On the conservative vision for healthcare

Screen Shot 2013-02-21 at 11.32.53 PMFormer Congressional Budget Office Director Douglas Holtz-Eakin and Forbes writer Avik Roy have an op-ed in Reuters calling out conservatives for dropping the ball on developing a coherent health reform strategy and rally around a “long-term vision of what a free-market healthcare system should look like.” What’s remarkable is that their proposal (beyond the obligatory shout-out to the Swiss system; more on that later) effectively concedes the inevitability of the Affordable Care Act, writing “Once the bulk of the program begins to be implemented in 2014 — especially its trillions of dollars in new health-insurance subsidies — it will become politically impossible to repeal.” Comparatively speaking, which is to say compared to a couple of years of ‘Repeal and Replace,’ that’s quite the admission of defeat.

I doubt that they would characterize their words as such, so perhaps it’s more of an acceptance of a changed landscape. Indeed, their proposal calls for a “transition” which is rather straightforward, broken down into four parts that I’ll just block-quote here (emphasis mine):

The first is to replace or reform Obamacare’s exchanges, which are larded with costly mandates and regulations. These drive up the price of insurance, while limiting insurers’ ability to come up with more innovative, cost-efficient products.

“Community rating,” for example, will dramatically increase premiums for young people, a counterproductive approach when one considers that most uninsured Americans are in their 20s and 30s. States should build free-market exchanges with affordable health plans — as Utah has done — and demonstrate their superiority to Obamacare’s costlier approach.

Second, Republicans in Congress should put the size, scale and growth of Obamacare’s insurance subsidies on the table in all current and future budget talks. The subsidies should end at 300 percent of the federal poverty level, as they do in Massachusetts, instead of 400 percent. And they should not grow at a faster rate than the economy, as they are now designed to do.

Third, we should use the insurance exchanges in the service of Medicare reform. Instead of bothering with complex legislation, Congress should raise the eligibility age for traditional Medicare by three months each year — for the foreseeable future. Retirees will then gradually migrate into the exchanges’ premium-support systems.

Medicaid-eligible seniors should also be offered exchange-based coverage, to improve the quality and coordination of their care.

Fourth is to gradually shift the remainder of Medicaid’s low-income enrollees into the exchanges. Today, Medicaid recipients face a strong disincentive to seek work, because entry-level jobs can force them to give up their health coverage in exchange for modestly higher income. The exchanges would allow these workers to climb up the income ladder while maintaining their insurance.

I had a less charitable interpretation on Twitter, to say the least:

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This isn’t the first time I’ve written about Roy’s ideas (see here and here), but snark and partiality aside, he and Holtz-Eakin are some of the few conservative policy people actually engaging seriously with healthcare reform. So while I may disagree — sometimes vehemently — with their ideas and proposals I and many others appreciate the effort to go beyond bromides and talking points (even if the former and latter are sometimes derived from their ideas).

Back to the merits of their proposal, though, please don’t take my random blogger word for it. The more authoritative Josh Barro, writing on Bloomberg:

And then the specific reforms Roy and Holtz-Eakin propose aren’t very good. They call for abolishing “community rating,” a rule that forces insurers to sell policies at the same price to everyone regardless of many characteristics, such as health status and sex. Price adjustments based on age are allowed within defined boundaries.
As Roy and Holtz-Eakin note, community rating raises premiums for people who are young and healthy. But that’s sort of the point; it’s a mechanism of redistribution from the healthy to the sick. Without it, health premiums would become unaffordable to many sick people.
Roy and Holtz-Eakin also propose to move Medicare and Medicaid recipients onto PPACA-style exchanges. Doing so with Medicare would reduce public expenditure while increasing total health expenditure, because private insurance plans tend to be more expensive than Medicare. All fiscal savings would come from shifting health costs from the government to individual middle- and upper-income seniors. This is less desirable than the approach taken in PPACA, which seeks to reduce the actual cost of health care provided to seniors.
Moving Medicaid recipients to exchanges would likely improve the quality of care, but it would raise public expenditure on health care. This is because Medicaid is far cheaper than private health plans, and unlike with Medicare, there is little room to shift health costs onto Medicaid’s poor recipients.

Earlier in that piece Barro calls it for what it is; keeping the Affordable Care Act but making it much worse. Yglesias agrees, but perhaps more interesting is the continued conservative fascination with Switzerland’s healthcare system (a basic primer). Roy in-particular enjoys praising their model, which is more firmly ensconced in private markets. However, there’s some important caveats in the Swiss model being the conservative healthcare Shangri-La. For that I’ll turn to what ends up being an incredible smack-down of the comparison, courtesy of the indispensable Aaron Carroll over at the Incidental Economist:

Do they know that the Swiss health care system has an individual mandate? Do they know that the Swiss health care system has arguably more regulations, such that they can’t even charge a 25 year old and an 80 year old a different price (like you can in Obamacare)? Do they know that the Swiss health care system regulates drug prices and fees for lab tests and medical devices? Do they know the most someone can pay for insurance in Switzerland is 8% of income (which is less than Obamacare allows)?
Do they know that the Swiss health care system employs community ratings?
Do they not know that this [shifting Medicaid enrollees to private exchanges] will be more expensive than giving them Medicaid? Do they not know that’s why Congress didn’t do it?

If I had to guess I’d say both Roy and Holtz-Eakin “know” these things in an argumentative sense and understand how health insurance operates. Furthermore, I’d assume they know in theory and practice how community rating works, the reasoning behind guaranteed issue, etc. I’m sure they generally get the basic framework for how any type of insurance works (which is just to redistribute money from one category of persons to others). Be that as it may they seem to think that these integral aspects — a government mandate, heavy regulation, community ratings — of Swiss care do not play a positivistic role. Praising everything but the (major) parts they don’t care for, at some point, ends up making the comparison meaningless in the way they intended.

This is where I think first principles and conservative ideology comes into place; first principles in the philosophical sense that an assumption (markets will make health care better) is irreducible (irrespective of whether the problem is not market-related) and foundational (the conversation always begins with markets), and conservative ideology in reference to the perspective that views spending less on future entitlements an unquestionable good. Of course in regard to Holtz-Eakin and Roy specifically, this is conjecture on my part…I don’t presume to speak for either of them.

Yet there does seem to be a bit of theme emerging. For all the strawman rhetoric on liberals thinking government can solve every problem, it’s not quite as much of a stretch to describe conservative approaches to healthcare as being all-markets everything — markets to solve providing healthcare to the elderly, markets to solve providing healthcare to low-income children (and their single mothers, the disable and long-term care for the elderly), markets to obviously solve the Affordable Care Act (which it should be endlessly noted is market-based reform), etc. The conservative approach to healthcare reform seems to be a broken record with the title Above All Else, Privatize, which isn’t always the case.

So while market transactions as a first principle for solving all societal ills is perhaps a bit unfair, it’s not too far off the mark with health insurance. The problem is that markets wouldn’t be particularly good at solving some important aspects of American healthcare, or least in such a way that still leaves a decent amount of people affordable access. Whatever you think of the distortions created by subsidies (of which their ‘market solution’ would be to simply remove or limit them), they aren’t only one. There are distortions that involve economic incentives on the behalf of physicians to over-test, imperfect information on prices and the consumer’s ability to accurately predict their future health needs, without even mentioning the profit-driven motive to reduce payouts. Absent any non-market influence health insurance won’t work very well for the people who need it the most.

What these policies would accomplish, and accomplish quite well, is reduce federal spending. Moving every American to market-based exchanges, limiting subsidies, and (this is critical) tying future growth to GDP (which grows much more slowly than health care) means the government will spend less as time goes onward. To the extent this is an unquestionable good, it may only be in the sense that ignores while government will be spending less, Americans would be spending more to make up the difference. To be fair the conservative counter is that markets will naturally reduce the cost so much that everyone would ultimately be paying less. If that were true (rather than a gigantic assumption) then the state-based exchanges in the ACA should have similar outcomes. I’m not necessarily holding my breath that the mere existence of a market will be such a panacea in bending the cost curve. I don’t think conservatives should either.

Sure, there are basic market dynamics in other areas of the economy, with less government interference, that reduces product costs. Health insurance is not one of those areas. In the case of Holtz-Eakin and Roy they just assume that it is no different and (improperly) cite other non-governmental portions of health care sectors as empirical proof. But the difference between devolving all duties to the healthcare market as a first principle and an empirical truth is the difference between seeing Switzerland as successful only because of its privatized portions and seeing them as successful because they found a way to use both to achieve universal coverage.

*Update 1. Edited for clarity, some link inclusions.

*Update 2. Holtz-Eakin and Roy respond to critics. Aaron Carroll counters, so does Krugman.

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