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A Plan Set Up To Fail

Summary:
So now we know what Republicans have to offer as an Obamacare replacement. Let me try to avoid value judgments for a few minutes, and describe what seems to have happened here. The structure of the Affordable Care Act comes out of a straightforward analysis of the logic of coverage. If you want to make health insurance available and affordable for almost everyone, regardless of income or health status, and you want to do this through private insurers rather than simply have single-payer, you have to do three things. 1.Regulate insurers so they can’t refuse or charge high premiums to people with preexisting conditions 2.Impose some penalty on people who don’t buy insurance, to induce healthy people to sign up and provide a workable risk pool 3.Subsidize premiums so that lower-income households can afford insurance So that’s Obamacare (and Romneycare before that): regulation, mandates, and subsidies. And the result has been a sharp decline in the number of uninsured, with costs coming in well below expectations. Roughly speaking, 20 million Americans gained coverage at a cost of around 0.6 percent of GDP. Republicans have nonetheless denounced the law as a monstrosity, and promised to replace it with something totally different and far better. Which makes what they’ve actually come up … interesting. For the GOP proposal basically accepts the logic of Obamacare.

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So now we know what Republicans have to offer as an Obamacare replacement. Let me try to avoid value judgments for a few minutes, and describe what seems to have happened here.

The structure of the Affordable Care Act comes out of a straightforward analysis of the logic of coverage. If you want to make health insurance available and affordable for almost everyone, regardless of income or health status, and you want to do this through private insurers rather than simply have single-payer, you have to do three things.

1.Regulate insurers so they can’t refuse or charge high premiums to people with preexisting conditions
2.Impose some penalty on people who don’t buy insurance, to induce healthy people to sign up and provide a workable risk pool
3.Subsidize premiums so that lower-income households can afford insurance

So that’s Obamacare (and Romneycare before that): regulation, mandates, and subsidies. And the result has been a sharp decline in the number of uninsured, with costs coming in well below expectations. Roughly speaking, 20 million Americans gained coverage at a cost of around 0.6 percent of GDP.

Republicans have nonetheless denounced the law as a monstrosity, and promised to replace it with something totally different and far better. Which makes what they’ve actually come up … interesting.

For the GOP proposal basically accepts the logic of Obamacare. It retains insurer regulation to prevent exclusion of people with preexisting conditions. It imposes a penalty on those who don’t buy insurance while healthy. And it offers tax credits to help people buy insurance. Conservatives calling the plan Obamacare 2.0 definitely have a point.

But a better designation would be Obamacare 0.5, because it’s really about replacing relatively solid pillars with half-measures, severely and probably fatally weakening the whole structure.

First, the individual mandate – already too weak, so that too many healthy people opt out – is replaced by a penalty imposed if and only if the uninsured decide to enter the market later. This wouldn’t do much.

Second, the ACA subsidies, which are linked both to income and to the cost of insurance, are replaced by flat tax credits which would be worth much less to lower-income Americans, the very people most likely to need help buying insurance.

Taken together, these moves would almost surely lead to a death spiral. Healthy individuals, especially low-income households no longer receiving adequate aid, would opt out, worsening the risk pool. Premiums would soar – without the cushion created by the current, price-linked subsidy formula — leading more healthy people to exit. In much of the country, the individual markets would probably collapse.

The House leadership seems to realize all of this; that’s why it reportedly plans to rush the bill through committee before CBO even gets a chance to score it.

It’s an amazing spectacle. Obviously, Republicans backed themselves into a corner: after all those years denouncing Obamacare, they felt they had to do something, but in fact had no good ideas about what to offer as a replacement. So they went with really bad ideas instead.

Paul Krugman
Paul Robin Krugman (born February 28, 1953) is an American economist, Distinguished Professor of Economics at the Graduate Center of the City University of New York, and an op-ed columnist for The New York Times. In 2008, Krugman won the Nobel Memorial Prize in Economic Sciences for his contributions to New Trade Theory and New Economic Geography.

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