What Should Replace Obamacare?

Question: What should replace Obamacare?

A) Nothing
B) New tax credits or deductions
C) New block grants to states
D) Devolution

Correct Answer: D) Devolution

Process of Elimination

Let’s look at each of these four options more closely.

Option A (replace Obamacare with nothing) is appealing but not viable. The pre-Obamacare status quo wasn’t Utopia. Health care suffered from serious problems: job lock, rising costs, excessive state and federal mandates, and red tape. Repealing Obamacare won’t remedy those problems. We must also reform health care.

Option B (tax subsidies) is favored by most Beltway conservatives. It would replace most of Obamacare’s mandates and subsidies with a voucher-like federal subsidy scheme administered by the IRS. In the best versions of this option, the so-called Tax Exclusion, the existing subsidy for employer-sponsored health benefits, would be scrapped or capped. That’s a sound idea. The Exclusion is the single largest cause of our current health insurance woes, encouraging overconsumption of health services and creating job lock.

Conservatives are split over whether the new tax subsidies should take the form of credits or deductions, and over whether they should be universal, means-tested, or age-based. But those are details.

A more important question is whether new federal tax subsidies for health insurance are even a good idea? I think the answer is No; although I will concede that, if well-designed, they could be an improvement over Obamacare.

But another question: Even if well designed, how would new tax code subsidies differ in principle from those under Obamacare? Wouldn’t they amount to Obamacare-lite? They would, if they included an embedded form of Obamacare’s insurance mandates, namely, those restricting insurers’ ability to price according to an applicant’s medical risk. (These mandates go by the names of guaranteed issue and community rating.) Alas, every Republican tax subsidy plan proposed so far does include some form of guaranteed issue, and some plans also contain a form of community rating (i.e., price controls).

Next up is Option C (block grants). These would replace Obamacare—and perhaps other federal subsidies—so states could carry out different, presumably better sorts of health reforms. Obamacare’s mandates would be eliminated within the borders of a participating state. All in all, this idea is superior to both Obamacare and Republican tax subsidy proposals; but like both, it ultimately keeps power centralized in Washington.

Devolution Is Best

The best option—and the only option that really should replace Obamacare, in my view—is D (devolution). Send health insurance back to the states, completely.

Devolution is not a form of block-granting (that’s option C, remember), although the two ideas do share a certain spirit. With devolution, Congress eliminates certain federal programs altogether and simultaneously reduces federal tax receipts by the same amount. The programs move from the federal level to the state level, without a reduction in funding (in those states that deem them worthy of continuation). Block-granting shifts dollars temporarily. Devolution shifts power and responsibility permanently.

Realistically, most devolved federal programs would live on. But over time, the states would evolve them in various ways. For example, some states would tighten means-testing. Other states would impose work requirements. And so on.

Devolution would be a godsend for the federal budget. Since health care spending traditionally grows much faster than tax receipts, it would naturally bring the budget into balance rather quickly (say, three or four years), making it possible to shrink and eventually eliminate the national debt.

And because health care devolution would cut out a thick layer of bureaucratic waste, it would reduce health insurance costs and increase the share of the population with health benefits coverage. More decentralization would unleash private sector competition and innovation. It would improve the quality of care, and accelerate medical progress.

Finally, as a legal and political matter, devolution is the only approach that follows the U.S. Constitution as originally understood by those who framed and ratified that document. It’s the only approach consistent with federalism and the Tenth Amendment.

Devolve What, Exactly?

For the wonkish reader, I’ve compiled a list of a dozen federal laws that would disappear under true health care devolution. Normal readers may wish to skip to the next section.

1. PPACA, the Patient Protection and Affordable Care Act of 2010, as amended by HCERA, the Health Care and Education Reconciliation Act of 2010 and subsequent amendments (Obamacare)
   
   
2. Medicare (title 18 of the Social Security Act)
   
   
3. Medicaid (title 19 of the Social Security Act)
   
   
4. CHIP, the Children’s Health Insurance Program) (title 21 of the Social Security Act)
   
   
5. The Tax Exclusion for employer-sponsored health benefits (section 106 of the Internal Revenue Code)
   
   
6. The Medical Expense Deduction (section 213 of the Internal Revenue Code)
   
   
7. Various other health-related tax-code subsidies, including: Health Savings Accounts (HSAs) (section 223); Health Reimbursement Accounts (HRAs) (section 105); Flexible Spending Accounts (FSAs) (section 125); and other “cafeteria plans” (section 125)
   
   
8. COBRA continuation coverage
   
   
9. HIPAA, the Health Insurance Portability and Affordability Act of 1996
   
   
10. ERISA, the Employee Retirement Income Security Act of 1974 (specifically, portions dealing with health benefits)
    
    
11. EMTALA, the Emergency Medical Treatment and Labor Act of 1986 (which requires hospital emergency departments to screen and stabilize everyone who shows up, regardless of ability to pay)
    
    
12. Title 27 of the Public Health Service Act (where most federal health-related mandates are codified)

(Clarification: I am not proposing the devolution of such public health agencies as CDC, FDA, NIH, and the Public Health Service; nor the Indian Health Service. I regard all of those agencies as constitutional, although undoubtedly some of their individual activities are not.)

By my estimate, in 2016 these 12 laws will account for at least $1.2 trillion in federal outlays, or about 30 percent of the federal budget.

(Technical note for budget wonks: According to the Congressional Budget Office’s January 2015 baseline, projected federal outlays next year will be $3.93 trillion, receipts $3.46 trillion, and the deficit about $470 billion. If we were to devolve all 12 laws next year, those respective figures would fall to roughly $2.73 trillion in outlays and $2.26 trillion in receipts, with the deficit remaining at $470 billion. But thanks to devolution, the budget would naturally come into balance within, I would predict, as little as three years. Without devolution, or something like it, I can’t see how the budget will ever balance.)

The Best Way Forward

Obviously, unfortunately, devolution has zero chance of happening any time soon. It would dramatically diminish the power of our bipartisan elite ruling class. Plus, it’s more change than our system can easily handle.

So what should we do? We should enact incremental changes now that make devolution easier to achieve in the future.

Which brings us back to block grants.

As a practical matter, I think the best way forward is to pass block grants that enable states to, in effect, repeal Obamacare’s mandates within their borders. Participating states would be let out from under Obamacare’s individual mandate, employer mandate, pre-existing conditions mandates, and other misguided mandates, without immediately losing its various subsidies, and without political risk for those who support the idea. Structure the block grants correctly, and every state will opt for one. Obamacare will be voted out of existence without a single conservative politician losing his or her job as a result.

Properly structured, the grants would also provide a template for block-granting Medicaid and CHIP, an essential step to getting federal spending under control. Later, ideally, we’d also fold Medicare and the Tax Exclusion into the grants—at which point, devolution would start to look very attractive to the states and feds alike. For the states it would mean policy control, for the feds, fiscal certainty. I realize our political culture would have to change dramatically before this could actually happen. But it takes seeds to produce a harvest. Plant the right seeds at the right time, and the impossible can become inevitable.

Now, realistically, block grants to replace Obamacare will of course be vetoed by the author of Obamacare. He will naturally veto anything that threatens his most hard-won handiwork. But he can’t easily criticize block grants. He can’t show how such grants would disrupt or reduce coverage. He could say they’re not big enough. But that would concede the point.

Proposing block grants in place of Obamacare would force Mr. Obama to argue that Washington knows better than the states, that centralization works better than decentralization, that federal control works better than interstate competition. Those arguments may persuade his supporters, but they won’t wash with state legislatures, not even Democratic ones. The states will be able to see how Medicaid and CHIP are busting their budgets and how a flexible replacement block grant would ease their fiscal woes.

If Mr. Obama loses in King v. Burwell, the 37 states who currently don’t have a state-based exchange will realize that taking the new block grant would preserve their citizens’ federal subsidies without all the expense and headache of establishing an exchange. In short, states will immediately appreciate the benefits of greater freedom and flexibility. That will put Washington Democrats on the defensive.*

To make that happen, of course, Republicans need to get their act together and actually put a politically savvy Obamacare replacement bill on Mr. Obama’s desk.

What should really replace Obamacare? Devolution-friendly block grants.

It’s the best way forward.

Dean Clancy is a former senior budget official in the White House and Congress. Follow him @DeanClancy.

[Originally published at Conservative Review, June 1, 2015. @CR.]

* Author's note, June 25, 2015: In the wake of Mr. Obama's victory in King v. Burwell, a state's incentive to prefer a block grant remains unchanged, but its incentive to operate a state-based exchange plummets to near-zero.