Republicans Should Convert Obamacare Into a Free-Market System

Give patients control of their health care dollars

Many liberals have been not-so-secretly hoping to use Obamacare as a Trojan horse for implementing a Canadian-style single-payer health care system. But Republicans could slip in market-based reforms that they've always wanted into this horse if they'd stop playing hotheaded rebels—a la Sen. Ted Cruz—and wasting time on futile budget battles.

The very fact that Presidents Obama and Clinton last week thought it fit to have an hour-long tete-a-tete on TV to put a happy face on the law suggests that it might be in trouble.

The latest evidence is Health and Human Services figures showing that, thanks to all the onerous new regulations on insurers, young people—whose participation is crucial for the law's success—will face massive premium increases when the much anticipated insurance exchanges are rolled out across the country today.

Men under 27 would see their premiums rise nearly 100 percent on average and women 62 percent. Manhattan Institute's Avik Roy notes that even Obamacare's generous subsidies won't be enough to cover these added costs.

The upshot will be that many young people—who are two-thirds of the roughly 40 million uninsured—will prefer to pay the penalty ($96 in the first year) rather than buy coverage, especially since they can always do so when they fall sick. That's because Obamacare bans insurance companies from turning away patients with pre-existing condition or charging them rates much above what others pay—the so-called community rating mandate.

Over time, this will unleash a downward spiral of adverse selection: Rising premiums will push more healthy people to drop out, leaving the insurance pool sicker, which, in turn, will cause premiums to rise further, which will require more subsidies from an already strained federal fisc—until the whole Rube Goldberg structure collapses.

At that point, liberals will blame greedy insurers for their mess and say: "Markets have failed to provide affordable coverage. We need to give government direct control to cover people and pay providers." This is not speculation. Sen. Harry Reid last month openly admitted that Obamacare was "absolutely" a step toward single payer.

However, if Republicans play smart, they can use the moment of Obamacare's reckoning to erect a market-based, patient-centered system that they've long advocated. How?

One big obstacle to this goal has been the lack of options for individuals to purchase coverage independently of their employers. Obamacare's insurance exchanges, essentially on-line shopping malls where consumers can compare plans and prices, could overcome that, if they were properly constructed. But currently they are not.

They are larded with excessive mandates and regulations that'll inflate premiums and limit coverage options for individuals. Republicans should start focusing on deregulating the exchanges so that insurers can offer more customized packages that genuinely serve customer needs at affordable prices.

Furthermore, employers will increasingly pay the $2,000 per worker penalty and dump their employees on the exchanges—especially since the Cadillac health plans many of them have been offering will now face a 40 percent excise tax. Walgreen recently announced that it'll require its 160,000 employees to purchase coverage from the exchanges.

Republicans shouldn't resist this trend. They should use it to end the $300 billion in health care tax exclusions that employers currently enjoy and hand health tax credits to individuals. One of the craziest aspects of America's health care system is that while employers get limitless tax deductions when they purchase coverage for employees, employees paying out-of-pocket get no breaks, which unfairly boosts their costs.

Individuals shopping for their own coverage with their own dollars will unleash robust competition that'll do more to bend the cost curve than the price controls and rationing that Obamacare will inevitably bring. What's more, if individuals are getting generous credits to purchase coverage, it'll render the employer mandate moot and the individual mandate a whole lot weaker.

Finally, as Roy suggests, Republicans could use the exchanges as a basis for entitlement reform by transitioning Medicare and Medicaid enrollees on to them. The country doesn't have a bottomless money pit to fund the promises made by these programs. Offering their beneficiaries an inflation-adjusted lump sum every year to purchase their own coverage will go a long way toward capping the nation's liabilities.

If Republicans think smart, they could hoist Democrats on the Obamacare petard while moving American health care onto a much more sustainable footing. The time for histrionics is over.

A version of this column originally appeared in the Washington Examiner