Time's Running Out to Fix Obamacare's Flaws

Written by David Frum on Tuesday January 4, 2011

Republicans seem to have calculated that it's better to have "Obamacare" as an issue in 2012 than to tinker with improvements in 2011.

What happened to repeal and replace?

The GOP has advanced a 2-page bill to repeal the Democratic health reform of 2010. That bill will likely pass the House and then ... dribble away. I doubt the Senate will ever find time to schedule a vote on it.

My sense is that this is just fine with many Republican legislators. They may calculate that it's better to have "Obamacare" as an issue in 2012 than to tinker with improvements in 2011.

But the fact is: the reform is beginning to bite now. And depending on what your view of the right kind of healthcare reform is, you might want to think very hard about this bite.

For example:

One of the reforms that bites this year is tighter regulation of insurance companies. Last year they were required to compile and disclose to the federal government how much of their revenues they spend to pay medical claims. This year, companies that pay out too little will face fines and sanctions.

This measure is very important for the Democratic health reform. The monitoring of payouts commences the process of transforming health insurers into something like utilities: still privately owned, yes, but tightly supervised by government. They can earn a specified profit by doing specified functions.

A utility has a very congenial life! Work is easy, markets are uncontested, profits are predictable.

But a utility is also one of the very last places you'll look for innovation.

In my (admittedly eccentric) view, one of the great problems with the American healthcare system is that health insurers are too weak. They don't have the clout to impose cost discipline on providers. The Democratic reform intensifies that weakness by also reducing competitive pressure to impose cost discipline.

Imagine this: You are the Sam Walton Health Insurance Company. Right now you have 100,000 customers from whom you collect $10,000 each in premiums. Wowza, that's $10 billion in revenues, of which you disburse $8.5 billion to providers. Out of the remaining $1.5 billion you must pay your overhead of $500 million. The rest is your profit: $1 billion.

A keen-eyed analyst discovers an opportunity to force down the prices charged by a hospital chain. She claims that this squeeze could push down costs by as much as $500 million. Boom! Straight to the bottom line, a 50% profit opportunity!

Except ... that mucks up your pay-out ratios doesn't it? Instead of paying 85% of revenues, you are now paying only 80%. So either you increase spending somewhere else - or you face fines and penalties. So why get into a hassle with the hospitals? Pay the money, take your cut, do your business the easy way.

If this analysis is correct, then the impending pay-out regulations matter. And 2013 will be a little late to do something about them.


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