November 12, 2016

Trump Is Right on Obamacare Reform

After his convincing election win, President-Elect Trump has already begun talking about policy reforms. First on his agenda is Obamacare, which he wants to remove and replace with a more market-oriented model. This is promising; as I explained in 2007, and again in 2009, interstate competition on the health insurance market is a very good way to let market forces reduce the cost of health insurance while increasing quality and choice for insurance buyers.

There is no doubt that this is the direction in which Trump wants to go. However, after his meeting with President Obama he announced that he may want to keep two elements of his predecessor's infamous reform: the mandate on insurers to accept pre-existing conditions, and the option for parents to keep their kids no their plans to the age of 26. This has sent reverberations of concern throughout layers of conservative voters: is Trump going to cave in and become mainstream?

From a principled viewpoint, Trump's statement about keeping a couple of elements of Obamacare is undoubtedly a cause of concern. However, reforming away an entitlement program as complex as Obamacare cannot be done based on principles alone. As a public-policy economist I research practical paths to reform on a regular basis (for those interested, check out my collection of practical reform models from 2012). I cannot afford to rely solely, or even primarily on principles. 

That does not mean you abandon your principles when you go to work on reforming away entitlement programs like Obamacare. Your principles set a point on the horizon, toward which you want to go, but they do not lay out the route from where you are to where they will eventually take you. That job, designing the route from here to there, is the job for the public-policy economist, the legislator, the president elect... 

Ideally, entitlement reforms will follow a straight, narrow path from here to the free-market ideal of no government. In reality, there will be lots of boulders and hurdles in the way of any entitlement reform, some of which I, as the public policy economist, have to place there. Primarily, there are two of them that we cannot remove.

The first one has to do with the nature of the entitlement program itself. A tax-paid entitlement is a promise that government makes to people. Essentially, government says: we will take X amount of money from you (the people) and in return we will give you Y amount of money back, packaged as a bundle of services or cash handouts, to those we deem eligible. 

When this promise is made, people adjust their lives to it in two ways. They accept that their bottom line is smaller because of the tax that pays for the entitlement, and they expect the entitlement to be there for them for the foreseeable future. In the case of health insurance, provided, regulated or subsidized by government, relying on the promise becomes a substantial part of people's lives. They make major adjustments in their lives to the promise that, in this case, Obamacare has handed out to them. 

The larger the impact of the promise on people's lives, the more substantial are the consequences if government chooses to walk away from its promise. If government terminated the entitlement program like switching off a light, it would have very deep consequences in many people's lives. This does not mean that the entitlement itself was good, nor does it mean that we cannot do away with it. But it means that the entitlement must be phased out in such a way that it does not do undue harm to those who have become dependent on the entitlement. 

When Trump says he wants to keep the up-to-26 element of Obamacare, it means that he wants a smooth and predictable path from today's Obamacare structure to a free-market based model. As the Christian Science Monitor explained:

Uncertainty about Trump’s healthcare plans led more than 100,000 Americans to sign up for coverage on Wednesday during the open enrollment period. Insurance companies have also been thrown for a loop by the election of Trump. Having spent hundreds of millions of dollars to reorient their business models toward the Affordable Care Act, they stand to lose significant amounts of money if the Act is repealed. Nor do they have contingency plans, because most didn't expect a Trump victory. “This wasn’t on the sheet” of election outcomes that executives considered, Mark Bertolini, the CEO of Aetna, told the New York Times. “We had no idea how to approach it.” Trump’s willingness to keep important parts of the bill may come as a relief, then. He has also indicated a commitment to replacing Obamacare, promising a seamless transition between the Affordable Care Act and his healthcare law. “We’ll repeal it and replace it,” Trump said in a interview with CBS’s “60 Minutes” to be broadcast on Sunday. “We’re going to do it simultaneously — it’ll be just fine,” he added, saying that Americans would not be without coverage for even two days.
In a nutshell: a reform to an entitlement reform that deeply affects people's lives must not disrupt people's lives. It must give them a way to move from dependency on government to independence in such a way that their lives are genuinely improved as a result of the reform. One way to do so is to keep the up-to-26 provision until the health insurance market and the economy in general have improved enough so that young people can make enough money to buy good, affordable insurance on their own - or their employers can offer them better, cheaper coverage than they can today. 

The second boulder that I as an economist must put in the way of entitlement reform is the demand for macroeconomic stability. Most entitlement reforms would not have macroeconomic effects, simply because they are small enough. However, some do, such as a fundamental restructuring of the way we save for retirement. Social Security is big enough to have macroeconomic effects on its own, meaning that a transition into a system with private savings could destabilize, or stabilize, the economy depending on how the reform is designed. 

Obamacare itself has had macroeconomic effects. It has thrown a wet blanket of higher costs, stifling regulations and cuts in hours for employees over the entire economy. It has also lured millions of people into dependency on subsidies and regulations the costs of which someone else is picking up. To lift the blanket off the economy, Trump and Congress will have to make sure that there are no negative "recoil" effects such as people being thrown off insurance plans before they have a chance to get an alternative plan. If that happens to a large enough number of people, it will have negative effects on such critical variables as labor supply, government spending  (through dependency on other entitlements) and private consumption.

Any such negative reaction from a reform aimed at improving the economy will partly or entirely neutralize the positive effects of the reform. It is an unnecessary cost that only the doctrinaire libertarian would overlook.  
So far, Trump comes across as a problem solver more than an ideologue. That bodes well, provided that his ideological reference point on the horizon is at least somewhere in the vicinity of free-market capitalism.

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