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Manhattan Institute

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Healthcare Reform: Mission Possible

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Healthcare Reform: Mission Possible

Washington Examiner May 19, 2017
Health PolicyAffordable Care Act

We're going down to the wire again in the Senate on healthcare reform. The American Health Care Act finally passed the House, but CBO hasn't scored the latest version. If the loss in coverage is still as large as the last version — up to 24 million by 2026 — it will only reinforce the Senate's determination to make significant changes to get better coverage numbers.

And they'll have to do that while threading the needle between conservatives like Sens. Ted Cruz and Rand Paul, and moderates like Sens. Bill Cassidy and Susan Collins. Ideally, Republicans would also make an effort to court moderate Senate Democrats, who are going to be under enormous pressure to "just say no" to anything Republicans propose. Bipartisan support can help make any reforms more stable in the long run — something insurers, providers, and the millions of Americans relying on individual coverage want.

Mission impossible? Maybe not.

There's a big, basic trade-off that might work: Republicans would agree to stabilize the individual insurance market, and even consider targeted coverage expansions, in return for Democrats compromising on Medicaid reforms and embracing much greater state-based flexibility that could enhance competition among insurers, doctors, and hospitals, and slow entitlement spending.

This compromise would reflect a growing consensus on the Left and Right: America's biggest healthcare problem is high costs driven by a lack of competition and productivity. About 50 percent of the increase in healthcare costs in 2015 was attributable to labor costs — costs that are ripe for disruption by technology, including the use of less expensive, high-quality mid-level practitioners. Research suggests that hospital consolidation is occurring at a rapid clip, raising prices and, in at least some cases, hurting the quality of care. Home-based care, supported by telemedicine and diagnostics, could reduce costs and reduce reliance on expensive bricks and mortars facilities.

Unfortunately, regulations — many at the state level — over-regulate healthcare, protecting incumbent providers from firms that could offer better services at lower cost. Paring back those regulations, with the government focusing on baseline patient safety and pricing transparency, would force providers to compete on costs and outcomes.

The advent of new, lower-cost care delivery systems would empower insurers to offer more affordable plans, expanding access to basic healthcare. Effective competition would also lower healthcare costs for taxpayers and employers, freeing up capital for wage increases, infrastructure investments, or an expanded earned income tax credit for the poor.

Competition could further both Republican and Democratic policy goals, and depoliticize our bitter healthcare debates.

The Senate can make it happen. Here's how:

Make a longer transition out of Obamacare. A multiyear transition out of Obamacare should be entirely reasonable. In the meantime, states should have access to all of ACA spending (Medicaid, premium tax credits, cost-sharing reductions, small business tax credits) to help retool their insurance and delivery systems through the ACA's 1332 waivers, and Medicaid's 1115 waivers, to prepare for a more competitive, market-oriented healthcare system designed around high deductible plans with health savings accounts.

In the interim, Congress should offer states funding for high-risk pools or reinsurance to stabilize markets, but only if they commit to a menu of both supply (regulatory reforms) and demand (freeing up information on provider costs, quality and safety) that enhances competition.

Target federal support for the uninsured through a high-deductible health plan with a Health Savings Account. Everyone who doesn't have Medicaid, Medicare, or employer-based coverage today should have access to a high deductible plan, or any other plan design with a similar level of cost sharing, attached to a health savings account. If consumers picked a cheaper plan than the baseline, the savings would accrue into the HSA. The federal government could top up the account for low-income Americans, and phase out the support at around 300 percent of the federal level (lower than the Affordable Care Act, but still enough to capture the vast majority of uninsured.) The credits should be available through private exchanges, lowering administrative burdens on states.

States should also be given the freedom to redesign cost-sharing under the ACA's current bundle of essential health benefits, and find ways to reward plans and providers that manage the care and costs of high needs patients (like diabetics or patients infected with hepatitis C) effectively, giving plans an incentive to cover these patients, rather avoiding them. Plans, at the same time, should have greater freedom in designing provider networks and cost-sharing to encourage the use of cost-effective options.

Right-size Medicaid spending. Currently, wealthier states draw down more federal dollars than poorer states, but don't necessarily get better outcomes for their money. A better approach would be a national baseline for Medicaid coverage (say, at 100 percent of the federal poverty level), with federal support delivered through per-capita caps for everyone who falls under that line. That change would expand insurance coverage in red states, a goal Democrats should welcome. States would also have the option of moving healthy, able-bodied Medicaid enrollees into private coverage and have greater flexibility in managing their Medicaid programs.

Paying for these changes should come from lowering the long-term growth of Medicaid spending, capping the tax exemption for employer-based insurance, lowering the baseline for federal tax credits down to 300 percent of the poverty level from 400 percent, and broadly encouraging the use of consumer-driven health plans.

If the Senate adopts these strategies, they can fulfill President Trump's campaign promises by delivering less expensive coverage for more people while setting the U.S. healthcare system on a more sustainable long-term trajectory. Federal subsidies and state Medicaid spending would be better targeted at the sickest and poorest patients.

Does anyone want to take credit for that? We'll see.

This piece originally appeared in the Washington Examiner

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Paul Howard is a senior fellow and director of health policy at the Manhattan Institute. Follow him on Twitter here

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