to starve healthcare companies of the funds needed to enroll new members. Enrollments dip, and the fixed costs of the business have to be divided among fewer customers, driving up per unit costs. Competitive markets never tell firms how to allocate expenses. Remove this mindless constraint, and the market should immediately start to perk up. Democrats should join Republicans in this deregulatory move

Nor is there any reason to stop there. The current system requires any insurer seeking a rate increase of more than 10 percent to get state or federal regulatory approval. But rate regulation works no better for healthcare premiums than for gasoline prices. The system costs lots of money to run, and forces firms to cover customers at a loss. Rely on competition to keep rates in line, and save the costs of misguided bureaucratic oversight.

The cost structure will drop significantly if government regulators don’t presume to know what set of benefits healthcare insurers should offer. Right now ObamaCare assumes that everyone in the insurance market has no idea what to sell. Why else require the various plans to offer rich benefit sets that are never found in any voluntary market at any price level? The hubris forces people to pay more than they want for benefits they would rather do without. Those net extra costs are an implicit tax on healthcare benefits.  Like all taxes, when they get to high, they shut down the market.

Fourth, don’t force health carriers to take customers they don’t want at premiums that don’t cover the full costs of providing them services. These programs amount to off-budget subsidies to some consumers, which today comes out of the pockets of other plan participants.  It is pointless to tell younger people that health insurance is a great deal when huge fraction of their premiums go to fund older individuals.  So they drop out and the plans, the subsidy is lost and the market implodes. 

The moral here is clear. If you want to subsidize older persons, don’t do it covertly. Put it on budget and have a candid debate to what funds should go to support what groups. At that point, the political system will have an honest debate over budgetary allocations that is impossible when subsidies are concealed by various community rating restrictions.

The genius of any exchange is that it matches buyers with sellers. It can do that efficiently if the baggage that blocks their operation is removed.  As the private markets become stronger, the number of insured should eventually increase as lower costs and higher efficiency will draw more people into the system.  The Republicans are right that the current entitlements in health care are no more sustainable than they for government pensions.

Fix this problem, even partially, and a return to markets should reduce the gloomy Congressional Budget Office predictions that tampering with ObamaCare will drive people from insurance markets.  And once the voluntary market is fixed, then something could be done on to fix Medicaid and Medicare.  The status quo is unsustainable.  But the mess of ObamaCare cannot be fixed in one omnibus bill.  It requires intelligence, focus and discipline to adopt a sensible transitional strategy. There is no way, politically or economically, to fix health care with one grand maneuver.  

Richard A. Epstein is the Laurence A Tisch Professor of Law, New York University Law School; the Peter and Kirsten Bedford Senior Fellow, The Hoover Institution, and the James Parker Hall Distinguished Service Professor of Law Emeritus and senior Lecturer, the University of Chicago Law School.


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