Obamacare is going to collapse.
While technical glitches on the health-insurance exchanges are getting a lot of attention, that’s not the real problem that Obamacare faces. It is fundamentally, conceptually flawed. Even if it “works,” in the sense that people navigate their way to signing up, it won’t work as originally intended: to expand access to health care services without sacrificing quality or affordability.
When a majority of the U.S. Supreme Court upheld the constitutionality of Obamacare’s individual mandate, the decision made a critical but widely underappreciated distinction. The justices actually agreed with the plaintiffs that the federal government lacks a general police power to compel Americans to buy health insurance. States have such legal authority (although most of us believe they should not use it) but Washington can exercise only powers specifically delegated to them by the constitution.
The reason the Supreme Court upheld the individual mandate, anyway, is that Chief Justice John Roberts redefined it as a tax instead of a regulation. No one disputes that Congress has the power to levy taxes. But, Roberts argued, the mandate only constitutes a tax if it is not large enough actually to compel Americans to buy federally regulated health plans they don’t want.
The reason the Obamacare exchanges will prove unworkable over time is that only older, sicker individuals will have a strong motivation to enter the exchanges. Because of the way the federal tax subsidies are structured, customers with high medical expenses are more likely to qualify for the largest subsidies. Many younger individuals at low risk of expensive care will find that, even after accounting for the often-small tax subsidy they get, the exchange plans are a bad deal for them. Moreover, if they do unexpectedly get sick, they’ll be able to buy an exchange plan during the next enrollment period at a highly subsidized price.
Recognizing the potentially devastating effects of adverse selection and moral hazard, some insurers have chosen to stay away from the exchanges altogether. Others, including Blue Cross Blue Shield associations and Aetna, have entered many exchange markets for now but are hedging their downside risk by proposing hefty premiums for their individual and small-group customers outside the exchanges — which they hope will either shore up their overall reserves or drive some of those customers into the exchanges.
Liberals are planning to pin the blame for public disaffection with Obamacare on those big, bad insurance companies. They need to blame because they can’t do what they want to address the problem (increase the federal penalty for noncompliance with the individual mandate) and they won’t do what conservatives desire to address the problem (lift federal mandates on both individuals and exchange-plan benefits to attract willing, low-risk customers with low-cost health plans).
There is a profound lack of realism on both sides. Obamacare defenders think Americans are about to fall in love with the program. Obamacare opponents think Americans are about to rise up to demand its immediate repeal. In reality, most people get their health insurance from self-insured plans, large-group plans, or government plans such as Medicare and Medicaid. They don’t yet see a direct link between Obamacare’s flaws and their own financial and medical circumstances.
Here’s what I believe to be the most realistic path forward after the flaws of Obamacare become undeniable and inescapable – and after more sensible people are elected to federal office in Washington.
First, deregulate the exchanges to make them resemble, and compete with, private insurance exchanges already cropping up in the market. Second, preserve federal tax credits for individual purchase of health plans or services, but make them simpler and universal. Third, create viable high-risk pools to subsidize those with expensive preexisting conditions in the most rational way. Fourth, remove all remaining tax and regulatory barriers to the growth of consumer-driven health plans, which really are reducing health care costs. Finally, use a premium support model to reform Medicare and to transfer able-bodied Medicaid recipients into truly private exchange plans.
The process won’t be revolutionary or dramatic. It will occur gradually, assuming that Washington and the states accommodate it. The Left won’t get its preferred outcome — the collapse of private insurance and the adoption of Medicare/Medicaid for all. But for everyone else, it’ll do.
Hood is president of the John Locke Foundation.