For GOP Health Reformers, No Sleep Til Cleveland

The Republican National Convention is less than three months away. The party may not have settled on a presidential nominee by then but if the GOP’s top elected official, Speaker Paul Ryan, has his way, Republicans will arrive in Cleveland with a brand-new plan for replacing Obamacare.

The time is right. Insurers are leaving Obamacare’s exchanges, and premiums are spiking. This fall, voters will be asking those on the ballot, Republicans and Democrats alike, what they plan to do about it.

A call to repeal Obamacare will not be enough. The GOP must show the American public how a market-driven healthcare reform plan can deliver better, more accessible care at lower cost.

Americans may be ready for their pitch. Lately, there’s been no shortage of bad news for Obamacare.

In mid-April, UnitedHealth, the country’s largest insurer, announced that it would pull out of all but a “handful” of state exchanges in 2017. The company projects that its losses in the exchanges over the last two years will eventually top $1 billion.

UnitedHealth’s exit will mean fewer insurance options for millions of people. More than 1.8 million consumers will see the number of choices available on their exchange decrease from three insurers to two, according to research from the Kaiser Family Foundation. More than 1 million will have just one choice.

What’s more, 12 of Obamacare’s 23 non-profit insurers — known as Consumer Operated and Oriented Plans — have failed. That’s left hundreds of thousands scrambling for insurance. Eight of the remaining CO-OPs are at risk of collapsing.

This decline in competition will only exacerbate the upward march of premiums. Marilyn Tavenner, the head of the insurance-industry trade group America’s Health Insurance Plans, recently told Morning Consult that rate hikes in 2017 are “going to be higher than we saw previous years.”

She’s right. Insurers have already begun requesting massive rate increases ahead of the May 11 deadline. Minute Health, the second biggest insurer on New Hampshire’s exchanges, has requested a rate hike of 45% for 2017. In Virginia, insurers have asked to increase premiums by an average of 18%.

Tavenner isn’t exactly a critic of Obamacare. She helped implement it as the chief of the Centers for Medicare and Medicaid Services from 2011-2015.

Exchange enrollment is already well below what the Obama administration promised. Last year, the Congressional Budget Office projected that 21 million people would sign up in 2016. In January, the agency revised that number to 13 million, only to rework it again two months later to 12 million. While the final tally came to 12.7 million, this number could drop to 9.5 million by December if last year’s attrition rate holds true.

Already, those who signed up for coverage appear not to be keeping it. In five states, enrollment dropped 14% between February 2016, when enrollment officially closed, and the end of March.

If that rate keeps up, insurers’ losses will surge. They set their rates for the year counting on a mix of healthy and not-so-healthy patients. If the healthy leave the pool, then insurers won’t be able to count on their premiums to offset the cost of treating the sickest patients.

To make up for those losses, insurers will request even higher premiums next year — or join UnitedHealth and beat a path toward the exits. That could cause Obamacare’s exchanges to collapse.

Voters will be looking for candidates who can provide an alternative to that bleak outcome. The GOP must provide one.

The party can start by scrapping Obamacare’s convoluted system of insurance subsidies, which are linked to income, the federal poverty level, and the price of the second-cheapest mid-level “Silver” plan in any given market. These subsidies currently cover eight in 10 people enrolled through Obamacare’s exchanges.

Small changes in any of these variables can have a huge impact on the amount of subsidy for which someone qualifies. And if a worker underestimates his income, he may have to return a portion of his subsidy come tax time.

The system also penalizes workers who advance in their careers. If they get a pay raise, their subsidy decreases. So they could actually be worse off by making more money.

The GOP should replace this mess with four simple, refundable tax credits that vary according to age. Those between the ages of 18 and 35 should get $1,200, those between 35 and 50, $2,100, and those over the age of 50, $3,000. Parents could claim $900 for each child.

Individuals could use these refundable credits either to help offset the cost of a comprehensive plan — or to line their pockets, if they choose one that costs less than the value of the credit. And because they vary according to age rather than income, the credits would benefit all Americans equally.

They’d even begin to level the playing field between the individual and employer health-insurance markets. Individuals would finally be able to purchase insurance with pre-tax dollars, as their counterparts in the employer market have for decades. A cap on the value of health insurance that employers could exclude from income tax — say, $8,000 for individuals and $20,000 for families — would make the system fairer still and help rein in overall health costs.

The GOP’s replacement plan must also bolster Health Savings Accounts. These vehicles allow people to set aside money tax-free for routine health expenses. By giving patients control over their healthcare dollars, HSAs encourage them to spend wisely. One study found that people who switched to HSA plans spent 21% less in their first year, compared to folks with conventional plans.

Finally, the GOP plan can provide some of Obamacare’s most popular features — like its guarantee of coverage, regardless of health status or history — in a more cost-effective manner.

Obamacare tries to counterbalance its coverage guarantee by requiring everyone to purchase a policy. But the penalties for remaining uninsured are so low as to be non-existent. The entire scheme effectively encourages people to wait until they get sick to purchase insurance. And that has caused premiums to skyrocket.

Obamacare’s replacement should instead guarantee affordable coverage to anyone who has maintained it for the previous year. Doing so would protect people from premium increases if they became sick — but discourage them from dropping coverage the moment their medical bills were paid.

For those relative few who cannot find affordable insurance because of poor health or chronic conditions, a replacement for Obamacare could resurrect state-level high-risk pools. If and when the nation’s health insurance market stabilizes, these high-risk pools could be abandoned, as the risk pool would be large enough to affordably cover people of all health statuses.

Obamacare’s ongoing collapse has created an opening for Republicans to present their plan for health reform — and to seek an electoral mandate for it. The Grand Old Party would be wise to seize the opportunity.

Nothing contained in this blog is to be construed as necessarily reflecting the views of the Pacific Research Institute or as an attempt to thwart or aid the passage of any legislation.

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