What the Left Gets Wrong About the Republican Party’s Health Ideas

In a recent interview, JD Vance said that Donald Trump “will promote more choice in our health care system, not a ‘one size fits all’ approach that puts many of the same people in the same insurance pools.”

In the blink of an eye, left-wing critics attacked me.

Trump and Vance “would allow insurance companies to discriminate against people with chronic conditions,” wrote Jonathan Chait. They would allow insurers “to charge less to the healthy and more (significantly more) to the sick,” added Josh Barro. “This is exactly how health insurance worked before Obamacare,” said Paul Krugman.

But it is the critics who do not understand how Obamacare works and how it should be reformed. When insurers are forced to sell to everyone at the same price, they have strong incentives to attract the healthy (on whom they make money) and avoid the sick (on whom they lose money). This is what is happening today.

Obamacare didn’t solve the problem; it just changed the nature of the problem. In the past, some chronically ill patients couldn’t get health insurance. As I show below, they can now get it insurancebut they may not succeed Healthcare.

So what’s the answer? It starts with recognizing that nearly everyone in America who buys private health insurance gets a tax subsidy for their purchase. People who get their insurance through an employer have that benefit excluded from their taxable income. People who buy through the exchange (Obamacare) get tax credits that are passed on to insurers along with the buyer’s payment.

Part of the premium we pay comes out of our own pockets, and the rest is covered by the government. Even if our share of the premium is at the community rate (i.e. the same price regardless of health status), there is no reason why the government’s share should be limited in this way.

In an ideal system, the government’s share would vary with health status. The total amount received by the insurer (personal + government payment) would be equal to the actuarial value of the insurance (the expected cost of care). If this were the case, the healthy and the sick would be equally attractive to insurers. There would be no incentive for insurers to discriminate on the basis of health status—not in cost sharing, benefit design, or choice of provider networks.

If insurers were fully compensated for taking on chronically ill patients, many of them would specialize and develop cheaper, better-quality care. We could have what Harvard professor Regina Herzlinger calls “concentrated factories,” entities that excel at treating different forms of chronic disease. Instead of putting everyone in the same risk pool, we could have separate pools for diabetics, heart patients, and people with other chronic conditions.

Some readers may wonder if this idea is practical. Could it actually work?

We already do that. What I just described is how the Medicare Advantage program was designed to meet the needs of more than half of all Medicare enrollees. Although originally a bipartisan idea, this approach to health care is increasingly associated with Republicans.

Medicare Advantage is the only place in the health care system where health plans receive risk-adjusted premiums that reflect the health of enrollees. Enrollees pay the same premium regardless of health status. But the additional government premium makes the total amount a health plan receives equal to the expected cost of enrollee health care. While it is not perfect, it is the most sophisticated risk-adjustment system in the world.

Medicare Advantage is also the only place in the health care system where a doctor who discovers a change in a patient’s health (such as cancer) can send that information to the insurer (in this case, Medicare) and receive a higher health plan premium that reflects the higher expected cost of care. That means plans are rewarded, not penalized, when they find and treat medical problems.

Finally, Medicare Advantage is the only place in the health care system where insurance plans can specialize. There are special plans for diabetics, respiratory patients, heart patients, cancer care, and more.

Professor Laurence Kotlikoff of Boston University and I have argued that the Medicare Advantage model is exactly the kind of model that will reform the Obamacare exchanges.

The individual market is currently great for the healthy and lousy for the sick. If you have an average income and no health problems, insurance is free (or nearly so). But if you have a costly health problem, the out-of-pocket cost this year is $9,450. For a family, it’s twice that. It’s the highest penalty for illness you’ll find in the health insurance system, and victims have to pay that cost every year.

Compared to employer-sponsored plans, plans on the exchanges have very narrow networks that often exclude the best doctors and best medical facilities. And if you go out of network, the plan pays nothing.

With rational risk adjustment, people wouldn’t have to be trapped in a “one size fits all” system. They could go outside the exchanges to buy short-term plans, shared plans, and other plans that aren’t subject to Obamacare regulations. In fact, we could have a completely free market for health insurance, comparable to the markets for other types of insurance.

Although I have described government as the risk regulator, the system I am describing would likely have developed privately if the insurance market had been allowed to develop on its own.

What Trump and Vance are talking about doesn’t mean we have to go back to the (pre-Obamacare) bad old days. It means we can look forward to a much better future.