The nation is watching to see whether the U.S. Senate repeals the Affordable Care Act (ACA), revises it, or even continues working in earnest to repeal Obamacare.
No matter the outcome, free-market health care reformers will be disappointed. None of the legislation under consideration offers a full-fledged, consumer-driven alternative to Obamacare. A genuinely free-market reform package would wipe out Obamacare’s insurance regulations and expansion of Medicaid, transition to age-based subsidies for insurance, and strongly incentivize people to maintain continuous coverage.
These reforms would produce a vibrant, competitive insurance market where a wide range of affordable coverage is available to all who want it.
Path to Repeal-and-Replace
Until the Senate rejected it on July 25, the likeliest path to repealing and replacing Obamacare appeared to be by passing a pair of amendments. The amendments would have effectively rewritten the American Health Care Act (AHCA), which the House of Representatives approved in May.
The first rejected amendment was the Obamacare Repeal Reconciliation Act (ORRA), based on a 2015 measure vetoed by President Barack Obama. If revived and passed, ORRA would repeal Obamacare’s individual and employer mandates, tax increases, and funding while leaving its regulations in place for two years.
The second rejected amendment was a version of the Better Care Reconciliation Act (BCRA), the Senate’s constantly changing “repeal and replace” bill. BCRA would eliminate some of Obamacare’s taxes and reduce its income-based subsidies.
BCRA, however, retains most of Obamacare’s regulations and permits the Medicaid expansion to continue, in the states that expanded their programs, for three years before gradually ratcheting down federal funding for the expansion population to match that for the rest of Medicaid’s beneficiaries. BCRA also earmarks nearly $200 billion in additional funds for states Medicaid expansion programs.
These Obamacare regulations and expenditures—which BCRA would protect—are to blame for skyrocketing insurance premiums.
For example, Obamacare’s guaranteed issue and community rating mandates prohibit insurers from turning away customers or charging them more because of their health status or medical history. That means patients can wait until they get sick to sign up for insurance. Consequently, the insurance risk pool disproportionately comprises individuals with costly conditions—people who really need the coverage. To cover their costs, insurers have had to hike premiums.
Then there are Obamacare’s age-rating rules, which bar insurers from charging older enrollees more than three times what they charge younger ones. Older folks, however, are generally about five times as expensive to insure. By artificially lowering premiums for older people, the rules force insurers to inflate premiums for younger ones.
To try to prevent people from gaming the system, Obamacare’s individual mandate fines people $695 or 2.5 percent of household income, whichever is greater, for remaining uninsured. It hasn’t worked. Many of the young and healthy have paid the fine or claimed an exemption from the mandate, knowing they will always be able to get coverage if they really need it.
Obamacare’s essential health benefits mandates have also pumped up premiums. These rules require all policies to cover certain treatments and services—everything from pediatric dental care to addiction therapy—whether patients want them or not. Patients looking for basic, low-cost plans are out of luck.
All in all, average premiums on the federal exchange this year were more than double what they were in 2013, before the marketplaces opened.
With too many high-cost beneficiaries and not-enough low-cost ones, insurers are pulling out of the exchanges. Next year, Americans in 42 percent of the nation’s counties will have only one exchange insurer to “choose” from. In more than three dozen counties there will be no exchange insurers at all.
A true free-market reform plan would scrap these regulations. Insurers would be free to offer a wide array of coverage, from bare-bones catastrophic plans to gold-plated policies. People could pick the level of coverage they want.
The plan could require insurers to sell plans to everyone regardless of health status, but only if people maintained continuous coverage over the previous year. The prospect of being locked out of the insurance market would spur young, healthy patients to buy and maintain coverage, without Obamacare’s individual mandate.
To further attract young people into the market, insurers could be allowed to charge older people up to five times what they charge younger ones, in line with actual medical claims.
A free-market reform plan could also protect people with preexisting conditions by providing federal funding for state-based high-risk pools, which would offer them subsidized coverage. Separating costlier patients from the standard risk pools would keep premiums down for the majority of enrollees.
To help older patients pay for rising premiums, a market-friendly reform package could replace income-based insurance subsidies with refundable tax credits that increase with age, as AHCA would do.
Go Big or Go Home
BCRA and the AHCA offer some small improvements over Obamacare. For instance, they would double the amount consumers can contribute tax-free to health savings accounts (HSAs) and let people use HSA funds to pay premiums. But this gesture is a substitute for other free-market reforms Republicans have promised for seven years.
Free-marketers should not let the Senate’s indecision and Congress’ proposed half-measure reforms distract them from the ultimate goal: a bill that uses market forces and individual freedom to guarantee access to quality, affordable coverage.