How Can Republicans Replace Obamacare?
Choice of directions.
(c) Can Stock Photo
In our last post I described how Obamacare (aka Affordable Care Act or ACA) is falling ever downward in its death-spiral. Its crash may be imminent. Those Republicans who oppose the ACA will have to propose something to ameliorate the pain its crash will cause.
Republican Rank-and-File Attitudes
It is somewhat surprising to me that rank-and-file Republicans are not more concerned about Obamacare as an issue, since the problem almost seems to be a “no-brainer”. Yet Drew Altman on the Wall Street Journal reports:
Campaign rhetoric may give the impression that the ACA is a threshold issue for Republican voters, but polling indicates that it is just one of many issues GOP voters care about. In the Kaiser Family Foundation’s August tracking poll, 69% of Republican registered voters said they would consider a candidate’s views on the ACA as one of many factors determining their vote; just 12% said they would “only vote for a candidate who shares their views on the ACA.” Eighteen percent said this issue would not be a factor in their vote. The findings suggest that Republican candidates are not likely to win many primary votes based solely on their ACA positions.
Nevertheless, Republican candidates need to take their positions early to help define for voters outside of the GOP how they might expect relief from their pain caused by Obamacare. This pain can only mount in severity to present an incredibly strong issue by election day 2016.
Mr. Altman goes on to explore more Republican reactions to the ACA from the Kaiser Family Foundation’s poll. Among the 59% of Republicans who want to replace the entire ACA, 29% want to replace it with a Republican alternative, 23% do not want to replace it with anything, and 7% either want some other reaction or do not know their own minds. Of the remaining 41% of Republicans, 17% would like merely to scale the law back, 16% would like to acquiesce to the law as it is, and 8% had no opinion or refused to express it.
I suspect the group that wants to replace Obamacare with nothing are merely expressing their desire for government to get out of health care altogether. If some Republican candidate could suggest changes in law making health care even more of a free-market, the faction that wants Obamacare replaced with nothing might be ecstatic.
Past Conservative Reactions to Health Care Problems
A good way of understanding basic conservative reactions to health care problems is to think about how much goods and services have changed in cost over time. In units of the number of hours a person with the average wage would have to work to obtain them, almost all goods have dropped precipitously in cost over periods of decades. For example, a consumer in 2012 would only have to work about three days to earn enough to buy a toaster, a TV, and an iPod. A worker back in 1958 on the other hand would have to work about 4.6 weeks to buy the same goods. This is assuming these goods had existed back then in the same quality! The comparison is made by translating todays prices for those goods into 1958 dollars through a price index. This means the work-time cost for goods and services declined by 86% over less than 5 decades.
This observation unfortunately is not universally true for all classes of goods and services, just most of them. One class of goods and services that is an exception is health care. (Another exception is higher education, but that is a story for another day!) A 1958 worker would have to labor about 15 days to earn the per capita cost of healthcare in his day. In 2012 the typical worker would have to work about 58 days to earn the per capita healthcare cost, an increase of 287 percent! In general the developments of technology have radically decreased the real costs of living. So why is healthcare such a big exception?
There seems to be one factor in common with these exceptions: They are in markets with which governments, particularly the federal government, have greatly interfered. In the healthcare market, government became an effective monopsony in healthcare with the passage of Medicare in 1965. Because of its control over reimbursements for medical care for the elderly, the federal government had an outsized voice in the determination of doctor, pharmaceutical, and hospital prices. With the advent of Obamacare, this monopsony power will only increase.
The reason why real costs for most goods and services have declined over the decades is that healthy competition between companies has inspired technical advances that have increased productivity and the quality of produced goods. Such competition is totally removed in a monopsony, because of monopsony’s monopoly buying power. This situation removes the major incentive for technological advances,
The last two paragraphs give the conservatives’ fundamental view of why the costs of medical care have skyrocketed while the costs of most other kinds of goods and services have declined greatly over the decades. Then the next question for a conservative is: What specifically has the government done to increase prices, and how can we counteract these government actions to produce mostly benign effects? Over the last several decades, conservatives have concentrated on two major kinds of actions.
The first major change contemplated by conservatives would greatly increase competition between health insurance companies. This would be accomplished by federal legislation to prohibit the states from stopping the sale of insurance across state lines. Due to the cost of setting up a network of associates in a new state to sell the insurance, such a reform might take time to show progress, but our entire history has shown competition between companies to be a major driver of progress.
A second change would lessen government encouraged health cost increases to some degree by reforming medical tort law, aka malpractice liability law. There has been a great deal of spirited argument over this issue with only limited agreement. I would point you, however, to a National Bureau of Economic Research (NBER) article, Does Tort Reform Reduce Health Care Costs? In discussing one piece of research, the article notes:
The authors begin by observing that tort reform must have an impact on medical practice – as opposed to solely on medical malpractice – in order to yield nontrivial reductions in healthcare costs. Direct costs of malpractice, which include premiums, damage awards in excess of premiums, and associated litigation costs, represent no more than two percent of health care costs. Thus, tort reforms can have a substantial effect on health care costs only if they affect the amount of healthcare services provided.
Therefore any such reform should not remove a malpractice victim’s recourse to the courts, but should allow doctors to dispense with extraordinary exercises of defensive medicine. Four types of reforms were considered.
- Caps on non-economic damages, usually pain and suffering.
- Caps on punitive damages.
- Collateral source reform, i.e.if plaintiffs receive public or private insurance benefits, their awards would be reduced.
- Joint and several liability reform. This limits the plaintiff’s ability to go after others affiliated with the defendant who had no other connection with the malpractice. Then the plaintiff could not go after others just because they had “deep pockets”.
Except for the cap on punitive damages, the study’s authors found each of these reforms reduces health insurance premiums by one to two percent. A much greater savings than this, however, might be provided if these changes give a physician enough confidence to lessen over-prescribed defensive medicine measures such as otherwise un-needed MRIs.
Other Conservative Thoughts
How else can the government be limited to reduce costs? Since government’s major role in increasing medical costs is as a monopsony, anything reducing the government’s role as a customer for medical services would be a great help. Repealing Obama care is a logical first step, since repeal would appear to be a relatively popular cause that should increase in popularity with time.
At the present time repeal of Medicare would not be viable, but perhaps something might be done to take away the Medicare program’s monopolistic price-setting power. The suggestion of reducing government’s power to drive down prices to the absolute minimum might seem curious to you. After all, are not the lowest prices possible the goal? The answer to your puzzlement is in the general neoclassical argument against wage-price controls in general. When such controls are imposed by government, it is almost guaranteed the price will be set much higher or lower than the equilibrium market price dictated by the law of supply and demand.
In our immediate case, the primary incentive of a Medicare bureaucrat is to set the price of services and medicine as low as he can dictate. If the price for a given service is PL, as shown in the plot to the left, a shortage will develop that is probably reconciled by some rationing through waiting lists. In any case the providers of goods (medical devices, medicines) and services (doctor visits, hospital stays) will have just the bare minimum profit (if that!) in order to keep going. There will not be enough profit to induce investments to improve technology and reduce costs of production. This is the microeconomic explanation for that 287% increase in work-time costs for medical care between 1958 and 2012. Therefore, if Medicare continues, one would want to restrain its ability to dictate prices. Perhaps the Medicare managers could be required to accept general market prices without negotiating them lower. I am not at all sure how this might be done, but the possibility deserves a great deal of thought.
I will comment on individual candidate’s positions on medical care as opportunity permits.
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