Three Unpopular Parts of Obamacare Should Stay

(Bloomberg View) -

As Republicans consider repealing President Barack Obama’s health-care law, what bits should they be looking to keep? A lot of people will have different answers to this, of course, but to my mind the most important and unobjectionable bits of Obamacare are payment reform, comparative-effectiveness research and the tax on gold-plated health-care plans.

These are not, you will notice, the most popular bits of Obamacare, the one that President-elect Donald Trump seems to favor. Nor are they the most famous. But all three attempt to tackle the biggest problem with our health-care system: its exorbitant cost. Americans pay a lot more for health-care services than people in other countries, in part because we are richer than other countries (health-care spending tends to rise along with affluence). But we also spend more because of the unique structure of our system, which has allowed provider costs to grow much higher than anywhere else.

Economist Milton Friedman famously divided spending into four types:

–I’m spending my own money on myself, in which case, I want to get the best combination of price and quality. This is the sort of spending that middle-aged women do on expensive handbags.

–I’m spending my own money on someone else, in which case I mostly care about price. This is why you get so many books you never read as gifts.

–I’m spending someone else’s money on myself, in which case … WEEEEE! This is the kind of spending that employees do on expense accounts. (Though not, of course, myself. I mean a generic employee with less moral fiber than I have).

–I’m spending someone else’s money on someone else, in which case … ah, who cares?

In our health-care system, almost no spending falls into category one. Medicaid and some employer insurance looks a lot like category two; the rest falls into category three or four. These are very expensive categories of spending, because the incentives for restraint are small, and when someone tries to make them bigger, usually another someone (typically a politician goaded by angry voters) intervenes to make them stop. As our system gets more expensive, pressure rises for third-party payers to pick up even more of the tab for our health care-which of course, just makes the problem worse.

Astute readers may be asking why the problem is so much more serious here than in countries that have an even bigger government presence in the health-care market. There are two reasons. First of all, health-care spending in those countries tends to look more like Medicaid, with heavy price controls on what providers can charge. America has immense difficulty doing this, because the decentralized structure of our government makes it easier to lobby against unpopular payment controls until they are destroyed. And second of all, the fact that our market is kind-of-free-but-not-really makes it extremely difficult for anyone, public or private, to crack down on prices. Providers have a great deal of negotiating power, both because they can lobby the government, and because they can find other payers to give them better prices if one insurer or government program tries to play hardball on reimbursements. So we end up with the worst of both worlds.

Our high costs make everything else harder. Want to do a single payer system, as Trump has suggested in the past? There’s not enough money in the budget, and voters will revolt if you try to raise enough taxes to pay for it. Want a more consumer, market-driven system? Services are simply too expensive for most people to buy out of cash flow. In theory, they could assiduously save up and pay for them out of those savings; in practice, getting people to save is hard, and some people will fall through the cracks.

Obamacare tried to tackle this problem in three ways. First of all, it levied a tax-the “Cadillac tax” on extremely generous health-insurance plans. The fact that employer-sponsored health-insurance benefits aren’t taxed like regular compensation, even if the cost of those benefits starts to approach the cost of an entry-level salary, is one of the major drivers behind our third-party-payer problem.

It is, to be sure, an awkward and inefficient way to approach the problem. It would be much more logical to cap, or eliminate, the tax deduction for those benefits. But at least this curbs some of the worst effects of keeping the deduction. And the reason it’s structured so bizarrely is that the tax-deductibility of employer-sponsored health insurance is politically sacred, even though wonks hate it. The Obama administration was able to slip it through only because there was so much else going on that the Cadillac tax didn’t get much scrutiny. If Republicans repeal it, they will have a very hard time putting anything as good back into place, much less something better.

The second portion of Obamacare that Republicans should at least consider keeping is some of the payment reforms. These attempt to tackle the problem from a different angle. Right now, Medicare will pretty much pay for any fool thing your doctor wants to do to you, as long as you’ll sit still for it. This system, known as “Fee for Service,” encourages doctors to perform lots of services. The idea behind various payment reforms is that they’ll pay the doctor for health (or at least, for having patients), rather than for doing a bunch of stuff to those patients. If the doctors save money, they get a bonus; if hospitals readmit too many patients after they’ve been discharged, they get hit with a penalty.

I don’t want to oversell the benefits of these reforms, as most journalists writing about them tend to: they are at best modest, and so far, the performance has been undeniably underwhelming. These programs are moving spending out of Category Four, which is good. But they’re moving it into Category Two, which has problems of its own; doctors now have less incentive to overtreat, but more incentive to undertreat. And patient-centered payment models make small practices riskier, because a handful of patients unexpected setbacks can make the business lose money.

On the other hand, it’s not obviously worse than the old system. As long as we’re going to have Medicare (and we are), we have to structure payments somehow; on balance, there’s a decent argument for keeping the new structure rather than reverting to the old one.

The third thing that Republicans should consider keeping is the Independent Payment Advisor Board, otherwise known as the “death panel.” Its lethal reputation is considerably exaggerated; IPAB will not be considering the fates of individual patients, and it doesn’t even have the legal authority to deny treatments. What it can do is look at the evidence and recommend payments based on cost-effectiveness.

I have real concerns over whether the IPAB will end up stifling innovation in the name of keeping costs down. But a government agency that evaluates the current state of medical knowledge, and disseminates that knowledge to doctors, is a good idea. Republicans shouldn’t necessarily keep the agency in its current form. But it could be reformed to be a central clearinghouse to make recommendations to insurers, doctors, and patients about what sorts of treatments are apt to work best.

So that’s what Republicans should think about keeping. That’s a very different question from what they will consider keeping. Unions hate the Cadillac tax; providers and health-care firms will be lobbying very fiercely to junk the payment reforms. And in the context of a repeal, Republicans will not be able to balance the costs of these programs against a wide array of new goodies for voters. Indeed, they’ll be undercutting one of their biggest assets in getting a repeal done: the fact that so many motivated lobbies will benefit from junking the law.

Thus, I expect the gap between what we should keep and what we will keep to loom large indeed. We’re most likely to keep the popular parts of the program, like forcing insurers to sell insurance to any customer that wants to buy it, which are also unfortunately the parts of the program that are destabilizing the insurance market. What we’re most likely to lose is the unpopular things that are needed to control costs, and keep the individual market from tipping into a death spiral: the mandate, the Cadillac tax, the payment reforms. It’s quite possible, even likely, that Republicans will end up doing a partial repeal that makes the program worse than either what we had before, or what we have now. From a policy perspective that’s crazy. But in Washington, that kind of crazy is perfectly logical.