Conservative 'Alternative' to Obamacare Misses the Market

It's good to see Republicans put forth health care ideas, but they may need to step back and think some more about first principles.

Instead of shutting down Obamacare's insurance exchanges, the government should expand them so that they also include patients who now are covered by Medicaid, Medicare, and veterans health programs.

That's the gist of a big new health care policy proposal that's getting a lot of attention.

It's newsworthy in part because it's so counter-intuitive. It comes from a think tank, the Manhattan Institute, that's generally known for conservative, free-market, center-right policy ideas. You'd expect them to be in favor of repealing Obamacare entirely, not expanding it.

The proposal is attracting respectful praise from other conservative voices. Steve Forbes, the former Republican presidential candidate, tweeted a link about the proposal with the words "what true patient-centered, consumer-driven healthcare reform would look like." (The plan's author, Avik Roy, is the opinion editor of Forbes in addition to being a senior fellow at the Manhattan Institute.)

At the conservative web site Townhall.com, Conn Carroll wrote, "Some conservatives will oppose Roy's plan since it does not begin by repealing Obamacare." But he insists, "fetishizing full repeal at the expense of smaller, more popular reforms would be a huge mistake… Progressives did not create the modern welfare state in one fell swoop. They did it by incrementally building it up over time. Conservatives should steal a page from their playbook and begin to cut the size and scope of the federal government whenever they can. If we wait to do at all at once, we may be waiting forever."

Dr. Roy's argument is that repealing the Affordable Care Act entirely is less desirable than his approach because a repeal "would cause a considerable amount of disruption" to the health care arrangements of 36 million Americans who will be getting subsidized insurance through Obamacare by 2017.

Nor is the lack of a full repeal the only aspect of the Roy-Manhattan Institute plan—Avik-Care, some are calling it—that may raise the eyebrows or the hackles of free-market types. The plan proposes "increasing federal funding of graduate medical education by $6 billion a year starting in 2016." So the rest of us are to be taxed to fund the education and professional training of physicians who, once they graduate, will earn six and seven-figure salaries? What about federal funding for graduate business or law education?

Avik-Care also recommends increasing staffing at the Federal Trade Commission, "so that the agency could do more to challenge anticompetitive hospital mergers." Here even Dr. Roy concedes that "expanding staffing at a government agency may seem like a counterintuitive way to increase market competition." Dr. Roy makes much of a measure of market concentration called the "Herfindahl-Hirschmann Index," or "the sum of the squares of the market share of each player in a given market." But he doesn't acknowledge how much the index depends on how you define the "market."

And, the paper says, "The proposal would increase the progressivity of health care-related federal outlays and tax expenditures. It would reduce subsidies for health coverage for high-income employed and retired individuals, but spend more on health insurance for the poor and the uninsured." For those who think the federal tax and spending system is quite progressive enough already, thank you, this will be a bitter pill.

There are some elements of the Roy plan that free-market types will have an easier time embracing. The proposal claims it will reduce the federal deficit by $8 trillion over 30 years. It would repeal the individual mandate and the employer mandate that are part of the Patient Protection and Affordable Care Act. It would repeal many of Obamacare's taxes, though it would leave in place the "Cadillac tax" on high-premium plans. It would increase physician supply by loosening restrictions on immigrant physicians trained abroad. And it recommends reform of the Food and Drug Administration to "give patients early access to innovative new therapies."

The Roy plan would reshape the rules governing the insurance policies available on the exchanges, allowing a larger price differential between premiums for the oldest and youngest customers (a 6 to 1 "age rating band" instead of 3 to 1), higher deductibles (averaging $7,000 an individual and $14,000 a family), and reduced subsidy eligibility (the upper threshold would be 317 percent of the federal poverty line rather than 400 percent). The proposal grandly describes this as "emancipating the ACA exchanges," but it may strike others as tinkering around the edges. And the increases in deductibles or premiums for some participants undercut the argument that the Roy plan is somehow less disruptive than a full Obamacare repeal.

Dr. Roy was a health care policy adviser to Mitt Romney's presidential campaign in 2012.

It's good to see the Republican side of the policy debate putting forth its own ideas for how to improve quality, reduce costs, and tackle the federal budget problems that relate to health care quality. But before they can successfully tackle the policy details—317 percent of the poverty line or 400 percent? A 6 to 1 "age rating band" or  3 to 1?—the politicians and their policy advisers may need to step back and think some more about first principles.