President-elect Donald Trump has asked Republican legislators for a “full repeal of Obamacare.” Judging from the reactions in social media, it will bring either a New Morning in America or utter disaster. But Alain Enthoven, professor emeritus of economics at Stanford Graduate School of Business, takes a different view.
“The Affordable Care Act was certainly not a disaster,” as Trump called it during the campaign, he says. “But neither was it ever a cure for our health care woes.” That means, whatever happens, things may not get dramatically better or worse. But we know how to fix health care, Enthoven says. And he sees signs that progress might just be possible now.
Enthoven is one of the country’s leading experts on health care finance. He has advised presidents and Congress, and his market-based prescription was adopted by Covered California, the most successful of the state insurance exchanges under the ACA. He’s also put his ideas to the test as the longtime chair of Stanford University’s benefits committee. He spoke to Insights by Stanford Business on what we should expect in the coming months.
Are we really going to see the end of Obamacare on day one?
Well, the Republicans’ mantra for the past six years has been “repeal and replace,” but they’ve never been able to agree on a replacement. They’re like the dog that chases the bus — after all the yapping, they’ve suddenly caught the bus and don’t know what to do with it. So the new slogan is “repeal and delay”: Pass a law on day one saying the Affordable Care Act is void, but it’s not void till two or three years from now, and maybe by then we’ll figure it out.
Is that a viable approach?
I doubt it. Insurance companies are going to say, “Look, we’ve been taking losses under the Affordable Care Act and hanging in because we want to be there when this becomes a stable, viable market. Now you’re saying there may be no light at the end of the tunnel?” The uncertainty is going to completely destabilize the insurance industry.
But is the status quo viable? Some insurers have already dropped out, and premiums are rising fast.
Oh, the Affordable Care Act needs fixing. But in terms of its primary goal, I think you’d have to say it’s been pretty successful: 20 million people who were uninsured now have health insurance. And health care costs are rising less rapidly than they were before. I don’t credit the ACA for all of that, but it didn’t increase costs as the Republicans claimed.
Why was it so embattled, then?
There was some ideological opposition on the far right, especially over the so-called individual mandate — the idea of requiring people to get health insurance. But mostly it was cynical politics. Let’s not forget: The model adopted by the Affordable Care Act was a Republican idea. When Teddy Kennedy wanted to have government-run universal health insurance, Nixon said no, let’s keep it in the private sector and have employers offer health insurance. The exchanges came from [then Massachusetts Gov.] Mitt Romney. Even the individual mandate was first proposed at a conservative think tank.
Republicans especially attacked the individual mandate during the campaign.
Sure, they spun it as “big government” forcing this on people. But anyone who understands health care knows insurance can’t be voluntary. Medical expenses are concentrated on a few very sick people. When you pay premiums, you’re paying for the care of those people, in exchange for a promise that you’ll be cared for if you get sick. People need to understand: The mandate isn’t “socialized medicine”; it’s actually the condition for doing this through the private sector.
So what is wrong with the Affordable Care Act?
The big problem, which neither party wants to confront, is that the penalties for not insuring are too low. As a result, not enough young healthy people signed up, and the insurance companies are losing money. That’s why premiums are going up. It’s what we call “adverse selection” — where the people who buy coverage are the ones most likely to need care. That leads to a negative spiral, where insurers raise rates and cut benefits, causing more healthy people to opt out, and so on.
What needs to happen? What should the Republicans do to fix health care?
Look, we’ve built all these institutions under the Affordable Care Act, and they’re finally up and running. It would be lunacy to blow it all up and start over. The Republicans should sit down with the Democrats and say, “OK, guys, don’t tell the public, but let’s take this system, we’ll rebrand it as Trumpcare, and let’s agree on six or eight changes needed to make it work.” That’s the best way forward for the country. And by the way, it could have been done long ago.
What’s at the top of the to-do list?
Number one, we have to stop the adverse selection spiral. That means giving the individual mandate some teeth. The Netherlands has a system like ours, where insurance is offered through a competitive market. But if you show up at the hospital without coverage, they make you very sorry financially. So something like 98.5% of Dutch people have health insurance.
What else needs to change?
Insurers are making their plans so complex, with all these copays, deductibles, and exclusions, you’d need a PhD in actuarial science to evaluate them. I heard about one plan that said in bold print, “We cover organ transplants.” Then in the fine print it said, “But not the cost of harvesting and transporting organs.” [laughs] You have to bring your own organ!
So it’s hard for consumers to choose between plans. That’s why I’m a fanatic for radical simplification. If you’re offering a few HMOs, standardize the contracts. That’s one thing we did at Stanford. You’re not keeping insurers from competing. But make them compete on quality and price, not the cleverness of their loopholes. It’s managed competition.
What about the cost of medical care itself?
Costs are out of control, and the reason is that with employer-based insurance, no one has an incentive to make economical choices. Most companies don’t even offer their people a choice of plans. Even if they do, the employer pays most of the premiums — it’s basically untaxed income for workers. So, heck, why not get the Cadillac plan? And for the company it’s a tax-deductible expense. This is the inflationary original sin of American health care finance.
The Affordable Care Act didn’t do a whole lot to address that. The upshot is that far too many people still opt for traditional fee-for-service care, where there’s no real price competition.
But surely employer-paid insurance is untouchable.
Perhaps, but we can still change the incentives by eliminating the tax exclusion. The employer contribution should be counted as part of your taxable income — or at least put a cap on it. We could say employer payments are tax-free up to a certain limit; if you pick a more expensive plan, you pay the difference out of pocket with after-tax dollars, just like any other purchase.
Is that really an easier lift, politically?
Maybe we need to recalibrate our sense of what’s possible now. I just heard that some of the new Republicans in Congress are talking about exactly that: limiting the tax exclusion on employer contributions. It’s really necessary if you’re serious about tax reform. Employer-sponsored health insurance is the biggest loophole in the tax code. It cost the federal budget $250 billion in 2015. Anyway, I’d be cheering for them, along with probably every other economist.
That would really make a big difference?
Absolutely. If you do just two things — simplify the contracts and fix the incentives, so consumers can make informed, cost-conscious choices — you’d transform health care. My mantra for the past 40 years has been “level the playing field and open the markets.” Let the Darwinian process work, and you’d force all these fragmented, inefficient providers to change.
What would a more efficient medical system look like?
Like Kaiser Permanente. I’ve been a longtime consultant for Kaiser, and I really believe it has the best model in America, maybe the world. Research has shown that they can provide high-quality care with much lower costs. Unlike solo practitioners or small group practices, Kaiser has an incentive to spend on prevention and management of chronic diseases, because it saves money if you stay healthy.
It’s also much simpler: Their doctors deal with only one insurance company, which is in-house, and all the negotiation, conflict, and paperwork between doctors and insurers, in-network or out-of-network — all that overhead goes away. It also eliminates the need for micro-management by regulators. If you can get a few integrated-care systems like this competing with one another, as we’ve done at Stanford, health care becomes almost self-regulating.
What’s your ultimate vision for health care?
Fix the incentives and you flip the whole dynamic. The costs savings would be enormous — enough, I believe, that you could give every American a standard insurance plan for free, so you’d have universal coverage by default. If someone wanted a fancier plan, they’d pay for it out of pocket. If they took a cheaper one, let them keep the savings. That would create a real virtuous cycle.
And by the way, we don’t have to wait for the politicians to figure this out; employers can take the initiative. At Stanford we adopted a managed competition model way back in 1990, when I became chair of the benefits committee. Our staff can choose from a menu of different plans, and the school pays in full for the basic option, which is excellent. I know this model works, because it’s still going strong nearly three decades later.