David R. Henderson  

David Rose on Obamacare Strategy

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The Wall Street Journal editors had an interesting unsigned editorial ("In Search of an Obamacare Breakout," May 22) recently (they call such editorials "Review and Outlook") on what Republicans in Congress should do if the Supreme Court finds, later this month in King v. Burwell, that the Obama administration did indeed violate the law by giving health-insurance subsidies in states that lack state-created "exchanges."

The political problem? Here's how the WSJ editors put it:

If the High Court upholds the plain text of the Affordable Care Act and vacates the insurance subsidies in the 37 states that did not establish their own exchanges, the White House will try to turn the disruption to its advantage. Some 7.7 million people are now part of the entitlement in those states, and their largely Republican Governors will come under intense industry and constituent pressure to restore the subsidies by joining ObamaCare.

In private, the Governors are petrified that dysfunction in Congress will force them into a lose-lose trench. If they set up a state exchange, they'll be pilloried by their GOP base. If they don't, they'll be blamed for cutting people off medical care.

The Journal editors' solution:
The best response we've heard comes from Mr. Johnson [Ron Johnson, Republican Senator from Wisconsin] and has broad support among Senate Republicans. In the event the Court overturns the subsidies, Mr. Johnson proposes a straight extension of the subsidies through August 2017 for anyone enrolled as of this summer. That insulates people who through no fault of their own would suddenly be victimized by ObamaCare.

In return, he'd restore to states the freedom to deregulate ObamaCare's central planning diktats and offer more policy choices to consumers. Over time, the subsidies would be less necessary as markets healed.

My favorite economist at the University of Missouri, St. Louis, David Rose, sent me a link to his letter published in the WSJ that goes further than the Journal but is in the same spirit. He writes:
Republicans should pass a bill that commits to continuing the same level of funding in those states that didn't establish their own exchanges with the provision that they must now offer a voucher option. The voucher option will allow citizens to choose a voucher equal to the subsidy they would have received before the Supreme Court decision. But here's the key: Insurance companies will be allowed to offer plans for the voucher option that are subject only to the state regulations that existed before ObamaCare regulations went into place. Going forward such plans will continue to be regulated by their respective states only.

A voucher option would be simple to administer and would make it impossible to blame Republicans for torpedoing ObamaCare because they will have maintained full funding. It would also enjoy support among Democrats desperate to do something to distance themselves from the original bill.

The states that didn't set up exchanges are precisely the ones filled with voters who are most likely to respond positively to a voucher option. It will not take long for political pressure to mount to pass another bill requiring that all exchanges offer a voucher option.

This is very clever. It's often easy for advocates of economic freedom to come up with policy proposals that solve real problems. It's much harder for us to come with policy proposals that contain the seeds of their political success. I think David Rose has one.

When I wrote him to congratulate him on his thinking, he replied:

It's not enough to recognize a bad equilibrium. It's not enough to spell out a good equilibrium. The challenge is building policies that can get us from the former to the latter.

COMMENTS (10 to date)
Tim Ozenne writes:

Or, how about allowing vouchers to apply to any policy approved by any state, so "folks" in CA can buy policies approved in any state.

Scott Sumner writes:

Great post, this sounds like a promising idea.

Charlie writes:

Correct me if I'm wrong, but the subsidy is already a effectively a voucher, correct? It can be used on any plan hosted by the exchange. The change here is just to allow plans without the same coverage as O-Care, basically stripped down plans.

But what about community ratings and organized exchanges. Will those go away under this plan? Would you and Scott support that?

That would be an interesting experiment to run.

Kenneth A. Regas writes:

You mean that when the dust settles, what's left of Obamacare could allow actual health insurance - you know, the kind that's cheap, that you hope to not collect on, that's just designed to keep a severe medical event - accident or hospitalization - from bankrupting the insuree? Be still my heart.


KLO writes:

I have no clue how the voucher idea would work, and I suspect that the person who came up with it does not know either. The subsidy a person receives is based on his income and the cost of the second lowest cost silver plan that he could enroll in. In all cases, the second lowest cost silver plan is a guaranteed issue plan that is rated for age, tobacco, family size, and location only.

States on the voucher system would presumably not have second lowest cost silver guaranteed issue plans, so how would the subsidy be set? I suppose we could set subsidies based upon 2015 premium data, perhaps with an index for inflation for all future years. If we were to do this, the subsidy would not be based on the actual cost of coverage, leaving many sicker and older people unable to afford coverage. Republicans would be blamed.

An alternative jury-rigged system in some states that is designed around the ACA seems like the worst possible option. We may be headed there, but I cannot see why anyone would see this as improvement over the current system. By no means would it be "easy to administer."

MG writes:

Sadly, the challenges, as Mr. Rose puts it, would still continue. Start with how the putative SCOTUS decision is greeted. If the usual opinion makers greet it as judicial usurpation, lawless right-wing activist court, etc., very few Dems will move a finger to help. To gather support, any bill will at best be loaded with irritants many here would not like. (The worse irritant would be that Dems will say: great here is a bill "clarifying" the various "unclear" clauses in the original bill Problem fixed...) Mr Rose should also have a plan B through which Congress can bypass the Admin in funneling the money to the states, because this WH believes it can afford to veto and/or ignore any "bad" legislative action (or inaction) when the "debate" moves to the Kangaroo court of public opinion.

Hazel Meade writes:

It's a promising idea, but I suspect the president will not sign anything that doesn't mandate guarenteed issue and coverage of pre-existing conditions.

Hazel Meade writes:

Er, I mean guarenteed issue and community rating.

mike davis writes:

But state regulations weren’t all that great either. Just for grins I googled “adverse selection and state insurance regulation”. I found some interesting academic papers that I want to read more closely but I also turned up a 2009 Blog post from some guy named Bryan Caplan . Here’s the money quote:

Bottom line: Real-world insurance regulation has little or nothing to do with economists' "moral hazard and adverse selection" mantra. The "intellectual" bases of real-world regulation of insurance are rather populism and paternalism: Big bad insurers won't cover people unless it's profitable, and simple-minded consumers don't care enough about their own health to pay for it themselves.

This Caplan character (if that’s even his real name) is probably some raving crank holed up in his Mom’s basement, but he may be on to something. (Insert grinning emoji here.)

I’m pretty sure that both Davids (Henderson and Rose) think the health insurance system that is evolving under ACA is a mess. Who doesn’t? They also recognize that the relevant question is how best to navigate the complex political hurdles necessary to get something more sensible. But superimposing pre-ACA state regulations on top of the subsidies plan may be like bringing a tiger to a tea party. Even if those who, like me want something closer to a free market for health insurance, don’t get blamed for the ensuing chaos, there’s still no guarantee that the outcome will be to their liking.

Given the latest news about the dramatic increases in premiums, I’m starting to hope that King v Burwell continues to allow the subsidies. If it goes the other way, I wouldn’t mind a simple fix that just allows subsidies for the policies purchased from the Federal exchange. That’s the cleanest way I can imagine to demonstrate the madness of the ACA insurance regulations.

magellan writes:

The problem of fixing broken health insurance markets has big similarities to the Regan era challenge of electricity market restructuring.

There are big differences, but the core issue is how to effectively combine government regulation with price signaling and market competition to build a workable model. The solution uses market forces as much as possible, combined with an appropriate regulatory framework.

Many folks called the changes to electricity markets "deregulation", but that was incorrect. The size of the regulatory framework needed to manage restructured electricity markets is much greater than what was needed to regulate simple monopoly utilities.

The same is true with health insurers and that's why Obamacare is so darn complicated. IMO, any alternative to Obamacare that tries to fix our broken individual health insurance markets (and they were terribly broken before ACA), will be massively complex out of necessity.

Beware of folks trotting out simple solutions that claim to fix this broken market. They will not work.

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