The Binary Choices of “Repeal-and-Replace”

During the run-up to the aborted vote on House Republicans’ Obamacare “repeal-and-replace” legislation, Speaker Paul Ryan repeatedly called the vote a “binary choice”: Republicans could support the leadership-drafted legislation, or, by failing to do so, effectively choose to keep Obamacare in place.

The rhetoric led to criticism of the speaker for attempting to bully or rush members of Congress into supporting legislation despite policy concerns and political unpopularity. That said, health care policy does involve several largely binary choices. They do not break down along the political fault lines the speaker proposed—support the leadership bill, or support Obamacare—but they demonstrate how health policy involves significant trade-offs that should be made very explicit as part of the policy-making process. Here are just three.

1: Obamacare’s Regulations Are (Mostly) All-or-Nothing

Just prior to the scheduled vote, Republican leadership and the Trump administration found themselves in trouble when they proposed eliminating Obamacare’s essential health benefits, for both legal and policy reasons. A more clearly drafted policy could minimize the former, but likely not the latter.

Here’s the problem: As long as insurers are required to accept all applicants regardless of health status or pre-existing conditions—a requirement known as guaranteed issue, and included in Obamacare—removing at least three other important Obamacare regulations would likely lead to unsustainable and perverse outcomes:

Community rating: Theoretically, insurers would have little problem with a requirement to accept all applicants, so long as they can charge those applicants an actuarially fair rate. However, “offering” a cancer patient an insurance policy priced at $50,000 per month would likely yield few acceptances (and would be politically unsustainable).

Obamacare allowed insurers to vary premiums only by age, family size, geography, and tobacco use. The House bill expanded the permissible rating variation, but only with respect to age. While this change would lower premiums for younger applicants, encouraging them to purchase insurance, it might not change insurers’ underlying assumption that applicants will be sicker-than-average.

Essential benefits: Requiring insurers to accept all applicants regardless of health status, but allowing them to vary benefit packages, would create incentives for insurers to structure their policies in ways that discourage sick people from applying.

For instance, no rational insurer would provide much (if any) coverage of expensive chemotherapy drugs, because doing so would prompt a flood of cancer patients to purchase coverage and run up large bills. Since Obamacare’s passage, HIV patients have already faced discrimination because of these inherent flaws in the law, even with the essential benefit requirements in place. Removing them would only accelerate a “race to the bottom.”

Actuarial value: Here again, removing the requirement that plans cover a certain percentage of expenses would lead to a rapid downsizing of generous plans from the marketplace—again, so insurers can avoid sick patients. Platinum plans have already become a rare breed on the Obamacare exchanges; removing the requirements would likely cause gold and silver plans to disappear as well.

These four major regulations—guaranteed issue, community rating, essential health benefits, and actuarial value—are inextricably linked. Repealing only one or two without repealing all of them, particularly the guaranteed issue requirements, would at best fail to lower premiums (largely what the Congressional Budget Office, or CBO, concluded about the House bill) and at worst could severely disrupt the market, while making the sickest individuals worse off.

The CBO largely agrees with this analysis. In a January document, CBO noted that Obamacare included major regulatory changes that require insurers to: “Provide specific benefits and amounts of coverage”—essential health benefits (the types of services covered) and actuarial value (the amount of that coverage), respectively; “Not deny coverage or vary premiums because of an enrollee’s health status or limit coverage because of pre-existing medical conditions”—guaranteed issue; and “Vary premiums only on the basis of age, tobacco use, and geographic location”—community rating.

CBO views these four interlinked changes as at the heart of the Obamacare regulatory regime. While lawmakers could repeal piecemeal other mandates beyond the “Big Four,” such as the requirement to cover “dependents” under age 26, or the preventive services mandate, doing so would have a much smaller effect on reducing premiums than the four changes referenced above.

2: Keeping Obamacare Regulations Requires Significant Insurance Subsidies

The January CBO analysis of the 2015 repeal bill passed under reconciliation illustrates the second binary choice. Because that 2015 reconciliation bill repealed Obamacare’s insurance subsidies (after a delay) and mandate to purchase coverage, but not its regulatory requirements on insurers, CBO concluded that the bill would severely damage the individual health insurance market. By 2026, premiums would double, and about three-quarters of the country would have no insurers offering individual insurance coverage, in CBO’s estimate.

The analysis revealed one big reason why: Eliminating subsidies for insurance would result in a large price increase for many people. Not only would enrollment decline, but the people who would be most likely to remain enrolled would tend to be less healthy (and therefore more willing to pay higher premiums). Thus, average health-care costs among the people retaining coverage would be higher, and insurers would have to raise premiums in the non-group market to cover those higher costs.

In short, CBO believed repealing Obamacare’s subsidies while retaining its insurance regulations would lead to an insurance “death spiral.”

By contrast, CBO concluded that this year’s House Republican bill, which (largely) retained Obamacare’s regulations and included a new subsidy for insurance, would lead to a stable marketplace: “Key factors bringing about market stability include subsidies to purchase insurance, which would maintain sufficient demand for insurance by people with low health care expenditures…”

The obvious conclusion: While the individual health insurance market remained relatively stable without subsidies prior to Obamacare, and repealing both the law’s subsidies and its regulations would restore that sustainable market, as long as the regulatory changes wrought by the law remain in place, the market will require heavy insurance subsidies to remain stable.

3: Banning Pre-Existing Condition Consideration Versus Repealing Obamacare

This binary choice follows from the prior two. If the “Big Four” insurance regulations are so interlinked as to make them a binary proposition, and if a market with those “Big Four” requires subsidies to remain stable, then Republicans have a choice: They can either retain the ban on pre-existing condition discrimination—and the regulations and subsidies that go with it—or they can fulfill their promise to repeal Obamacare.

Consider, for instance, Ryan’s response to a reporter on February 16 questioning the similarities between the refundable tax credits in the House plan (later the House bill) and Obamacare: “They call them refundable tax credits—they’re subsidies. And they’re subsidies that say ‘We will pay some people some money if you do what the government makes you do.’ That is not a tax credit. That is not freedom. A tax credit is you get the freedom to do what you want, and buy what you need—and your choice.”

Based on Ryan’s own definition, the House bill qualifies as an Obamacare-esque subsidy, and not a tax credit. It gives some people (those with employer coverage or other insurance do not qualify) some amount—the credits had to be means-tested to solve major CBO scoring issues—if they buy insurance that meets government requirements.

For an individual “buy[ing] what [they] need,” the option to purchase health insurance without under-26 “dependent” coverage, or without maternity coverage for males, did not exist. So it’s not that others derided the House bill as “Obamacare Lite,” it’s that the bill qualifies as such under Ryan’s own definition.

Much of the problem lies in House Republicans’ Better Way proposal released last summer, which stated a desire to retain Obamacare’s pre-existing condition provision. The import of this proposal was not clear at the time. There are other, simpler ways to provide coverage to individuals with pre-existing conditions (such as high-risk pools), and as Yuval Levin has pointed out, prior conservative health proposals did not include promises on pre-existing conditions. But Republicans’ unwillingness to upset the Obamacare standards for pre-existing conditions has significantly boxed in the party’s policy options regarding repeal.

To Govern Is To Choose

As with Barack Obama in 2008, Republicans face a self-inflicted dilemma, having over-promised voters by claiming they could keep the popular portions of Obamacare (pre-existing condition protections) while repealing the law.

But Republicans face what looks increasingly like a binary choice: going back to the status quo ante on pre-existing conditions, or breaking their seven-year-long pledge to repeal Obamacare. As the saying goes, to govern is to choose—but in this case, failing to govern may be the worst choice of all.

This post was originally published in The Federalist.