Repeal and Replace – Some Options

Note: Take away paragraph at the end.

Quite the bru-ha-ha broke out in DC regarding Obamacare.  With Vice President elect Pence and President Obama both pow-wowing with their respective parties the battle lines seem clearly drawn.  The democrats are crying that repeal will “make America sick again.”  Typical scare tactics, and a clear signal that the game plan is to obstruct and gamble that the republican plan will backfire and yield midterm wrath similar to what happened in the wake of Obamacare’s passage.  With the repeal all but certain let’s look at some of the considerations for the replace side of the equation.

What Trump Wants

While running for election candidate Trump published a position piece on his web page.  While he may not get everything he wants in the final bill this gives us a good idea what he is thinking.  Of these seven points, he is likely to have Congressional cooperation on:

• Completely Repeal Obamacare.  This one is a no brainer.  The question is what will the replacement look like.
• Modify existing law that inhibits the sale of insurance across state lines. This action theoretically reduces prices and is pro-business.  The democrats likely wouldn’t put up a fuss on this one if it were a stand alone provision.  That makes it a good compromise point for them to concede even if just for public relations points.
• Allow individuals to deduct health insurance premium payments [on] their tax returns.  Although the democrats will fight this since it is a tax reduction it will have republican support.  Also, it’s a good tool for enacting reconciliation like the democrats did to initially pass Obamacare.  Although less certain, this provision likely in incorporated in the final product in some form.
• Allow individuals to use health savings accounts.  This provision is an already existing portion of Obamacare.  Even with political posturing it is difficult for democrats to object to maintaining this provision.

Trump has also made other statements indicating provisions of Obamacare he would like to keep.  Specifically, he wants to keep

• preexisting condition coverage
• allowing parents to keep children on their policies until 26.

The former makes political sense since it’s a wildly popular provision of Obamacare.  The latter makes economic sense since it keeps more younger and presumably healthier individuals in the system.  Which brings us to the core question that any replacement law will face – how do you keep costs down?

Options to reduce costs (and premiums)

Reducing premiums and not driving up the ranks of the unwillingly uninsured are the two measures by which the new law will be judged.  A secondary consideration, more ethereal in nature, is what will the plan do to the national budget.  With Obamacare, the thought was the addition of young, healthy, individuals will offset the increased costs associated with caring for preexisting conditions.  While it didn’t work out as planned the theory is sound, and if tailored well will reduce premiums.  So what can be done to reduce premiums while still keeping coverage available for all?

Start with giving consumers more choices.  One option is to have all policies start with Obamacare coverage, but then to allow the plan to be stripped down.  This would work similar to purchasing auto insurance.  Each individual plan starts with Obamacare coverage, and each piece of coverage has a line item cost and consumers get to opt out of the items of coverage they do not want. This both reduces premiums and empowers the consumer making the law more palatable.

Unless all the choices are bad, which takes us to the next level of consideration.  How are costs kept down so that the choices available are attractive?

Cost drivers and possible solutions

The premium hikes were a result of insurance payments going up for preexisting conditions that were previously excluded.  Simply put, more sick/injured individuals were in the system so coverage costs increased.  Remove or isolate the sick and injured from the general population pool and coverage costs for the general population pool decreases allowing premiums to fall.  We all have our aches/pains of life.  The normal acute illnesses and injuries do not constitute the bulk of the coverage costs.  It’s catastrophic conditions and chronic conditions where the costs lie.

The solutions aren’t easy, and all potential solutions draw ideological objections.  However, to not suffer catastrophic consequences in terms of insured some ideological bitter pills need to be swallowed.  In the end, maintaining and increasing the majority on Capitol Hill is nice, the end game is the health of the insured.

The catastrophic element is easier to deal with.  While mandates are frowned upon, mandating medical gap coverage be part of every plan addresses the issue.  Medical gap insurance is inexpensive  ($46.61/month for my family of two) and would rarely be used. This also offers protection to the republicans because as the coverage is used the sudden financial strain of a major health crisis is mitigated leading to a happy insured and easy photo ops.  In order to cover the costs of the gap insurance redeemed the insurance companies need to have a return on investment at 4.66{997ab4c1e65fa660c64e6dfea23d436a73c89d6254ad3ae72f887cf583448986}.  With US News and World Report’s mutual fund rankings showing the best funds have a five year return over 30{997ab4c1e65fa660c64e6dfea23d436a73c89d6254ad3ae72f887cf583448986} the insurance companies come out ahead, and this profit helps drive down premium costs.

The possibilities for driving down chronic condition costs are equally ideologically difficult to swallow.  However, one solution that does significant good is to isolate the high cost insured from the regular insured.  This can be done by having policies for individuals with only acute conditions, and segregating policies for individuals with chronic conditions.  The policies for individuals who have acute conditions only would see lower premiums because they are not high cost insured.  Sure, there’s going to be the occasional accident.  That’s covered by the gap insurance and falls in the catastrophic category.  Ditto myocardial infarctions, cerebral vascular accidents, and other naturally occurring catastrophic events.  If there’s residual issues the next year these policy holders are transitioned into the chronic policies.  If not, they stay in the acute policies.  The concept could be extended into some sort of a hybrid policies to further stratify costs.

The chronic condition policies is where the hefty premiums occur and the need for action lies.  Reducing costs isn’t a realistic option in this scenario so increasing the number of premiums collected or having alternative sources of funding is how premiums are reduced.  Using diabetes as an example shows how premiums can be reduced.  In 2014 an estimated 29.1 million people had diabetes.   This is a significant portion of the population, and consists of those who are in the end stages of life as well as those who are otherwise healthy and on Metformin maintenance.   Forcing the relatively healthy individuals into the policy increases the number of premiums collected.  It’s a start to making premiums lower.  Decree the adult children are covered in the same group as their parents and the policy group sees an influx of young, healthy insured driving down premiums more.

When people think of Obamacare costs to the treasury they think in terms of the tax credits issues.  However, Obamacare had another expense to the treasury.  Since the insurance companies were going to lose money Congress authorized payments to offset the losses.  This latter portion of the expenditures could be maintained in the new law.  The expenditures could be set up where a set amount is authorized each year and insurance companies must recalculate premiums each year based on funds received.   The premiums are lowered, and the treasury saves the tax credit portion of Obamacare.

Take Away and Conclusion

The battle lines for repealing Obamacare are drawn.  “Make America Sick Again” shows the democrats will obstruct and hope for a disastrous result leading to election backlash.  The  new legislation will be measured on the amount of premium reduction and not driving up the number of unwillingly uninsured.  While no easy solution exists steps can be taken to contain premium costs. All solutions will have ideologically bitter pills.  Having policies that start as a base Obamacare policy with line item costs that can be opted out of helps to reduce costs and empowers consumers.  Mandating health gap insurance coverage as a part of every policy will reduce premiums overall since premium investment far exceeds policy redemption. Isolating chronic condition care lowers premiums for those who only have acute conditions.  Retaining Obamacare loss reimbursement provisions to the insurance companies on the chronic condition policies drives down premiums on those policies. Ideologically, it’s a  bitter pill to swallow.  Electorally and for the greater good it’s one of the better paths to follow.