The Wisconsin Two-Step

Published March 15, 2017

Speaker of the House Paul Ryan is saying that Health Care Reform will require two steps. The first – involving certain fixes to Obamacare – would be in conjunction with a parliamentary process known as reconciliation. The second – involving measures to reduce the cost of health care – would occur at a later time. Ryan is intimating that this is a “take it or leave it” proposition.

For most Americans, health care is paid by an employer-sponsored plan or by Medicare or Medicaid. But, prior to Obamacare, many Americans found themselves without any plan, and having certain problems with respect to access to health care. The individual market in health insurance didn’t work very well. We economists identified the underlying problem as “self-selection.” That is, sick people (those with pre-existing conditions) were disproportionately the ones who sought insurance in this market, with the result that insurance companies had to charge very high premiums. Obamacare was supposed to make the individual insurance market work by requiring everyone to buy health insurance, the healthy as well as the sick, which was supposed to bring premiums down. In addition, Obamacare allowed states to expand Medicaid, and tremendously increased the required the benefits covered by private health insurance plans.

With Obamacare, premiums have skyrocketed, and many people in employer-provided plans and in the individual market have been forced to buy high-deductible plans that effectively mean they are not insured. Surveys indicate that something like 30 percent of people with private health insurance are in high-deductible plans and – while a majority of people with private health insurance say they are satisfied with their plans – a substantial minority do not. Among this substantial minority, many forego routine health care because for them bearing the out-of-pocket costs of health care with their high-deductible plans would be burdensome.

The net effect of Obamacare has therefore been to increase access to health care for some at the expense of reduced access for others. The winners have mostly been those made eligible for Medicaid, and the losers have mostly been those in working-class families. The Democrats point to those who gained from Obamacare and ignore those who lost. Donald Trump was elected President in large part because he resonated with working-class voters.

The Ryan plan is best viewed as an attempt to make Obamacare work. Its quick fix is to end the individual mandate (that is, it ends the tax penalties on those who do not carry qualifying insurance). In this way, working-class families would not be forced to buy useless high-deductible plans. It has been projected that several dozen million Americans would elect to go without insurance that, for them, isn’t insurance in the first place.

For others, the most significant parts of the Ryan plan involve re-jiggering the subsidy program, channeling subsidies to qualifying Americans as “refundable tax credits,” and expanding health savings accounts. In concept, sliding-scale subsidies can make it fair for the government to provide 100 percent subsidies to welfare recipients, since those who work but are nevertheless in the lower-middle class, still receive partial subsidies. Working should always result in increased income net of taxes and loss of subsidies. Unfortunately, when you consider all the subsidies you lose by working – food stamps, housing vouchers, Pell Grants for your children, etc., etc., in addition to Obamacare subsidies – for many people at the margin, it’s better to work only part-time or not work at all. The system is indeed rigged against the working class and those who laugh at the description of working class people as “deplorable” and “irredeemable” should be ashamed of themselves. Working-class people are heroic in their struggle to provide for themselves and their families.

The biggest problem of Ryanized Obamacare is the continued confusion of insurance and subsidy. Subsidizing health care will never lower the cost of health care. It’s like anything else that is subsidized, education, housing, or what have you. The more you subsidize something, the more it will cost, and the higher cost will have to be paid somehow whether through fees or taxes. The subsidies of Obamacare were supposed to be cross-subsidies, paid by forcing more healthy people to pay into the system. But, Obama couldn’t make that work. And, Ryan won’t be able to make it work either.

For many people, health insurance makes perfect sense. They have assets to protect, such as equity in their home, should they wind up in the hospital and get hit with a really big medical bill. These people will do fine with a high deductible plan, especially if they also have a health savings account. These people did o.k. before Obamacare; they’re doing o.k. now; and, they’ll do o.k. with Ryanized Obamacare

But, between the welfare class and the upper-middle class, there’s a range of people who have little if anything to protect in the event of a big medical bill. Their main concern is the out-of-pocket expenses associated with routine health care. Prior to Obamacare, limited benefit plans were growing in popularity precisely because they met the needs of this segment of the population. Limited benefit plans essentially pre-pay for routine health care. In doing this, limited benefit plans enable working-class households to budget their income. The problem of limited benefit plans is that they stiffed hospitals. The underinsured as well as the uninsured forced hospitals to absorb much of the cost of big medical bills as charity care, or else write those bills off as uncollectible, or else forced the hospitals to force their patients to go through the process of bankruptcy. The so-called “savings” of limited benefit plans forced hospitals to increase charges on other patients.

Obamacare was supposed to end the problem of charity care and medical bankruptcies, and bring hospital charges and insurance premiums down by ending limited benefit plans as well as by mandating universal coverage, but it failed. Ryancare leaves the mess Obamacase left basically unaddressed, and simply acknowledges that millions of Americans are twisting in the wind, not eligible for Medicaid and yet not able to afford low-deductible private health insurance even with Ryan’s refundable tax credits.

Step Two of Ryancare is supposed to lower cost by expanding choice and competition, by reconsidering the mandated coverage of Obamacare, by medical tort reform, and other measures. With lower health care cost and lower premiums, and with the subsidies provided to those in the working-class, Ryancare is supposed to entice working-class people voluntarily into the system. But, passing Step One is no guarantee that Step Two will pass. The Wisconsin Two-Step, like the dance from Texas, may involve a lot of motion that brings you back to where you started. Speaker of the House Paul Ryan is saying that Health Care Reform will require two steps. The first – involving certain fixes to Obamacare – would be in conjunction with a parliamentary process known as reconciliation. The second – involving measures to the actual cost of health care – would occur at a later time.