September 18, 2017

Last-Ditch ACA Repeal Is Worth Taking Seriously

Tyler Cowen

Holbert L. Harris Chair of Economics at George Mason University
Summary

Critics should compare Graham-Cassidy bill to realistic alternatives, not their ideal insurance world.

The Republicans are making yet another run at repealing Obamacare, this time with a bill sponsored by Republican senators Lindsey Graham, of South Carolina, and Bill Cassidy, of Louisiana. While this legislation doesn’t seem workable in its current form, as the old saying about Richard Wagner’s music goes, the bill is in some respects “better than it sounds.”

Think of Graham-Cassidy as allowing each state to try its hand at health-care policy, backed by a federal lump sum payment. Not surprisingly, opponents fear the states could waive essential components of Obamacare, such as the individual mandate, required coverage for pre-existing conditions or the regulations for “essential” health benefits. Alternatively, states could use the money to help develop their own single payer systems or pursue other innovations. The bill would also replace the federal-state partnership on Medicaid with capped per capita aid to each state, a formula that would induce many states to spend less on the health program for the poor.

The critics correctly suggest that the federal government would be cutting backon its fiscal commitment to health care, and that the bill would boost the number of uninsured by millions. It seems the CBO won’t be scoring this bill in time for any possible vote, but note that the behavior of each state is not always easy to predict (the most critical interim projections are typically expressing worst-case scenarios)

So why might anyone take Graham-Cassidy seriously?

The most important reason is that any predicted increase in the uninsured is relative to the status quo, but perhaps the status quo isn’t stable. The CBO has estimated that the U.S. is on an unsustainable fiscal path, and over time will need to choose some significant mix of tax increases and spending cuts. Graham-Cassidy looks bad because it accelerates some of those fiscal adjustments, but American health-care consumption will end up being curtailed anyway.

There is an unfortunate tendency of Obamacare defenders to pick and choose which CBO messages they publicize. If the CBO estimates that a Republican health-care bill will cut insurance coverage, that estimate is played up. But when the CBO surveys the nation’s longer-term fiscal conditions, that is downplayed for fear it will discourage moves toward bigger government. Many fiscal conservatives, however, commit a similar error but in reverse.

It is a legitimate worry that Graham-Cassidy might cut health-care benefits in an unequal fashion, but the bill may be more egalitarian than it at first appears. Due to the embedded formulas, the bill redistributes resources to red states, in particular states that have not already accepted the Medicaid expansion from Obamacare. Often those are rural states, some of them in economic decline. Favoring such states does have an egalitarian aspect, even if the Republican Party isn’t very effective in explaining the policy in those terms.

The biggest losers from Graham-Cassidy are likely New York and California, two states with very costly Medicaid rolls. That might appear anti-egalitarian, but is it really? The beneficiaries in those states tend to be relatively young, and thus their human capital endowments, in the form of future life enjoyment, are usually quite high. All things considered, a 28-year old lower middle-class immigrant in Los Angeles is arguably better off than a 61-year-old in Nebraska with $100,000 in the bank. Giving a benefit to the red state individual actually may reflect the more egalitarian sentiment, although that’s not usually how health-care policy discussions are framed by either Democrats or Republicans.

So what’s wrong then with Graham-Cassidy? Most of all, it relies on state governments to engineer the next evolution of health-care policy. The unfortunate reality, however, is that American federalism is broken. Some states are either effectively bankrupt or on the verge of  being so, including the populous locales of Illinois and New Jersey. Connecticut is usually among the leaders in per capita income, but it too cannot manage its fiscal affairs. Some state governments are well-run, but it seems odd to put health-care policy in the hands of so many failing institutions.

There is another problem with state experimentation in this context. So many health-care problems are on the supply side, namely weak incentives for quality care, barriers to entry and innovation, and regulations that raise costs but don’t improve safety. Ideally policy experimentation could cover all of these dimensions, but almost all of the debate is on the side of financing and insurance coverage. With a more or less fixed set of supply-side institutions, simply pushing more financing decisions into state governments may not produce much, if any, improvement.

The final version of this bill isn’t clear, and it’s appropriate to withhold judgment for now. But the actual pluses and minuses of this general approach to health-care policy are quite different from what you usually hear. Both Republicans and Democrats need to climb out of their traditional rhetorical postures and look at what the bill would do, relative to realistic alternatives.