This week, the new Republican majority in the House will vote to repeal Obamacare. The vote will be largely symbolic. The bill will die in the Senate.
Yet the exercise will raise the question: Republicans want to repeal and replace, but replace with what?
A concept rapidly gaining traction in Republican circles borrows from a trend in the private sector, and is explored in detail in Rep. Paul Ryans Road Map for Americas Future.
As private pensions have shifted from defined benefit to defined contribution, both the health care system and the big entitlement health programs should make a similar shift from open-ended entitlements to fixed-dollar contributions.
Obamacare will be a financial disaster, primarily because the number of people who will migrate from employer-provided insurance to the new subsidized exchanges funded with open-ended spending will be larger than predicted.
Once the exchanges start in 2014, employers will seek ways to shift low and moderate income workers onto the government-subsidized plans. Start-up companies will have zero incentive to offer insurance. Existing firms will have a powerful incentive to dump their own plans as AT&T illustrated when it discovered last year it could save $1.8 million a year by doing just that.
The Congressional Budget Office estimates that by 2019, 19 million people will obtain subsidies via the exchanges. But former CBO director Douglas Holtz-Eakin says the real number could be around 54 million. If so, the 10-year cost of Obamacare would double to $2 trillion.
Moving to a system of fixed-dollar contributions, not only for our health care system but for Medicare and Medicaid, would put the nations fiscal position on a more even keel. It would move purchasing power and choice directly to individuals, who would have the means to seek the best deal at the best price.
From that, a real functioning health-care market could be built, which is the only real hope of curbing health-care inflation.
A key starting point for many reformers was the work of the 1999 Medicare commission, chaired by former Democratic senator John Breaux. He called for replacing Medicares open-ended benefits system with subsidies premium support paid directly to recipients.
Late last year, Rep. Ryan worked with Alice Rivlin, former budget director in the Clinton administration, to propose a Medicare reform that was broadly similar.
The idea of fixed-dollar contributions funneled directly to individuals could also be used to reform the health care system for those under 65. The plan would be to eliminate the tax preference for employer-provided insurance and give it to individuals as a refundable tax credit, which they would use to buy a plan of their choosing in the open market.
The concept could also be applied to Medicaid, which could combine income-based subsidies along with the tax credit, allowing people to pick their own health insurance.
James Capretta and Tom Miller, in a paper published by the American Enterprise Institute (from which much of the above was taken), point out that this would reduce a problem bedeviling many Medicaid recipients.
Medicaid doesnt mesh well with private-sector policies, so when people jump from workplace insurance to Medicaid and back, their relationships with doctors and clinics are disrupted. A system of tax credits and income-based subsidies would allow more people to stay on the same policy.
Tax credits would also reduce the problem of pre-existing conditions, which often comes up when people start on new coverage. But since policies purchased outside the workplace with the tax credits would be more portable, more people could keep the same coverage when taking a new job.
Capretta and Miller suggest a key statutory change that would encourage people to stay covered. Under this rule, those with continuous coverage could not be denied because of a pre-existing condition. This would be far more effective in encouraging people to buy insurance and stay covered than Obamacares heavy-handed personal mandate.
People with more severe problems and chronic conditions could be covered via high-risk pools subsidized by annual federal appropriations.
The root problem in American health care is third-party payment; because were not paying, few of us have an incentive to seek real value. Nor do we have the power to fire insurers who issue lousy plans.
Instead of remedying this problem, Obamacare will worsen it. We wont have cost control in health care until we have real markets, and the way to develop them is to move purchasing power to individuals.