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The Public Policy
How to Replace Obamacare
Conservatives should articulate a vision for Patient Power.
A COMMON LIBERAL REFRAIN is that conservatives have no real health care agenda of their own— other than, of course, opposing Obamacare. For instance, in the midst of debate over the president’s signature health “reform” bill, one progressive Florida congressman famously told the House that the GOP’s plan was for sick Americans to “die quickly.”
Baloney. Conservatives could probably stand to put more emphasis on the latter part of “repeal and replace,” but the fact is that many free-market health care reforms enjoy broad consensus on the right.
The Supreme Court is expected to rule on the constitutionality of Obamacare in late June—after this magazine hits the press. But while the court’s decision could be explosive politically, it will not change the need for conservatives to articulate a strong alternative to state-centered health care. The answer is patient power.
EXPLODING HEALTH CARE COSTS in America stem ultimately from what is known as the thirdparty payment problem—that is to say, the great majority of health costs are not paid by the patients themselves. There is almost always some third party, whether it be an insurance company, an HMO, or the government, footing the bills. Indeed, in 2008, 84 percent of health expenses were paid for by private health insurance or government programs such as Medicare, Medicaid, or CHIP.
Consequently, the consumer has no incentive to control costs. To put it in formal economic terms, the consumer has an incentive to spend until the marginal benefit of additional spending is zero. For instance, if a $1,000 procedure costs you nothing, it’s worth doing—at least in economic terms—for just $1 Of benefit. In an efficient market, consumers spend until the marginal benefit is equal to the marginal cost. That $1,000 procedure should only really be worth it for $1,001 of benefit.
In more colloquial terms, the problem is that consumers have an incentive to spend on health care until it hurts, and they have no incentive to shop around. Even worse, doctors and specialists not only have no incentive to control costs, but they actually have a direct financial interest in spending more. Health care providers have no incentive to compete on price, so they compete primarily on quality and secondarily on convenience.
That explains why the American health care system produces far and away the highest quality care in the world: The rewards go to he who creates the best new innovations and most effective new treatments. It also explains why new technology— which drives down costs in every other field—actually increases costs in medicine.
The only solution is to unite the decision over what health care services to purchase with the economic responsibility to pay for them, so costs can be weighed against benefits. And there are only two ways to do that: either the third-party payer (the government or insurance company) is given the power to decide what treatments the patient is allowed to consume, or the patient is given market incentives to consider the full costs of his health care.
Obamacare (and most foreign systems like Britain’s National Health Service) effectively impose the first alternative. With 159 new bureaucracies, boards, agencies, commissions, and programs to govern American health care, plus the individual and employer mandates that require specific health insurance policies, Obamacare could be rightly Labeled “government-centered health care.” The government takes primary responsibility for paying health expenses. The government takes primary responsibility for deciding what health care services its citizens are allowed to consume. The government, then, decides whether each individual’s health care is worth the price. This is why the concept of the government “death panel” expresses a fundamental truth about Obamacare.
WHAT AMERICA NEEDS NOW is the opposite, a patient-centered alternative that maximizes consumer power, choice, and control over health care and its financing. The intellectual godfather of this approach is John Goodman, president of the National Center for Policy Analysis (NCPA) in Dallas and author of the 1991 book Patient Power published by the Cato Institute.
Central to this concept are Health Savings Accounts (HSAs), which were first proposed in 1981. HSAs include an insurance policy with a high annual deductible, in the range of $2,000 to $6,000 (the higher the better). Such high deductibles reduce the cost of the insurance so much that the savings would mostly cover the deductible in the first year. The HSA funds earn interest tax-free and roll over year after year. After one healthy year with few or no medical expenses, the patient has enough money in the account to cover all expenses below the deductible.
This transforms the incentives of third-party payment. For all but the most catastrophic health expenses, the patient is essentially using his own money. Whatever he doesn’t spend he can keep for later health expenses or for retirement. The patient, then, will try to avoid unnecessary care and will look for the best prices for routine visits or services.
In turn, since patients are then concerned about controlling costs, doctors, hospitals, and other health providers compete not just to maximize quality, but also to lower prices, as in all normal markets. (This competition will become more intense and effective the more widespread HSAs become.) These incentives would flow all the way through to the developers of new technologies, who would compete to develop technologies that both improve quality and reduce costs.
Federal legislation providing for HSAs was adopted by the Republican congressional majorities in the 1990s and has improved over the years. These HSAs have been proven to cut the growth in health spending by as much as 50 percent. Participation in HSAs and similar high-deductible plans has soared in recent years and may now exceed HMO enrollment.
PATIENT POWER REFORMS replacing Obamacare would expand HSAs throughout the health care system. Workers should be allowed the freedom to choose them in place of employer-provided coverage, the poor to choose them for their Medicaid coverage, and seniors to choose them for Medicare.
About the Author
Stephen Moore is a member of the Wall Street Journal editorial board.
About the Author
Peter Ferrara is Director of Entitlement and Budget Policy at the Heartland Institute, General Counsel of the American Civil Rights Union, Senior Fellow at the National Center for Policy Analysis, and Senior Policy Advisor on Entitlements and Budget Policy at the National Tax Limitation Foundation. He served in the White House Office of Policy Development under President Reagan, and as Associate Deputy Attorney General of the United States under President George H.W. Bush.
Letter to the Editor View all comments (30) | Leave a comment
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aware| 8.23.12 @ 6:20AM
Beware neo cons who "replace". You won't like their big government any more than you like progressive big government. Notice the primacy of the State is one thing they never question, and real free market is never an option.
So Romney will "repeal" Obamacare and "replace " it with Romneycare.
aware| 8.23.12 @ 6:44PM
The "regulators" see a problem and they bestow regulation A. Then that causes a lot of problems that didn't exist previously and doesn't half solve the original problem.
So then they "enact" regulation B which also brings in additional problems, doesn't even address the half solved 1st problem, and makes a mess of solving the problems brought on by reg. A, which is supposedly the reason for its need in the first place.
Naturally, it's on to regulation C, then D, and so on. Each step involves increases in money, personnel, "regulators", and mostly problems. At a certain point the regulations aren't lettered or even named regulations, but are called "reforms".
Eventually you end up with a mess so colossal, wasteful, and inefficient that your choice is only that the "regulators" should not only "regulate", they should just run the entire show.
That's where you are with this: the ones that created the whole unmanageable mess are going to run the whole show. Even you "conservatives" now accept that the State should be supreme and fool yourselves into thinking you can manage that supremacy for "good".
Wake up, for God's sake. You are hypnotized by the python that is swallowing you.
TLP| 8.23.12 @ 7:34PM
What's the problem?
#1 - Open up the Health Care Insurance Companies to Competition ala Every Other Type of Insurance.
#2 - Put the $714 Billion back in Medicare.
#3 - Put people with Pre-existing Conditions into Medicare, as well as those with Catastrophic Conditions.
#4 - Make everybody pay a Co-Pay.even if it's just $10. That would mean Hunderds of Billions back in to the System. Ditto - Prescriptions.
#5 - CLOSE THE BORDER.
That is all.
aware| 8.24.12 @ 6:14AM
#1-With the State "managing" the "competition" even the losers get trophies.
#2-That could only come from the previously plundered and helpless taxpayer, so you advocate massive tax increases.
#3-The existence of Medicare makes your #1 null and void. That's the regulation A snowball that started the avalanche.
#4-"Make" can only mean "government" since they hold a monopoly on making people do things "legally". Yeah a new department of "co-pay" regulators will be needed. See how you quickly move on to regulation B, C, and so on?
#5-We're too busy trying to control the borders of Iraq and Afghanistan to spare the manpower. Empire comes first now.
Next.
TrueBlue | 8.24.12 @ 4:21PM
If Iraq and Afghanistan were empire building we'd have already established permanent buildings and wouldn't be planning retreating. We'd also have gotten use of the oil fields in Iraq, which didn't happen, nor would we have establish local governments that we have no control over. Japan is far closer to empire building, and even that one fails the test.
Mimi | 8.23.12 @ 7:23AM
There is always a simpler, cheaper,more effective, way of doing things....it takes ingenuity, creativity, and SMARTS !
Think about it....this election is between the smart guys and the DUH ! types...you see it everyday when they open their mouths ...ie Paul Ryan/ Joe Biden...look close compare what and how they say things ! No match! Same with Obama....nothing is serious here and then hear Mitt and the changes he has to get the Money and Prosperity back in town...All the Dem's want is to " RUN OUT THE CLOCK" so no one finds out how badly they managed the country.
We can have a better health-care Plan...One that will REALLY cut costs...We FREE people deserve better from our ELECTED!
LindaF | 8.23.12 @ 7:46AM
You're wrong about that - the most common suggestion I've heard is a voucher system for at least the poorest citizens, that uses the private sector.
In HSAs and other personally-controlled systems, the individual has both control over how much he budgets for the health care, and how much he/she spends.
With private insurance, the insurance company has a vested interest in keeping costs, and they do a rigorous job to weed out fraud and waste.
With the government, it's not their money, and they win no points with the user to keep costs down - so, rather than tick off a voter, they allow outright fraud - which isn't that difficult to counter.
Von Mises Jr| 8.23.12 @ 8:58AM
As a policy wonk, I have read both books by Laffer and Moore, and I have met Peter Ferrara at a TEA Party event. Both are economic geniuses.
Unfortunately, most Americans are not. As an ex-sales professional, Romney/Ryan needs a marketable platform. Here is what I recommend:
- ObamaCare will be repealed and decisions returned to the patients and their doctors
- Tort Reform with loser pays like in Texas will minimize frivolous lawsuits and limit unnecessary tests
- Medicare and Medicaid fraud and abuse will be aggressively prosecuted
This is what people will react to, not rolling over HSA accounts from year to year or mesmerizing tax credits and rebates.
JD| 8.23.12 @ 4:19PM
There's a sad correlation between marketability and lack of practicality.
For example, Medicare and Medicaid, like all taxpayer handouts, will always be subject to fraud and abuse. There's no fixing that. They are too large, too political, and run by too much bureaucracy to be managed efficiently.
Von Mises Jr| 8.23.12 @ 6:42PM
I agree my friend. But ObamaCare increases Medicaid by staggering proportions. It is a recipe for collapse of states and much worse.
Jacob McCandles| 8.23.12 @ 9:38AM
Another point about Obamacare...in addition to a massive expansion of the "Medicaid ghetto", Obamacare is essentially like managed care on steroids for seniors. Basically, the idea is to change how doctors and hospitals are paid (this has already been tried and failed btw). Currently providers of care are paid for doing a service- a procedure, an admission, an office visit etc. These services are assigned a value, a "relative value unit". The more you do, the more you are paid. Obamacare, however, wants to pay Drs and hospitals for the comprehensive care of a certain population. Hospitals are currently scrambling to integrate doctors into "Accountable Care Organizations.". Monies get bundled and distributed to these ACOs as long as they can prove "quality.". This requires sophisticated computer systems (a huge expense) for providers. The less Drs and hospitals spend on seniors, the more they keep for themselves. Perverse incentives for those looking out for your lives. Will be a disaster.
buckeyeman| 8.23.12 @ 10:18AM
All these articles overlook the reality staring us in the face. Modern medical care is intrinsically too expensive for everyone to be able to afford all that they wish. Organ transplants, dialysis, monitoring, pharmaceuticals, the list goes on and on. Technological advances we take almost for granted were simply not available fifty years ago.
Advanced cancer therapy can be hugely expensive but often with marginal benefit. The poor soul facing death will likely opt for the third bone marrow transplant since someone else will have to pay for it and he has no other real choice.
The bitter truth is that not everyone can afford a Maserati and not everyone can afford top shelf health care. Sympathy and compassion do not change these basic facts. Ergo, we must face the reality that a multi-tiered system of variable costs and benefits is the only solution and this means some people will not receive the care they want (and want someone else to pay for).
Harry the Horrible| 8.23.12 @ 10:29AM
I think we need a two-tier system.
If you have insurance or can self-pay, you get the best of what your insurer or your money will buy.
If you DON'T have insurance and can't pay, you get minimal care - no heroic efforts, no advanced treatments, only generic drugs, etc.
I have never understood why someone who insists that taxpayers pay the cost of his medical care should get care equal to that of people provide for themselves and and their families.
Kwan| 8.23.12 @ 10:58AM
Let's not forget that the Democrats are selling the fantasy that because you were born in the United States, you have a "right" to free health care. The same fantasy the Democrats used to destroy the housing market with Carters "Community Reinvestment Act", in other words you had a "right" to own a home even if you didn't have sufficient income, or a decent credit rating. We all know how that turned out. ObamaCare will do to our healthcare system what the Community Reinvestment Act did to the housing market. Just more of the Commiecrats efforts to bring about a Marxist Egalitarian Society.
Jacob McCandles| 8.23.12 @ 11:55AM
That is a great point and you are absolutely right. The most correctable problem is what you described- very expensive treatments that have only shown slight survival benefits. Doctor says there is a survival benefit to a third transplant. Even if it is a SLIGHT benefit everyone involved feels it's "worth a shot". Same with the 94 year old patient who can't respond to others due to Alzheimer's. Fractures her hip- off to the operating room for surgical repair instead of IV medicine for comfort. Half of these folks do not have specific living wills so family feels guilty and says "Do all you can Doc.".
I could go on and on but your point is true: there are not enough resources for every patient to get every treatment. We as a society are not even close to being ready for the tough decisions.
fmm| 8.23.12 @ 11:16AM
Although HSAs appear to work well for younger workers, they don't work well for people near retirement or senior citizens since those people do not have the time to build value for supporting routine health care. A modified medicare system probably would still be needed, and should be retained as older people have paid into the system, no matter how poorly managed. The money which accrues in HSAs also should probably be limited to health care issues so that means testing for seniors who had HSAs could be efficiently implemented.
JD| 8.23.12 @ 1:09PM
They'd work just fine for the old workers if they got into the HSAs while they were young. Furthermore, the biggest difference between health care spending in the US vs Europe is that we spend far more on the elderly. We can either spend less on them or continue dealing with huge costs, which should be paid by the people using them.
JD| 8.23.12 @ 11:53AM
The problems with any "replace" suggestion are twofold.
1. Liberals define "solution" as "government doing something". If your proposal isn't a government program, they don't view it as a proposal. They call it a "do-nothing".
2. Liberals define any market-based solution as "gambling in casinos". Because they have sabotaged the economy a few times in recent history, they think the market is now like their stupid tax - the lottery - where the House always wins.
George S| 8.23.12 @ 12:14PM
Patient Power? How does this help congress's reelection efforts? The reason our health care costs are high is because we, the consumer, do not incur the cost of the commodity we purchase. The risk has been socialized.
The solution is the car warranty model. Starting over, Americans entering the work force at age 21 or so get to choose which illnesses they want INSURED against, and like a chinese menu, the premium is based on what you buy. Then, you are required to pay out of your pocket routine health care costs, laboratory tests and checkups. You get a receipt. If you then get an insured illness, you are to present your "maintenance receipts" to see if you honored the terms of your warranty.
This will only work for the next generation of youngsters, who are unfortunately the wage earners and taxpayers who will be crucial to supporting the present day beneficiaries. Congress will have to worry about their votes while trying to reform the system. But since this is all a Ponzi scheme -- all gain and no pain for the first entrants -- somebody must suffer at the collapse of the scheme for the system to reform.
Trouble is: how do you prevent the Ponzi losers from voting? Hence the system can only be reformed by Ryan-like 50-year projections, that is, well past your next election.
Purp| 8.23.12 @ 12:18PM
What happened to "Limited Government". Your proposals are filled with government action. The flaw in your argument is this - " After one healthy year with few or no medical expenses, the patient has enough money in the account to cover all expenses below the deductible" - what if you don't have a healthy year? Or you have several unhealthy years?
Medicare is a government-run healthcare program that has low overhead and has taken care of seniors for decades. Moreover, do you know anyone on Medicare who wants to give it up for the "marketplace"? Do you really think you won't be in dire need one day? Is it not comforting to know that you have guaranteed healthcare? Of course it is.
No, your ideas are tantamount to "IDONTCARE" that Romney/Ryan tout as "VOUCHERCARE". What's good for Seniors is good for the rest of us. If you don't like Obamacare, marketbased with private insurance as it is, fine, then I say MEDICARE FOR ALL! Healthcare is too important to play ideology and politics with it.
JD| 8.23.12 @ 1:07PM
There are plenty of people on Medicare who don't like it, mainly because many doctors can't afford to take it.
There will never be "guaranteed" healthcare. Its availability is always contingent on someone providing it. Constant use of health care WILL require a personal contribution to its cost, and that's the way it should be.
You try to make what you call healthcare "special", but it isn't. It still needs to be produced. It still exists in the real world, not a fantasy world. Furthermore, it is not the only factor in health. If we sacrifice food or environment or a reasonable work week to provide "health care", we could end up less healthy, not more healthy.
Too important for ideology? What a despicable claim on your part. What you're really saying is YOUR ideology should win without discussion!
Purp| 8.24.12 @ 8:21AM
That's the argument - doctors can't afford to take Medicare? Very weak argument. You made my point for me. They like Medicare, just not greedy doctors that prefer to make money rather than care for the sick, as their Hypocratic Oath says they must. Just as all wages are dropping in this country, doctors' wages must also. That doesn't mean worse healthcare, it just means the gravy train is ending. Perhaps if we supported Unions, with Union wages against the Corporatocracy, we could afford higher payments to doctors, ya think?
Healthcare IS special - just as food, medicine, transportation and housing. We all need all of them, all of the time. We don't need an iPhone, we don't need a new pair of shoes, we don't need the most powerful firearm, we don't need perfume or cologne, and hundreds of other items that can be market-based, because they are not life necessities. Unless you have those basics, you don't have much of a life, do you?
Affordable healthcare access is NOT an ideology. Obamacare is primarily a Republican ideology, first proposed by the Heritage Foundation and touted by Republican Senators in the early 1990's ,certainly not Medicare for All, which would be a Democratic ideology.
Joe D.| 8.23.12 @ 1:24PM
Sounds good except there are more factors that are driving up costs and not addressed in this article. They are government payments for their employees, along with medicare and medicade make them the #1 payer. This means they control the costs we pay. Lawyers steal from insurance companies with faulty lawsuits (John Edwards). Illegals taping into the system is wrong and would need to be stoped.
Finally, employers pay people less money now because of benefits like insurance, most of the time paying about 50%. This should go to the employees the first year as a base. After that they would be on their own and new raises would be based on the new base starting point of the first year.
If those concerns were addressed, then I think most people like me would agree with this new concept.
Joe D.| 8.23.12 @ 1:54PM
I see your point about medicaid block granting. However, will that prevent the government (biggest employer) from having so much control over costs that insurance companies, doctors, hospitals hit us with to make up there losses?
I also saw your tort reform. I hope this would go through right now.
Stick| 8.23.12 @ 5:34PM
Anyone for a cash system backed by catastrophic insurance for true health emergencies? Permit shopping across state lines for insurance and allow shoppers the freedom to tailor coverage to their needs. Allow taxpayers a Med IRA to fund the deductible tax free and allow these funds to grow annually to permit higher and higher deductibles. Further, cap pain and suffering payouts to no more than 20% of lost wages in lawsuits. Finally, outlaw the practice of cost shifting by hospitals and clinics - its illegal for any other business. Think these reforms would go a long way to lowering heathcare costs fast and more importantly placing the responsibility for healthcare at the individual/family level rather than the employer. Incentivize being healthy by allowing people to grow their wealth for their ultimate old age. Further, this method cuts out the middle men administrative costs so prevalent in our current system.
LeoInTheWoods| 8.23.12 @ 5:41PM
I dispair when I read articles like this. Replacement needs to start with the American Solution: limit government.
First, apply the same 80% medical loss mandate to the UMMC and VA. Then, see what needs to be done afterwards.
When Pelosi and Reid were saying, "We already pay for half of all medical procedures in the country", the UMMC was realizing less than 30% medical losses. The proper response to this is the same as we had towards the Red Cross when they said they weren't going to use all the monies collected to relieve 9/11 victims to actually relieve 9/11 victims... outrage and disenfranchisement.
We can no longer afford the waste and fraud that is government management... of ANYTHING. We deserve to get what we pay for and nothing less.
topcat52| 8.23.12 @ 6:26PM
You left out one of the great cost savers of high deductible medical insurance - even for the care which is part of the deductible, the claims go through the insurance company and receive their discounts.
Fiscal| 8.23.12 @ 10:50PM
It seems that Moore and Ferrara have little understanding of healthcare. So, I have a heart attack and I'm going to sit down, hit the internet, and shop for a cardiologist? Or I'm having a colonoscopy and they find cancer and a polyp so I should then find the doctor who can do the surgery for the least cost?
You can't shop for something you can't predict and this is why Moore and Ferrara don't have a clue. In addition, insurance is not the proper vehicle for health insurance as long as the health insurance company is incented to limit claims rather than improve health.
The best solution would be national health coverage for emergency and preventative care and the free market for anything you can schedule. But the problem here is the stupid ideology for both the right and left.
Art| 8.24.12 @ 7:13AM
The Moore/Ferrara prescription would work. With the individual patient in control, acting in his own self-interest, healthcare providers would naturally compete for the business of individual consumers (who have cash to dispense and who will shop for quality and price).
Driven by this dynamic (the opposite of ObamaCare) quality would remain high and price would become more affordable (again the opposite of ObamaCare).