In the aftermath of President Obamas re-election, in which the implementation of the Affordable Care Act plays a large role, many states are facing an important decision. Should these states act as agents of the Obama administration, and set up state-based versions of Obamacares subsidized health insurance exchanges? Or should they say no, leaving implementation of the law in the hands of HHS Secretary Kathleen Sebelius? In this article, I will discuss a third possibility: that states set up their own markets for health insurance, markets that drive down the cost of insurance by ignoring Obamacares tangled web of mandates, regulations, and taxes.
Health insurance exchanges, as liberals have been happy to point out, were originally a conservative idea. But the conservative idea of health insurance exchanges is quite different from the one expressed by Obamacare. Indeed, Obamacares exchanges are more accurately a perversion of the term.
"If the ACA didnt include exchanges as a method to distribute the subsidies," says Brett Graham of health-exchange consultancy Leavitt Partners, "I guarantee that there would be more exchanges up and running than there are today by a factor of three or four or even five." Instead, the implementation of Obamacares exchanges is increasingly looking like a mess.
The original idea: Save consumers money through choice and competition
Exchanges were conceived by conservative health-policy experts as a way to work around the original sin of the U.S. health-care system: the fact that our tax code encourages Americans to obtain insurance through their employers, instead of buying it for themselves. While the employer-based system works great for people with well-paying jobs that offer health coverage, it works terribly for people who are unemployed, or havent been offered employer-sponsored coverage, or go back-and-forth between those two situations.
The reform that economists of all stripes have long sought is to equalize the tax treatment of employer-sponsored and individually-purchased health insurance, so that Americans who sought to buy health insurance for themselves would not face discrimination. People who shop for their own coverage are naturally going to choose insurance products that are good value for the money—something that doesnt happen today.
The original, market-oriented exchange concept was designed as a way around this problem. Today, most employers buy coverage for their workers on a defined-benefit basis: employers buy insurance with a certain set of benefits, such as hospitalization coverage, and take the cost out of workers wages. As the cost of insurance goes up, employers maintain coverage for their workers, but take the cost out of workers take-home pay.
Under the market exchange concept, employers could give workers a tax-advantaged defined contribution towards their health insurance. For example, an employer could give a worker $10,000 with which to shop for the coverage of his choice on the exchange. Employers who otherwise would be reluctant to offer health insurance could partially subsidize coverage by offering a smaller amount, expanding opportunities for low-wage workers.
Its this ability for individuals to choose among a wide range of options that is the essence of market-based reform. "Allowing employers to offer health benefits on a defined-contribution basis," explains Ed Haislmaier of the Heritage Foundation, "gives workers the ability to choose the coverage that best suits them and their families from a wide menu of options, creates new incentives for insurers and medical providers to compete for customers, and encourages greater diversity and experimentation in health plan design and benefits."
One big advantage of these kinds of exchanges is that they are helpful for people who work multiple jobs. If a worker earns income from two different jobs, each paying $30,000 and contributing $5,000 to health insurance, that worker now has the ability to purchase more generous coverage.
Obamacares exchanges force people to buy expensive insurance
Obamacare takes this concept and distorts it in a critical way, by taking over the insurance market and micromanaging the design of insurance plans that can be sold on the laws exchanges.
As my Manhattan Institute colleague Paul Howard notes, the thrust of Obamacares exchanges is to shoehorn consumers into a narrow set of government-approved products, so as to protect them from making choices that the government deems unwise. The side effect of this approach is to prevent insurers from coming up with innovative products that deliver cost-efficient care. "The emphasis in this active-purchaser model," says Paul, "is ensuring that there is no wrong option for plan choice within the exchange, even if restrictions on insurer participation limit competition and consumer choice."
Imagine if the government required that you could only buy a home that was between 2,000 and 2,500 square feet, with two bedrooms, five electrical outlets, and a solar panel, and you get a sense of what Obamacares exchanges do.
Obamacare gives the Secretary of the U.S. Department of Health and Human Services the power to mandate that insurers cover anything and everything that HHS deems "essential." Weve already seen how this is a highly politicized process; consider that insurers are now required to cover oral contraception, needlessly driving up the cost of exchange-based coverage, and infringing upon the First Amendment rights of religious institutions.
Obamacares exchanges drastically raise the cost of insuring the young by instituting "community rating," a senseless policy given that the majority of the U.S. uninsured population is under 35. "If I were a young person, I can see elements of this bill that I wouldnt like," says Brookings Henry Aaron, who also serves as vice chairman of the District of Columbias exchange. While the exchanges allow for true catastrophic health insurance, Obamacare only allows them to be sold to individuals younger than 30.
Otherwise, plans must be sold under a specified actuarial value (the percentage of expected health costs that will be covered by the insurer, as opposed to by co-pays, deductibles, and the like), with a floor of 60 percent. That requirement will also drive the cost of insurance upward; according to researchers at the University of Chicago and Towers Watson, more than half of Americans with individual-market insurance in 2010 had coverage with an actuarial value below 60 percent.
The bottom line: Obamacares exchanges will force millions of Americans to buy more costly coverage than they currently own.
States gain nothing by implementing Obamacares exchanges
In a nod to conservatives interest in state-based solutions, Obamacare gives states the option to set up their own exchanges, rather than having the federal government do it. But theres almost no point in states setting up their own exchanges, because states have no flexibility to improve upon Obamacares creaky design.
If states set up the exchanges themselves, they are liable for the costs of operating them. And setting up these exchanges is no picnic. "To call it complex would probably be an understatement," observes Sarah Kliff. HHS Secretary Kathleen Sebelius has already been forced to push back the timelines for exchange implementation.
Given that its Sebelius who authored the avalanche of regulations that govern Obamacares exchanges, many states understandably feel that its Sebelius that should take responsibility if things go wrong with their implementation. Politically speaking, states that hit snags setting up their own exchanges face the risk of blowback from voters. Theyd much rather have that voter anger directed toward Washington.
Instead, states should set up health insurance clearinghouses
But states that decline to set up Obamacare exchanges shouldnt sit on their haunches and do nothing. Instead, they should strive to show that free-market reforms can do a better job of offering affordable health insurance. In this way, should Obamacares exchanges falter, those who have been skeptical of the law will gain a mandate for reform.
What these states should do is set up a free-market version of a health insurance exchange: what Haislmaier and Howard call a "clearinghouse."
The health insurance "clearinghouse" is meant to capture the original conservative idea for an exchange, and separate that idea from Obamacares exchanges. The key principle in a clearinghouse is that it caters to any willing seller of certified health insurance products. As Tom Miller and Scott Gottlieb write in the Wall Street Journal, "Any willing insurers already licensed to operate in a state should be able to offer plans. [Clearinghouse] operating rules would focus on providing better information to consumers, rather than limiting the types of plans available."
Clearinghouses can thereby serve the key function of allowing individuals to aggregate the insurance subsidies they obtain from their employers and the government, and provide cheaper insurance than that offered in Obamacares exchanges. If these clearinghouses are successful, Kathleen Sebelius—or some future HHS Secretary—could grant waivers to allow Obamacares insurance subsidies to flow through them.
Utahs innovative clearinghouse model
Utah has been the nations innovator in setting up a health insurance clearinghouse. "Several other states are interested in establishing similar plans" to Utahs, write Miller and Gottlieb, "and daring the administration to stop them."
While the number of enrollees in Utahs clearinghouse is low—6,800 in June 2012—the marketplace only recently emerged from beta-testing. Enrollment could increase substantially if HHS were to allow Obamacares insurance subsidies to funnel through it. Utahs performance compares favorably to that of Massachusetts, where 5 years into Romneycare, only 19,331 individuals purchased unsubsidized non-group insurance. (Massachusetts has 2.3 times the population of Utah, and its program was implemented state-wide without beta-testing.)
As Amy Lischko—who served as Director of Health Care Policy in Massachusetts under Mitt Romney—puts it, "Although the [Massachusetts exchange] has engaged in innovative marketing…to enroll eligible individuals into its programs" under current Governor Deval Patrick, "these efforts have not attracted large numbers of non-subsidized people and have been very costly." Patricks anti-market implementation of the Romneycare exchange is the model for Obamacares.
Doing nothing would be a serious mistake
Sebelius, as partisan an operator as they come, could decline to connect these clearinghouses to Obamacares subsidies. But clearinghouse states will have a powerful political message: that their markets will offer health insurance that is far more affordable than that required by Obamacares exchanges. And they also have significant leverage: a critical drafting error in the Affordable Care Act may mean that Obamacares insurance subsidies must flow through state exchanges, because federal exchanges and federal-state partnerships were not allocated that authority by the law.
Most importantly, Republican state governors face a choice: do they "just say no" to Obamacare, without promoting a constructive alternative? Or do they sit back and let Washington impose costly federal exchanges upon their states?
Remember that, without a state-based alternative, Obamacares individual mandate will force many state residents to purchase expensive exchange-based coverage. If that system fails, with no viable fall-back option, expect calls for true single-payer health care to escalate. Across the policy spectrum, systemic failures nearly always result in more government intrusion, not less.
Whether you still want to repeal Obamacare, or whether you simply want to make the health-care system better, youre more likely to achieve both objectives by helping the residents of your state afford health insurance. On the other hand, if Obamacare causes the individual health insurance market to collapse, with no alternative in place, free-market reformers will have the most to lose.
Original Source: http://www.forbes.com/sites/aroy/2012/11/19/what-states-should-build-instead-of-obamacares-health-insurance-exchanges/