Monday, February 10, 2014

What if the (Republican) dog catches the Obamacar(e)?

Healthcare economists Austin Frakt, Donald Taylor and Yevgeniy Feyman on the future of healthcare reform

If Republicans win both houses of Congress and the presidency by 2017, what will they do to the Affordable Care Act?

The first substantive "repeal and replace" legislative proposal offered by Republicans since the ACA passed, unveiled in outline on January 27 by Republican Sens. Tom Coburn (OK), Richard Burr (NC), and Orrin Hatch (UT), purports to settle that question by making repeal of the ACA its first provision.  The Coburn-Burr-Hatch proposal (CBH*) has led healthcare wonks on the left and right, however, to conclude the opposite: "Repeal ACA, RIP," as Donald Taylor of Duke titled his analysis.

That's because after the "repeal" provision come the come the "replace" provisions, and to greater or lesser degree most are cousins of their counterparts in the ACA. CBH subsidizes insurance for people whose earnings fall between 100% and 300% of the Federal Poverty Level (FPL); provides a functional if more porous equivalent of the individual mandate and guaranteed issue; allows adults up to age 26 to stay on their parents' plans; bars lifetime coverage caps and  policy cancellations for reasons other than fraud; semi-privatizes Medicaid; taxes employer-sponsored insurance more heavily than the ACA does; and leaves the ACA's Medicare payment reforms and cuts untouched.

CBH thus clarifies that we are in a healthcare world remade by the ACA, and any conservative proposal that purports to cover as many people as the ACA, or close to it, must retain its basic infrastructure: subsidized private insurance, with some mechanism for minimizing medical underwriting and luring almost everyone into the risk pool. In short, the first relatively fleshed-out "repeal and replace" proposal demonstrates that "replace" effectively erases "repeal."

If repeal is all but off the table, how would a GOP-controlled federal government alter the ACA? I asked three healthcare economists to consider that question: progressives Donald Taylor of Duke and Austin Frakt of the U.S. Department of Veterans Affairs and Boston University, and conservative Yevgeniy Feyman of the Manhattan Institute. There was substantial consensus among them that repeal is dead -- but also that conservative alterations of the ACA are likely. Feyman is  eager to open the individual market to a greater variety of plans than the ACA allows on its exchanges.  Frakt and Taylor have long urged compromise that could win Republican acceptance and deploy "conservative designs for progressive ends," as Frakt put it (as the ACA itself does). Both Taylor and Frakt find some provisions of CBH palatable and even desirable on the merits. (Frakt, Taylor and Feyman all blog extensively on healthcare reform: Frakt at the healthcare policy blog The Incidental Economist, where he is co-editor in chief; Taylor on his personal blog; and Feyman at Forbes.)

Running room, but no touchdown

Last November, Feyman, in an op-ed co-written with Paul Howard, made a bid to wean conservatives off the "repeal" meme, suggesting that the ACA could be viewed as a "Trojan horse" for conservative reform. The piece proposed tweaks more modest than those put forward in CBH: expanding the variation in premium allowed for age; funding high risk pools; paring down the minimum essential benefits; and incorporating catastrophic plans in the exchanges.

Now, Feyman enthusiastically embraces CBH as a vehicle for more thoroughgoing reform. Paradoxically, he sees the possibilities for conservative redesign widening, not because supporters of the ACA have been weakened, but because the Tea Party has. The CBH rollout signals that some Republicans at least are ready to deal. 

"We've seen the hardliners lose a good deal of influence since the shutdown," Feyman said. "If they don't gain more seats and influence, I imagine that a bill like this could pass."  Feyman is most excited by the prospect of maintaining subsidies for private insurance but ending the state exchanges' monopoly of subsidized plans.  The exchanges, he says, are "simplistic -- only designed to do one thing: sell health insurance as defined by the letter of the law and enroll people in Medicaid."  He considers private insurance an engine of innovation, particularly in private exchanges that are gaining some traction among employers.

"In the employer market," Feyman said, "exchanges are doing a great job directing employees into best locations for care,"  providing cost and quality information and incentives to chose the cheapest and best. He would like to see states encourage private exchanges in the individual market, and innovate in other ways, such as providing services that help consumers track their spending or set up HSAs.

But Feyman also believes that states that have invested in making their exchanges work should be allowed to keep them. A reform within the framework of the ACA would give states the option of running their exchanges, with private exchanges running alongside.

That's quite a disruptive change, envisioned in the context of Republican control of Congress and the presidency.  Even under those circumstances, though, Feyman acknowledged, "It would be tough to repeal Obamacare in 2017.  We'll have a lot of people benefiting from the law, those who have bought on the exchanges, those 26 and under on their parents' plans." Repeal "would destroy whatever political capital they [Republicans] have for the remainder of their term."

He elaborated, "We're past the point where full repeal can succeed, barring some major blunder. If in 2016, after risk corridors and reinsurance expire, we see significant premium hikes, that may give Republicans some leverage to repeal. But barring something like that, repeal is probably impossible."

That impossibility is Donald Taylor's starting point. CBH, according to Taylor, "is not a repeal of the ACA, though it's got some of that language wrapped around it. It sounds harsh, but it locks in much of the basic structure of the ACA, which is now the default. The CBH is best understood as a bid in a negotiation that will take place at some point in the future. It is inevitable."

CBH, Taylor pointed out, would cause more disruption to the market existing in 2017 or 2018 than the ACA is causing now. Without Democratic buy-in, Republicans would be exposed to the same kinds of political attacks that Democrats have endured. In fact, the reformers would get it from both sides.  That exposure is particularly obvious with respect to a provision in CBH that Taylor enthusiastically approves (as do Frakt and Feyman): replacement of the ACA's excise tax on expensive employer-sponsored plans with a cap on the employer tax exclusion for healthcare benefits. The provision, as originally described and then  assessed in a private score by the Center for Health and Economy, would make any premium amount above $5,400 for individual plans, and $11,250 for family ones, raising just over $1 Trillion in revenue over 10 years. Apparently that tax hike generated heat on the right, because the threshold was changed a day later to "65 percent of the average market price for an expensive high-option plan," with the "expensive" plan left undefined. If Republicans went ahead with the initial proposal, Taylor said, "Americans for Prosperity would start running ads about a trillion dollar tax increase."

Austin Frakt sees insurmountable difficulties in any drive to repeal the ACA. "I take an institutional view of things. There will be a lot of institutions invested in the ACA or something like it: insurers, hospitals, other providers, Medicare beneficiaries  By the time repeal could occur, the ACA coverage expansion will already have been in place for four years. Tens of millions of people will be relying on it."

A GOP-controlled government might call their reforms "repeal and replace" for political reasons, Frakt allowed, applying that label to "incremental or evolutionary reform." Republican-driven reform "wouldn't necessarily be bad. There might be some good things, it might be mixed. There are limitations to the ACA: there will be states that haven't accepted the Medicaid expansion, states where exchanges are struggling or failed. It would make sense to entertain other designs that might be more compatible with states and culture." State waivers, enabled by the ACA beginning in 2017, allow states to submit plans that would meet the ACA's coverage goals by other means -- for example, by the kind of open competition on- and off-exchange, or without any exchange per se, that Feyman envisions.

Indeed, Frakt sounds almost as receptive to opening the ACA up to further variety as Feyman. "The key is state flexibility. There will have been some states that have made tremendous effort and at great expense implemented their exchanges and expanded Medicaid. For them, the ACA is working just fine. There's no reason they should be disrupted. At the same time, many states aren't playing ball and won't.  I think [the administration] should consider even more flexibility in Medicaid expansion -- though it's hard to see much daylight between what Arkansas has done and what conservatives like."

Arkansas has won approval for using Medicaid expansion funds to pay for private plans on the exchange for households with income below 138% FPL -- that is, those who under ACA provisions would qualify for Medicaid. Frakt hopes that red state governors and legislatures will eventually experiment further with waivers. "There are lots of ways to tweak plans -- change essential health benefits, change coverage parameters, encourage HSAs" (tax-favored health savings accounts, usually paired with high-deductible plans).

Frakt gets exercised, though, at the prospect of the kind of root-and-branch repeal-and-replace that Section 101 of CBH would entail.  "That would be the same top-down, government imposing, 'shove down our throat' as the ACA [in Republicans' telling]. Why should Washington come and rip out states' functioning exchanges? That's not the way it's done under a conservative, pro-federalism point of view. If you like what you're doing, keep doing it." Under repeal, "There would be such a hue and cry from governors, invested insurers, health systems, doctors' organizations. This thing will have been running for a number of years -- I don't see how Americans are going to accept ripping it up."

Where opposites attract, or coexist

What conservative reforms to the ACA, prefigured in CBH, would progressives find palatable, or even preferable?  It seems that almost all healthcare policy scholars across the political spectrum would like to erode the tax-favored status of employer-sponsored insurance (ESI), which is currently excluded from employees' income when calculating income and payroll taxes. That tax exclusion cost the federal government $248 billion in 2013, according to the Congressional Budget Office. The exclusion gives employers an incentive to spend disproportionately on the tax-free health benefit, which puts downward pressure on wages and contributes to healthcare inflation, as employees are generally unaware of how much their employers are paying for their insurance. To repeal the tax exemption all at once, however, as John McCain proposed in the 2008 presidential campaign, would induce employers to cut back massively on health insurance spending, subjecting over 100 million Americans to cancellations or major coverage cutbacks.

CBH as originally unveiled took a big bite out of the exclusion, and while the subsequent backtrack left the details somewhat ambiguous, it still purports to raise an estimated $1.05 trillion over ten years. That tax increase, Taylor points out, is progressive.  "Take a housekeeper at Duke versus me. We'd take the same hit in taxable income if we picked the same plan (there are only 3 options), but because of the progressive nature of federal income tax, I'll pay much more because I am in a higher tax bracket." Because it's "an upside-down subsidy," its partial removal is "very progressive." Taylor added that the provision might not cost the lowest-paid full-time employees anything, as they might not owe any income tax at all, depending upon other tax related circumstances.

Feyman also thinks that the cap on the employer's exclusion is "a great idea . One of the main factors driving spending is that a lot of people are overinsured. That results in lower wages than you'd otherwise have." But a provision like this cries out for bipartisan cover, because "150 million people are in employer sponsored insurance, and half would feel it. The average [current] employer plan would fall somewhere between gold and platinum on the exchanges. It will hit a ton of people."

Surprisingly, neither Taylor nor Frakt are particularly fazed by CBH's repeal of the individual mandate -- a conservative brainchild that became  the focus of intense conservative opprobrium (and of the court challenge ultimately decided by the Supreme Court). The individual mandate was conceived as a means to make "guaranteed issue" -- the sale of insurance without regard to the buyer's medical history or current health -- economically feasible. If everyone within a given market is drawn into one risk pool, the healthy subsidize the sick.

To replace the individual mandate, CBH kicks off with an open enrollment period in which all uninsured Americans can buy insurance (subsidized if their income is up to 300% FPL) without medical underwriting, i.e., regardless of any preexisting conditions. After that, it is incumbent on everyone to maintain continuous insurance or else be subject to medical underwriting.  To prevent people from breaking that chain in hard times, CBH would auto-enroll everyone who loses coverage in a default catastrophic plan in which the premium does not exceed the subsidy. The auto-enrolled could opt-out (freedom!) -- but would then lose their protection from medical underwriting.  If the loss of that protection seems harsh, one might imagine adding a provision from an ACA replacement plan created by James Capretta and Douglas Holtz-Eakin, on which CBH seems closely modeled: schedule an open enrollment plan every five years.

That combination of features could be food for serious thought for progressives. Frakt proposes a thought experiment: "If something like Coburn-Burr-Hatch had been proposed by Democrats in 2009, how differently would I feel about it?  There are aspects that are or would have been viewed as no worse or no different than the ACA. You need some inducement to enroll. You need to battle adverse selection. As to the precise mechanism, it's most important that it's accepted as legitimate and people think it's fair." With the individual mandate so relentlessly slimed, one might infer, a viable replacement is worth considering, to win that acceptance. To extend Frakt's thought experiment, recall that during the 2008 campaign, Obama opposed the individual mandate; it was the only substantive point of difference between his health reform proposal and those of Hillary Clinton and John Edwards. It's not hard to imagine him embracing the CBH continuous coverage/auto-enroll alternative.

Conservative reform scenarios

If ACA repeal is near impossible and conservative reform, at least in red states, is near inevitable, how might reform play out? I asked Feyman to consider an interim step: the GOP wins control of the Senate in 2014.

A GOP Senate, Feyman said, "Might start pushing serious reforms. I can imagine them expanding age rating bounds, possibly pulling Medicaid funding from states that have expanded."  Would they really take insurance away from millions of people?  "They're going to play to their constituency," Feyman said. "As long as red states don't expand, it's feasible."  Other options, according to Feyman, might include expanding the age bands to 5-to-1, reducing the cap for subsidy eligibility to 300% FPL (as in CBH), even funding state high-risk pools -- which implies opening the door to some kind of medical underwriting and/or undoing the individual mandate.

What leverage would a GOP-controlled Congress deploy to impose such sweeping changes? "They could make sure that absolutely none of Obama's agenda gets done," Feyman said. "Stymie everything he's asked for: minimum wage, job training, universal pre-k, trade promotion authority."

I pointed out that with a GOP-controlled Senate and House, Obama would have virtually no chance of passing any item on his agenda in any case, except perhaps the fast-track trade deal authority.  How could Republicans force his hand? "They could try to defund Head Start. That could be a bargaining chip, though I'm not sure it's significant enough for Obama to make serious changes to his chief legislative achievement."  As for carrots to induce less radical changes, "The minimum wage -- some Republicans might agree to a hike in exchange for changes to Obamacare."  On job-training, too, "Obama could probably get Republican buy-in."

What's in it for Democrats?

Of course, there is a good chance that Republicans will win neither the Senate in 2014 (Feyman thinks it unlikely) nor the presidency in 2016. Why, then, should Democrats be receptive to moving healthcare reform in a conservative direction?  As Frakt points out, the ACA is built on provisions with a conservative heritage that the GOP has subsequently demonized, and their refusal to engage has become for Democrats "a way to maintain the status quo. If you constantly change what you're willing to accept, you're perceived as constantly shifting the goalposts." Now, Republicans are playing on the Democrats' field. "The status quo has changed tremendously. I'd like to see problems with the ACA addressed, but many people for political if not for policy reasons think it's good...Democrats are okay with the status quo." 

Frakt and Taylor both see the status quo as unstable because the ACA rollout is so stunted in red states -- by refusal of the Medicaid expansion and stonewalling or even sabotage of the exchange rollout (e.g., by setting up obstacles for the "navigators" recruited to help people with the enrollment process)  For Taylor, a lifelong southerner, the imperative to expand health insurance access in the South is personal. Taylor has sketched out various visions of long-term progressive-conservative compromise on healthcare reform (here's one) and has submitted detailed proposals to the North Carolina legislature for privatized Medicaid expansion. The chief inducement for Democrats to negotiate, he suggests, is to cover the 25-30 million people that the ACA leaves out.

 "If I were to argue for negotiation from a pro-ACA perspective," Taylor said, "I'd be most worried about the uneven rollout, with the South left out.  I'd look to come up with some way to make the South willing to expand insurance coverage." He adds that there's probably no way to do this between now and the next election in 2014 in states that haven’t already starting moving that direction.

From a policy standpoint, I suggested, progressives should be committed to getting all Americans covered. But might there be a certain political logic for Democrats to let the states diverge, let the South suffer on its own terms?  Speaking as a southerner, Taylor said, he could only respond, "a lot of people are gonna get hurt by that."

"When I first read the Supreme Court ruling" upholding the ACA but making the Medicaid expansion optional, Taylor said, "I remember thinking, usually in the South we say we hate the feds while we cash the checks. In many ways, Roberts called the bluff of the South. If you hate the federal government, don't take the money. It's up to people who live in the South to make the case why we have to do this thing."

He's tried hard to make the case in southern terms, embracing privatized Medicaid expansion although it's more expensive and the benefits are skimpier than in Medicaid as we know it. It's the only way, he suggests, because Medicaid is anathema in the South. The dominant response, he says, boils down to "Medicaid is poor people's insurance and we don't want to do it."  Speaking from experience, he adds, "Let's say North Carolina was gonna cook a deal to do expansion -- you'd never call it Medicaid.  The term is not quite as bad as "Obamacare," but it's creeping up on it. Whenever I talk to someone in the North Carolina legislature, I try to make the point that Medicaid is not one monolithic program, it's many programs—kids, adults, the disabled, the dual eligibles, all with different needs."  Just don't call them Medicaid beneficiaries.

There's a power imperative to get the Medicaid expansion done, Taylor said.  "Now you could have such a major expansion of insurance coverage in a way so advantageous. If you pass this up, there's no way poor states will do something like this on their own.  Medicaid expansion is not that consequential in California or Massachusetts [where eligibility was already extensive pre-ACA], but in North Carolina, you could cover a half million people in a year, and that's a huge change. You can leverage $4.1 billion in federal money in 2016 alone. It's painful to watch that deal go begging."

Hence his own proposal for North Carolina to use Medicaid money to offer a private "Basic Health Plan" (BHP, a little-known ACA option) to people with incomes ranging from 0 to 200% FPL.  With respect to federal waivers authorizing such use of the Medicaid expansion money, Taylor said, "I'm sure there's something the administration would say no to -- we should find out what that is. The administration is desperate to say yes."

Coloring within the lines

While Frakt, Taylor and Feyman all expressed varying degrees of cynicism and war-weariness about the legislative process, they all also betrayed a kind of backhanded faith in the system.  All assumed that those actually wielding power would remain accountable to multiple constituencies and so would eschew the kind of nihilism that has characterized legislation in the GOP House -- in short, that a governing GOP would not be dominated by the Tea Party. It might, however, be hamstrung by it.  Taylor, envisioning CBH-style reforms passing in the Senate, said that in the House "it would be a whip operation for the centuries."

At the same time, Taylor expects a ruling GOP to moderate. "They can run in 2014 on hating Obama, but after that, they've got come up with something positive. What might finally 'break the fever' is Obama not being president any more."

Asked to envision a realistic worst-case scenario for what a GOP-controlled federal government might do to the ACA, Frakt responded, "Maintaining most of its structure but using it as a cash cow. 'Let's lower subsidies or index them so they're less and less generous. Let's save on essential health benefits. Let's make plans cheaper but allow them to provide catastrophic coverage.' Appeal to people who think the ACA is much too costly: show 'savings' paired with a tax cut."

There's a reassuring side to this scenario, though. Frakt added, "What I've described is a kind of tinkering where the structure is more or less in place, but moving the levers a bit. That's what's happened with Medicare Advantage payments: the levers go up and down. It's moving the dial but never changing the structure."  And the ACA is now part of the woodwork.

At the same time, Taylor suggests, even an enacted reform cannot endure long-term as the sound of one hand clapping.  "It is not viable for something so vital as health reform to be the purview of one party alone. For a variety of reasons, both sides need a deal."

*          *          *          *

* The Coburn-Burr-Hatch proposal's official name is The Patient Choice, Affordability, Responsibility, and Empowerment Act, a.k.a. the Patient Care Act. I've followed Avik Roy in dubbing it CBH.

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