Judging by appointments to top posts in health care, the incoming Trump administration is on course to validate its campaign promise to “repeal and replace” the Affordable Care Act.
Despite the emphasis by many on preserving secondary parts of the law like maintaining children up to age 26 on the parent’s coverage, Americans should understand that the ACA indeed must be eliminated. Why? Because its misguided amalgam of regulations generated skyrocketing insurance premiums, reduced choice of doctors, funneled millions more poor people into substandard programs and accelerated consolidation throughout the health care industry– serious consequences directly harmful to patients.
The ACA’s biggest error was broadening a detrimental misapplication of health insurance that began decades ago. The point of insurance is to reduce risk of financial disaster. Instead, with its long list of mandates and regulations, the ACA furthered the inappropriate construct that insurance should subsidize all medical care and minimize out-of-pocket payments. The ACA’s coverage requirements directly caused more widespread adoption of bloated insurance.
When combined with invisible health care prices as well as doctor qualifications, most patients have virtually no incentive and lack sufficient information to consider value; similarly, providers don’t need to compete on price. The consequences are the overuse of health care and unrestrained costs.
An ironic and unrecognized result of the ACA is that it selectively disadvantaged a key remedy of the problem. Based on my analysis of Employer Health Benefits Annual Survey data from the Kaiser Family Foundation, the premiums for high deductible plans (HDHPs) rose from two to five times faster than premium increases of any other type of coverage after ACA passage. That’s counterproductive because high deductible coverage is highly effective in reducing health spending using value-based decisions, especially when paired with health savings accounts (HSAs).
HSAs, tax-sheltered accounts for smaller health expenses, are another critical component of reform, because they motivate direct consideration of price. Better than simple tax deductions, HSAs also incentivize saving. These accounts have been over-regulated by current law. Raising maximums and catch-up contributions at least to those of IRA limits, and allowing uses for elderly parents and rollovers to surviving family members are steps to take immediately.
Modifying the tax deductibility of health expenses should accompany focused deregulation. The income exclusion for unlimited health spending is one of the great mistakes of US tax policy, costing approximately $250 billion in 2013, according to the CBO; 85% of the subsidy goes to the top one-half of earners.
Beyond the numbers, the tax exclusion created perverse incentives. It encouraged higher demand for care, regardless of cost, while distorting insurance into covering almost all services, greatly increasing health care costs. Rational tax reform should have three main features: 1) deductibility for everyone, whether insured through employers, or self-employment, to level the playing field; 2) limits on exclusions to the maximum allowable HSA contribution; and 3) limited eligibility for exclusions to incentivize appropriate health spending, i.e., HSA contributions and catastrophic coverage.
This approach has important advantages over tax credits, an alternative favored by many conservatives, including U.S. Rep. Tom Price and House Speaker Paul Ryan. Tax credits would create yet another government entitlement, at a time when entitlement reform in the opposite direction is already urgent. Tax credits further complicate a monstrously complex tax code. Tax credits further expand the far-too-dominant IRS’s mission from collecting revenues to doling out money to favorite economic activities.
Tax credits are actually reminiscent of Obamacare subsidies, given that government officials would necessarily set rules about eligibility, including “appropriateness” of coverage, to receive the credit. While politically appealing as a visible demonstration of a “helping hand”, let’s realize this — tax credits represent another example of government literally taking taxpayer money from one person and allocating it to someone else.
Moreover, we must know by now that entitlement costs always — always – expand far beyond projections. Income exclusions, on the other hand, meet a different and important fairness test — the government overtly admits that some earned income is simply off-limits to the dictates of government and should stay with the worker.
Both Medicare and Medicaid also need reform, and that should center on new eligibility for HSAs and private high-deductible choices. With almost 4 million Americans reaching Medicare age 65 every year, and given that life expectancy from age 65 increased to 19.1 years in 2010—a 25% gain from 1972, today’s seniors need to save for decades of future health care. Moreover, seniors are the biggest users of health care, so their empowerment is crucial to driving prices lower.
As for Medicaid, Mike Pence’s Indiana Medicaid plan included: 1) HSAs with premium support for private coverage; 2) obligatory out-of-pocket payments for all recipients starting at $1 per month, and co-payments for non-emergency use of ERs; and 3) incentivized personal responsibility, such as rewards for healthy behavior and dis-enrollment for failure to pay premiums.
More aggressive reforms to the entire Medicaid program are necessary to reverse the ill-advised expansion that furthered the second-class system for poor Americans, at a cost projected to rise from today’s $540 billion to $890 billion in 2024 Let’s fully transform Medicaid into a bridge program toward HSAs and private insurance with the same access to doctors, specialists, and treatments as everyone else.
A comprehensive reform plan coupling these important incentives with common-sense deregulation would achieve high quality health care at reduced cost. Such a plan would conservatively decrease private expenditures by $2.7 trillion and federal spending by $1.5 trillion and transform the mindset from “raise taxes or take away benefits” to using incentives to achieve excellence and value. Shouldn’t that be the goal of any reform?