Repeal and Replace, But With What?

Key Points:

• Republicans in Congress appear to be solidly committed to repealing ObamaCare.
• Republicans’ last attempt at reforming health insurance, the Health Insurance Portability and Accountability Act of 1996 (HIPAA), did not solve the problems of portability and coverage for pre-existing conditions, the stated goals of the Act.
• The official Republican alternative to ObamaCare also fails to solve these problems, because it maintains employers’ monopoly control of their employees’ health care dollars, and is an inadequate response to the opportunity created by repeal.
• A more credible alternative to repeal is also much simpler: Let the American people, not our employers, control our health dollars.

One of the most important goals of the president’s health-insurance reform was to ensure that Americans with pre-existing conditions would have access to health insurance, and that people who lose their jobs don’t automatically risk losing access to health insurance. Let’s read what the president wrote in his signing statement:

For too long, tens of millions of Americans have been denied health insurance coverage because they have preexisting conditions. We have all heard their stories.

A husband and his pregnant wife lose their insurance and then find they cannot buy new coverage because her pregnancy is considered a preexisting condition.
A young woman starting out in her career cannot accept a promotion with another company because its health insurance policy won’t cover her diabetes.
A small business owner faithfully pays his group health insurance premiums for years only to learn that his coverage won’t be renewed after one of his employees develops a heart condition.
Since taking office, I have been fighting for changes that would stop this kind of unfairness and make health insurance more accessible for all people, including the most needy.

This legislation will set into motion several key reforms. First, it will eliminate the possibility that individuals can be denied coverage because they have a preexisting medical condition. Second, it will require insurance companies to sell coverage to small employer groups and to individuals who lose group coverage without regard to their health risk status. Finally, it will require insurers to renew the policies they sell to groups and individuals.

President Obama expressed these sentiments many times over the past year. But these quotations come from President Clinton, when he signed the Health Insurance Portability and Accountability Act in August 1996.1 HIPAA, originally the Kassebaum-Kennedy Act, passed the House of Representatives by a vote of 421-2, with leading Democrats on board, including Nancy Pelosi. The Senate passed it unanimously by 98-0.

The Republican presidential candidate, Senator Bob Dole, suggested that “The American people should ask why it took President Clinton more than three years to support these common sense reforms which he previously threatened to veto.”2 According to House Majority Leader Dick Armey, President Clinton’s signature said emphatically that “‘Republicans were right on health care, I was wrong.’ It’s a shame it took him so long to come to that conclusion.”3

The debate leading to passage of ObamaCare last month confirms that if HIPAA achieved its bipartisan goals, President Obama and the American people remain blissfully unaware. According to a February poll, 63 percent of respondents support “new requirements that insurance companies cover those with pre-existing conditions,” although this has actually been the law since 1996, at least for individuals with continuous employer-based coverage who switch jobs or who buy individual coverage.4 Even in 1996, a number of observers understood that this provision would drive up costs.

“The new law requires individual health insurance to be offered to anyone not employed, and without regard to pre-existing conditions for new employees,” the Jacksonville, Florida, Times-Union editorialized. “There is no reason to buy health insurance and pay premiums if you can buy it after you are sick. Issuing insurance to people who already are sick or injured will drive up the costs for all ratepayers.”5

Michael Tanner, now a senior fellow at the Cato Institute, concurred that the provision was similar to one that would require “insurers to sell fire insurance on a burning house.”6 Years later, Dick Armey concluded that the bill was a mistake, crafted in a legislative panic for which he admits much responsibility.

“It turned out that HIPAA did little to make insurance more portable, but it did set a dangerous precedent for the federal regulation of health insurance,” said Armey,7 and he’s got that right. Federal regulation, measured by the number of pages in the Code of Federal Regulations devoted to health care, excluding the FDA, increased by 56 percent from 1998-1999 through 2008-2009, a period of mostly Republican power.8

So, while unanimous Republican opposition to ObamaCare, and a commitment to repeal, are welcomed by those who advocate more individual choice in health care, it also invites the question of whether Republicans have learned anything from HIPAA’s failure.

The basic flaw in HIPAA is that it reinforced employers’ monopoly control of their workers’ health care dollars. This explains why it did not achieve its goals of eliminating exclusion of coverage for pre-existing conditions or improving portability of coverage. If someone wants to buy individual coverage after leaving employer-based coverage, he only enjoys HIPAA protections if he exhausts COBRA, the program by which people who lose their jobs continue coverage under their employer-based plan, without being underwritten for risk.

A former employee has up to 60 days to exercise the option of buying into his former employer’s plan via COBRA. Obviously, a smart former employee will wait two months to see if he gets sick. If he does, he can immediately claim COBRA coverage. This option is very valuable to the departing employee. Former employees who take up COBRA coverage have medical claims 145 percent greater than active employees.9

Obviously, when these folks move out of COBRA and seek continuation coverage in the individual market via HIPAA, they are a very sick group of people, and their premiums will reflect that.

Unfortunately, most Republican politicians appear not to have learned that health insurers cannot pool risk effectively as long as the government forces employees to accept health “benefits” chosen by their employers’ HR managers. Although tax reform that gives individuals control of their health dollars was a feature of Senator McCain’s and Mayor Giuliani’s presidential campaigns in 2008; and Representative Paul Ryan continues the proposal in his Roadmap for America’s Future, this alternative reform has not mutated the DNA of the Republican establishment.10

The G OP’s official health reform bill (H.R. 4038 § 221) retains the current discriminatory tax treatment but tries to mitigate its consequences with 27 pages of legalese that purport to make it easier for Americans to buy health insurance across state lines, and more than 60 pages discussing “association health plans” to help small businesses buy health insurance. While such measures are not necessarily wrong, they avoid the real issue.

Suppose the tax code was malformed such that workers’ homes were owned by their employers (using non-taxable dollars). If your employer’s HR department changed HMO (Home Maintenance Organization) annually, you’d have to move house every year. If you got a new job, even across the street from your old office, you’d have to switch jobs. Obviously, housing costs would be out of control and there would be huge bureaucracy and lack of responsiveness in the “system.”

Consider three reforms:

Reform the tax code so that individuals can use pre-tax dollars for homes of their own choice (through, perhaps, a mortgage-interest tax deduction);
Allow employers to use HMOs that were regulated in another state where the building code was not so strict; or
Allow small employers to band together in “association housing plans” so that they could get the same discounts on commissions, etc., as large employers.

Obviously, the first choice is the only one that remotely makes sense.

Repeal of ObamaCare is possible, but it has to be replaced with real change that gives the American people control of their health dollars. Any alternative that ignores that fundamental reform will fall as short as the Kassebaum-Kennedy Act of 1996, and fail to slay the zombie of government-run health care.