Why the Exchanges Are a Mess and a Very Simple Alternative



More than one commentator has remarked on the puzzling way the Obama presidency has dealt with online technology. When it comes to elections, the Obama campaign’s use of the Internet was state of the art—doing what had never been done before. Yet when it comes to the Obamacare exchanges, the administration has been accused of using ten-year-old technology—producing a website with defects that are baffling to a whole generation of website designers. (David Friedman, I believe, was one of the first to point out this incongruity.)

The short explanation, I believe, is that Obama privatized his election campaigns, while he nationalized health reform. The Internet aspect of his election campaign was managed by folks from Google and other entrepreneurial ventures that were able to devise strategies unencumbered by bureaucrats in Washington, D.C. In health insurance exchanges, by contrast, almost everything has been managed top down from inside the Beltway (with 55 contractors separately reporting to CMS!). As we have pointed out many times at this blog, the Obama administration has been unwilling to accept any healthcare innovation that emerges in the private sector.

Instead, the administration has insisted on carrying out its own pilot programs and demonstration projects, despite the miserable results. And as I noted last summer in the Wall Street Journal, the federal government is about the worst possible entity to manage new, online technology.

But let’s put all that aside for the moment. Assume that there were no “glitches” in the exchange software. The Obamacare exchanges would still have been a disaster for a different reason.

There is nothing new about the idea of an exchange. EHealth has been running a nationwide online exchange for more than a decade and has enrolled more than 2 million people. As far as I can tell, EHealth could enroll the entire country if it were given the freedom to do so. But at last count, not a single state-run exchange has contracted with EHealth or any other private exchange. The federal government did contract with EHealth to create a portal in the 36 states where it is managing the exchanges. But it did so only at the last minute.

Even so, there is one thing EHealth cannot do. It can’t tell an insurance buyer how much subsidy he/she can expect. One reason is that figuring out how much subsidy you are entitled to is almost as difficult as filling out your income tax return.

Do you know what your “modified gross income” is? I bet there is not one person in a million who can answer that question. Take that back. I bet there is not one person in the whole country who can answer it unless he has already done some considerable research. Yet we all need to know this in order to determine how much subsidy we are entitled to in the health insurance exchange.

The problems don’t end there. You’re not entitled to any subsidy if your employer has offered you affordable coverage or if you are eligible for Medicaid. Do you know how difficult it is to determine if you are eligible for Medicaid? Last time I looked, the Medicaid form in Texas was about 20 pages long. The ACA is supposed to streamline the applications process and create a one-stop-shop to determine eligibility. How easy is it to do that? At this point, I can’t say.

Do you know if your employer has offered you insurance that is “affordable” and has the “minimum essential benefits”? If you don’t know, there is no way EHealth would know either.

Okay, now let’s turn to the promise I made in the title to this post. How could all this complexity be reduced to easy-to-manage simplicity? By adopting an idea proposed in 2008 by Barack Obama’s opponent, John McCain. It’s an idea Obama spent millions of dollars demagoguing on his way to an electoral victory.

The idea? Give everyone the same subsidy regardless of income, age, geography, or any other factor. For reasons explained below, I’m going to assume that amount is $2,500 for an adult and $8,000 for a family of four. So, if you are buying an individual policy and you enter the exchange, neither you nor anyone else will ever have to wonder how much your subsidy is. It’s $2,500. Voila! Problem solved.

Now let’s solve a second problem. Many people will want to know how much of their subsidy is advanceable. That is, how much can be applied directly to reduce the monthly premiums they must pay? Answer: in the exchange at least, the entire amount can be advanceable and this probably should be the default option. Then, when people file their April 15th income tax returns, they will pay the same amount of tax they would have paid even if Obamacare didn’t exist.

And a third problem is implicitly solved: What to do if one person is getting too much subsidy or someone else is getting too little? Or, how to rectify overpayments and underpayments on next year’s tax returns? If the subsidy is less than the premium that is owed, the applicant must pay the difference out-of-pocket. If it is more, the difference should be automatically deposited in a Health Savings Account, regardless of any other features in the plan.

[BTW, I’m not sure how Obamacare is dealing with this last issue. If a reader knows, pleas share the information in the comments.]

Why did I choose $2,500 and $8,000 for the subsidies? Because that’s the Congressional Budget Office (CBO) estimate of the cost of enrolling new people in Medicaid. Let’s suppose that we allowed everyone to enroll in Medicaid if that is their choice. If they are “eligible,” they can use their tax credit to enroll. If they are not “eligible,” they have to add out-of-pocket funds to pay an actuarially fair price. At the same time, imagine we allowed everyone in Medicaid to leave the program, claiming the tax credit and enroll in private health insurance.

In the language of the left, Medicaid would be the “public option,” although God knows why anyone would want to choose it.

This allows us to solve a fourth problem: In the exchange there would be no reason to care whether someone was technically eligible for Medicaid. If they want private insurance they can claim the tax subsidy and buy it.

And a fifth problem: the tax subsidy for employer-provided insurance would be exactly the same as it is in the exchange. In that case, the exchange would have no reason to care what the employer offered. Employees could get health insurance at work or they could go to the exchange. The federal government’s contribution would be the same either way.

Since every individual and every family would get the same help from government, those subsidies would be the same regardless of:

  • Whether people obtain the insurance at work, in an exchange, or in the marketplace;
  • Whether they work less than 30 hours a week or more;
  • Whether their workplace has fewer than 50 employees or more; and
  • Whether they are in a union or not.

If we also dropped the employer mandate, we would have an approach that:

  • Would not encourage employers to avoid hiring new workers;
  • Would not encourage employers to drop health coverage for current employees or for their retirees;
  • Would not penalize employees and their employers if they work full time rather than part time;
  • Would not favor small business over large business or vice versa;
  • Would not favor non-union firms over union firms or vice versa;
  • Would not encourage outsourcing of labor-saving technologies or in other ways discourage economic recovery.

Blissful, is it not?

The idea of a fixed-sum refundable tax credit with the same amount for all taxpayers was introduced by Mark Pauly and me in a Health Affairs article about 15 years ago. And here is the irony: had the administration listened to us (instead of whom? Cutler? Gruber? Reinhardt?)...

Ah, but forget all that. Think how different this world would be if Barack Obama had paid attention to his own rhetoric and brought the two parties together by endorsing John McCain’s idea of a uniform tax credit.

The Obamacare exchanges at this point might be working like a charm.

[Cross-posted at Psychology Today and John Goodman's Health Policy Blog]

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