Code Red: Two Economists Examine the U.S. Healthcare System

February 3, 2014

One and One Half Republicans Respond to the President’s Call for Ideas

Filed under: Uncategorized — David Dranove and Craig Garthwaite (from Oct 11, 2013) @ 3:06 pm

In the State of the Union, President Obama told Republican Members of Congress to stop holding votes to repeal the ACA and start proposing propose alternative ideas for health reform. In response, House Majority Leader Eric Cantor promised a vote in the House of Representatives in 2014 on a Republican alternative to the ACA. There were few specifics about what this alternative would entail.

Both of us would have preferred for this conversation to have happened over the past three years – before the ACA exchanges had gone into effect. While we agree with the President’s sentiment that the Republican’s quixotic efforts to repeal the ACA have been, at best, a distraction, it is disingenuous to suggest that there are not many existing ideas that would greatly improve the efficacy of the Affordable Care Act. Yet Representative Cantor’s comments make us wonder if any of those ideas are forthcoming from his side of the Congressional aisle.

It is not as if Republicans lack ideas for health reform. At least one of us is a Republican (the other waffles too much) and in the past three months we have offered numerous concrete proposals. So we thought we would take this opportunity to provide a “Republican” response to the President’s call.

In their blanket criticisms, Congressional Republicans have often failed to grasp that if you distill the ACA down to its most basic elements, perhaps its most important feature is the introduction of competition in private health insurance through the creation of exchanges. This is, at its core, a Republican idea, and unfettered by additional regulations, could lead to real innovation and cost savings. But the President, like most Democrats, appears to intrinsically distrust markets, and the exchanges are burdened by too many regulations. Here is just a partial list of those regulations, followed by our proposals to improve competition in the ACA:

1) Employers are mandated to continue offering health insurance

2) There is an exceptionally rich minimum benefit package

3) The ACA prohibits catastrophic health plans for the majority of enrollees

4) The ACA continues the tax subsidy for employer provided health benefits

Proposal 1: Repeal the employer mandate

In addition to being the largest expansion to of public health insurance since the Great Society programs of Lyndon Johnson, the ACA creates a realistic alternative to the system of employer provided health insurance that has dominated the American health insurance system since the 1940’s. In a prior blog we discussed at length the problems that employer-sponsored insurance creates for workers. The ACA has new regulations governing non-group insurance that should partially reduce these problems, yet still attempts to force employers to continue to offer employer provided benefits. Why add layers of new regulations to perpetuate this system when a more obvious and simpler solution is available? Allow all employers to opt out of offering coverage if they believe it is the right business decision. In all likelihood, employers would instead offer subsidies for purchases on the exchange (either through earmarked payments or higher wages). Not only would this unburden employers of a responsibility that they should never have borne, it would also greatly expand enrollments in the exchanges, leading to more stable risk pools and more affordable premiums.

Proposal 2: Scale back the minimum benefit package

As we have recently written, mandating exceptionally rich and homogenous coverage across all plans limits the ability of these plans to innovate on plan design. First, it prevents individuals from opting out of coverage for certain services or to at least choosing less generous cost sharing for things such as mental health coverage. Second, it limits the ability of insurers to tailor coverage to control the costs of services that provide uncertain benefits, such as robotic surgery or proton beam therapy. These mandates come at a time when academics and practitioners alike are experimenting with Value Based Insurance Design – creative alternatives to the traditional structures of deductibles and copayments. The ACA stops such innovation in its tracks. Any realistic alternative to the ACA should begin by reducing regulatory hurdles that allow insurers to innovate on the design of benefit packages. If we are concerned about the potential for cream skimming by plans offering less generous benefits, we can modify and extend existing reinsurance programs.

Proposal 3: Repeal the prohibition on catastrophic health plans and, if proposal 4 is not feasible, provide a level tax playing field for high deductible plans

Perhaps the biggest innovation in insurance design in the last ten years has been the high deductible health plan, coupled with Health Savings Accounts. (HSAs are accounts that allow for tax-free expenditures on health services and are meant to level the tax playing field versus more expensive, traditional insurance plans.) Currently, only individuals under the age of 30 or who have a hardship exemption are allowed to purchase high deductible plans in the exchanges. However, even those who are lucky enough to be allowed to buy these plans cannot use the ACA tax subsidies for lower income individuals for their premiums. This makes absolutely no sense. We propose that individuals purchasing high deductible plans receive the same tax subsidy as individuals purchasing plans for the “Silver” tier of the exchange, with any subsidy that is greater than their premium to be placed in qualified Health Savings Account. If we are unable to repeal the tax deductibility of employer provided insurance, expenditures from this account should be tax free. However, if we do level the tax playing field expenditures from this account should be taxed but limited to medical services. After age 65, any remaining balance in this account could continue to be used for health services not covered by Medicare or converted into an annuity for retirement spending.

Proposal 4: Level the tax playing field

Nearly all economists agree that the tax subsidy for employer sponsored insurance is inefficient, because more expensive plans enjoy larger subsidies, and regressive, because it disproportionately benefits the rich. Talk about having the worst of both worlds. We realize that it is probably easier to repeal the ACA than it would be to repeal the tax subsidy – a benefit that is currently supported by both big business and organized labor. But we are compelled to renew the call; here is a chance for Republicans to prove themselves as the voices of reason on economic policy. Couple this repeal with a reduction on marginal tax rates for all Americans, and we have a win/win/win for economic growth, reducing health spending, and increasing equity. Beyond this, the ACA continues a decades-long curiosity in the tax code: employer-sponsored health insurance enjoys the full tax subsidy, but insurance purchased by individuals receives a partial subsidy at best. These parts are the ACA are fighting against each other. We should also note that this change in tax policy is really just an expansion of the “Cadillac Tax” already included in the ACA.

So you see, it is possible for Republicans to offer concrete and realistic proposals for health reform. Now if only we had the email address for the President’s Blackberry …


  1. To my 1.5 esteemed Republican colleagues from a Democrat:

    A few quick reactions:

    Thanks for your thoughtful ideas. I don’t think, however, the issue is whether there are or have been ideas from Republican-minded health policy experts like yourselves but whether the Republican leadership has ever been serious about any of them. The history of health care reform since at least 1995, under HillaryCare, has been Republican making policy reform proposals and quickly abandoning them whenever the Democratic leadership was ready to adopt them. There is no evidence that things have changed and although the Coburn-Hatch-Burr plan could be considered a serious proposal, the sponsors are already backing away from at least one of its key provisions (relating by the way to your point of leveling the tax playing field).

    A few issues:

    1. One point you make that I believe deserves qualification is the statement that President (and most Democrats) basically distrust markets. The success of the exchanges under the Affordable Care Act are ultimately dependent on market competition, and the President and supporters of ACA are well aware of that. The issue is not whether the President distrusts markets, the issue is more about the relative strengths and weakness of markets.

    The question is whether health insurance markets are like markets for broccoli, where no regulation is necessary, or whether consumer protections are necessary. There were certainly a lot of junk insurance sold previously in the individual market and to use economists’ lingo there are information asymmetries between buyers and sellers of health insurance were unregulated markets do not yield efficient outcomes. There are also important externalities including the market for mental health insurance. Are you arguing for unregulated insurance benefits?

    2. Pareto efficiency is only one policy criteria and issues of fairness and inequality are also paramount. One could argue that these should be dealt with outside the health insurance market but that stance belies the political reality of legislation and implementation.

    3. The bronze plans in the ACA are close to catastrophic plans with an actuarial value of 60%. So your point about lack of catastrophic plans is overstated, in my opinion. Part of consumer dissatisfaction with ACA so far is that deductibles are too high, not too low.

    4. Good luck with leveling the tax playing field. Status quo bias permeates policy making so your proposal even if sound is completely unrealistic. I suspect you would call this politics rather than sound policy making based on economic principles but we live in an electoral democracy and no party is going to make major changes here and risk electoral defeat.

    5. I could agree with you on the employer mandate but there are two problems here: markets for labor do not work like Econ 101 models and employers may have greater power than employees and take advantage of availability of exchange alternatives, reducing benefits without increasing wages accordingly. And even if this were not true, politically you would have never gotten the ACA passed without the employer mandate, as many Democrats were quite skeptical of exchanges.

    In any case who you need to convince is less President Obama and more Representatives Cantor and Ryan, the true power brokers in the U.S. House of Representatives. I don’t think they would really listen, but who knows, perhaps I am wrong.

    William Ocasio
    Management and Organizations
    Kellogg School of Management

    Comment by William Ocasio — February 3, 2014 @ 5:12 pm

  2. […] One and One Half Republicans Respond to the President’s Call for Ideas […]

    Pingback by Here’s A Republican Response To Obama’s Call For Ideas To Reform Health Care | Today Health Channel — February 4, 2014 @ 8:30 pm

  3. Some very interesting ideas.

    However, I feel that you two are missing a very fundamental point in this discussion: the inability to treat the healthcare market like other markets. You say that O. doesn’t trust markets, and you recommend relying on markets to innovate by reducing minimum mandates, etc.

    The health care market doesn’t function as a competitive market according to traditional laws of supply and demand. Most of the things in the legislation that are mandated are there for this reason. There are many reasons that you can treat it as a competitive market, and depend on supply and demand to regulate price and quality. Some of the most salient:

    1. It is supplier-driven demand.

    2. The imbalance of necessary knowledge and information between suppliers and users.

    3. The potentially life-threatening results of the wrong decision

    4. The users do not “choose” when to purchase the services ( like they would, say, “choose” to purchase a new car or sweater.)

    Again, most of the mandates can be traced back to these factors, along with the issues of national affordability. Let me know if you’d like to discuss further.


    Bob Strickland
    Senior Vice President
    Executive Assistant: Debbie Sage, 303-383-2786


    Comment by Strickland, Bob — February 10, 2014 @ 4:09 pm

  4. It’s nice to see reasoned discussion on this topic; the bombast on both sides has been unbearable.

    I think Bob Strickland brings up a very important factor — the consumer isn’t the one paying the bill, so the incentives are perverse. All the focus is on the insurance market, but the underlying fundamental market is the actual health care. And it’s a market that is setup for inefficiency, even more so under the new regulations. The consumer’s exposure is capped and limited, and so there are no incentives to price shop/compare. The insurer bears nearly all the risk exposure and thus the incentives to provide complete and quality care are limited. The employer often carries the bulk of the insurance cost and bears little downside risk to quality care. And the health care provider is incentivized to develop a core competency in documentation and billing, in order to service insurance company needs, not to mention the incentive to over-diagnose and over-test in order to minimize exposure to malpractice.

    I’m a rock-ribbed conservative with a deep abiding faith in markets, but I don’t see a functioning market here. And until the real market problem is addressed — healthcare delivery — it seems a waste of time to focus on making the insurance market more efficient. And don’t get me started on the fact that it’s becoming less and less “insurance” and more and more “prepaid healthcare” bundled with some catastrophic insurance.

    Comment by David Schmitt — February 19, 2014 @ 11:20 pm

  5. Republicans have passed several bills on healthcare since 2009. The general public knows little about these bills because the mainstream news media outlets don’t report on them. Any healthcare bills passed in the House are automatically killed by Sen. Reid.

    HR 2300 was the Republican alternative to the ACA in 2010, but it did not receive the light of day in the Senate.

    Jeff Stiegler
    Kellogg ’78

    Comment by Jeff Stiegler — February 20, 2014 @ 10:48 am

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