New York Times columnist Ross Douthat noted last weekend that conservatives should control their schadenfreude over the ongoing catastrophe that is the Obamacare insurance exchange. He wrote:

[While] conservatives think the Obamacare exchanges are overregulated and oversubsidized, they are actually closer to the right-of-center vision for health care reform than the Obamacare Medicaid expansion, which is happening no matter what transpires with Healthcare.gov. So if the exchanges fail and the Medicaid expansion takes effect (and, inevitably, becomes difficult to roll back), we’ll be left with an individual market that’s completely dysfunctional and a more socialized system over all.

In that scenario, the Democratic Party would probably end up pushing, not for the pipe dream of true single payer, but for a further bottom-up/top-down socialization, in which Medicare is offered to 55- to 65-year-olds and Medicaid is eventually expanded even more.

Meanwhile, the task for serious conservative reformers — already not the most politically effective bunch — might actually become harder, because they would have to explain how their plan to build an effective, exchange-based marketplace differed from the Obama White House’s exchange fiasco.

I wrote before the roll out of the exchange that so long as Obama is in the White House, the defund Obamacareobamacarertcosmin strategy won’t work. Hence, the smarter thing for Republicans to do would be to switch tactics and co-opt Obamacare’s exchange and turn it into a more market-based system by radically deregulating it and eliminating the individual mandate. Also, they should pare back the tax subsidies that individuals receive from the exchange. Instead, they should push to fix the tax code so that individuals could buy coverage with their pre-tax dollars, just as workers in employer-group plans do.

But if the Obamacare exchange implodes, should free market advocates mourn? Will it make it harder for “conservatives to achieve their public policy objectives,” as Douthat claims? Or will it make it easier?

In my view, the second is more plausible.

The implosion of the exchange won’t just mean that the country will be able to return to the pre-Obamacare status quo that: priced 45 million Americans out of the health insurance market at any given time; made coverage unportable by tying it to employment; and couldn’t put a lid on rising insurance costs because of built-in incentives for overconsumption by those who have coverage. Now that Obamacare has released this genie, there is no putting it back in the bottle, one of the few good things the law has accomplished.

However, the Obamacare debacle will discredit Democrats’ Big Government solutions to these problems, creating a political opening for the kinds of reforms that free marketers have been long advocating. Douthat is right that if the exchange fails, Democrats will try and push the two prongs of Medicare and Medicaid to capture more uninsured. However, they’ll have a much weaker hand that’ll make it harder for them to win, especially if Republicans start putting some of their cards on the table for viable alternatives now.

What would these look like?

Although there are big problems with the American health care system, they are not intractable. Indeed, to the extent that they are a result of lopsided government policies, they can be fixed by reforming these laws -- and without resorting to more intrusive government. There are two policies in particular that have prevented individuals who already have employer-group coverage from switching to personal and portable coverage of their choice through a private version of the Obamacare public exchange (like ehealthinsurance), notes Ed Haislmaier of the Heritage Foundation. “We should have fixed them a long time ago,” he says.

There is of course the tax code that discriminates against individuals. The other is that, unlike in the group insurance market in which insurance companies are barred from turning away patients with pre-existing conditions when these patients change plans (switch employers, for example) there is no such “guaranteed issue” requirement in the individual insurance market. So covered individuals who develop a medical condition and want (or need) to move from the group insurance market to the individual market (when they start their own company or become unemployed and lose their COBRA coverage) currently have very few options. In most states they can only get new coverage from a designated insurer or the state’s high-risk pool.

This has dampened the demand for individual insurance policies, preventing online “marketplaces” (President Obama’s new term of art for the exchange) targeted at individuals from emerging. Therefore, maintains Haislmaier, Republicans should push for parity not just between the tax treatment of companies and individuals, but also regulatory treatment between group and individual insurance plans.

This would mean a guaranteed issue requirement for individual plans. However, this guaranteed issue would be more limited and fundamentally different from Obamacare’s.

Obamacare requires participating insurance companies to issue coverage without pricing for risk regardless of when an individual decides to obtain it. So individuals have a very strong incentive to wait till they get seriously sick. (Theoretically, individuals are confined to buying coverage during the open enrollment period each year under Obamacare, but there are so many exceptions to this rule that it is likely to be fairly toothless.) But the more limited approach to guaranteed issue would only apply to those who have maintained continuous coverage for some years and then need to switch plans. This would create a powerful incentive for individuals to always maintain coverage without an individual mandate. That more limited and balanced approach has operated successfully in the group market for the past 15 years.

The other big reason why the concept of private insurance exchanges is likely to catch on is that they are succeeding even as the Obamacare exchange is failing.

Even though these private exchanges have limited appeal for individuals and small companies for the reasons mentioned above, big companies are turning to them because they are switching from a defined benefit to defined contribution health coverage model in order to control rising employee medical costs. Indeed, notes Haislmaier, Obamacare itself has accelerating this switch to defined contribution (and hence private exchanges) by jacking up corporate health care costs through its diktats (removing annual lifetime limits on coverage and requiring coverage of dependents up to age 26, among other things).

More importantly, Obamacare’s mandate that small companies with over 50 employees provide lavish coverage means that the limitless health benefits that corporations offered no longer gives them a competitive edge in the labor market. So they’d rather give employees a fixed sum to pick their own coverage from a wide array of choices.

Indeed, at the same time that Obamacare’s exchange debacle was unfolding, The Detroit’s News’ Henry Payne reports, Walgreen moved 160,000 of its employees to a private exchange run by Aon Hewitt, a consulting company, without a hitch. Interestingly, in contrast to the Obamacare exchange that was launched even though it crashed during a test run, Hewitt made its exchange available to its corporate customers only after first successfully beta testing it on its own employees in 2011. Walgreen’s employees now get to pick a plan from 25 options on the Hewitt exchange instead of the previous two to four on the company's menu.

It is premature to write the obituary of the Obamacare exchange. Time is running out, but it is possible that the administration will be able to fix the problems before the death spiral of adverse selection destabilizes the entire insurance market. This means pumping likely hundreds of millions more on something that has already cost taxpayers $635 million. If, despite all this, the exchange still collapses, Americans won’t be in the mood for more Big Government solutions. There will never be a politically more opportune moment to put sensible market-based alternatives — with an established track record — on the table.

So Republicans shouldn't waste the Obamacare crisis — they should start thinking of ways to capitalize on it now.