The Republican Response to Obamacare

Two weeks after Republicans took control of the House in January, they kept a key campaign promise and voted to repeal President Barack Obama's health-care law. The Democratic Senate later rejected the repeal, but House Republicans say they still plan to "replace Obamacare with something that's a lot better," says Fred Upton, chairman of the House Energy and Commerce Committee. Their focus, he says, is to lower the cost of care.

Yet according to a Bloomberg analysis, the alternatives suggested so far—ranging from limiting malpractice lawsuits to allowing insurers to sell across state lines—would save less than $5 billion a year. That's less than 0.6 percent of the $836 billion the government spent on health care in 2009. "None of these proposals get to the heart of what the issue is, which is to really address cost," says Ashish Kaura, a health-care analyst with Booz & Co. "They nibble around at the margins."

The Congressional Budget Office, the legislature's research arm, projects that Obama's law, which celebrated its first anniversary on Mar. 23, will reduce the deficit by $143 billion by 2019. Republicans say that estimate is too rosy and doesn't account for fast-rising medical costs that are driving up insurance premiums and Medicare and Medicaid spending. In making repeal a key issue, Republicans are opening themselves to attacks in the 2012 elections if they can't offer convincing alternatives that maintain the bill's deficit reductions while tamping down health-care costs.

Some of their proposals, such as exempting abortion from federal funding, would have little economic impact. Others, such as creating "high-risk pools" for those with preexisting conditions and keeping people up to age 26 on their parents' insurance, are already features of Obama's law.

At the top of the Republicans' wish list: curbing medical malpractice lawsuits. Proponents say the ease of suing physicians and the likelihood of winning sizable verdicts cause doctors and hospitals to perform costly, duplicative tests out of caution, raising insurance prices. The CBO estimates that limiting lawsuits would save about $54 billion over 10 years and reduce total medical expenditures by just 0.5 percent. Actual savings could be less. Since 2003, Texas has limited noneconomic damages in malpractice suits to $250,000. Yet Medicare costs in the state are second only to New Jersey, according to The Dartmouth Atlas of Health Care. In the region around McAllen, a Texas city along the Mexico border, the average patient costs Medicare $15,695 per year, higher than anywhere except Miami. The malpractice proposal just "chips away" at costs, says Joseph Antos, a health policy expert at the Republican-leaning American Enterprise Institute, who supports the idea.

Another leading plan would let health insurers sell their products across state lines, something now prohibited by federal law. Certain states, including New York, have rules requiring insurers to cover specific benefits or guarantee coverage to people with preexisting conditions. Some also limit how much premiums can rise as people get older. Those mandates drive up the cost of insurance. People in states such as New York should be able to save money by purchasing coverage in a less regulated state, say Republicans.

But according to the CBO, only the healthy would benefit, since they could shop around for the best deals. Sick people would stay in the more regulated states, where coverage protections are stronger. That would drive up prices for everyone in those markets, which would have a larger proportion of sick people. The CBO says the plan would save the government about $7.4 billion over a decade, a modest amount in annual terms, since it would encourage people to use post-tax dollars to buy cheaper coverage in other states rather than accept work-provided benefits, which are tax-exempt.

Helping small businesses band together when negotiating policies, another Republican proposal, also yields little in the way of cost savings. Even large businesses with tens of thousands of employees have little bargaining power in the health-care market. "If GM can't control costs, do you think a small group of firms in Texas can?" says Uwe Reinhardt, a Princeton University health economist. "They would never have enough clout against the hospitals."

Republicans also want to expand health savings accounts, which are coupled with a high-deductible insurance plan. Until a person reaches the annual limit, which can run to $3,000 or more, they pay for all their care—from a flu shot to a quadruple bypass—out of a pretax savings account. Economists who support the idea say that since consumers are directly paying for care, they'll shop for lower-cost treatment or use fewer health-care services. Reinhardt says the change would mostly benefit high-income consumers, who would use the accounts to shield income from taxes. "HSAs are not a cost-containment device," he says. And the CBO estimates it would reduce federal tax revenue by $300 million from 2009 to 2018.

Republicans argue that small changes can add up to big savings. Says Representative Phil Gingrey (R-Ga.), an obstetrician who leads the GOP Doctors caucus: "A billion here and a billion there, and the next thing you know you're talking about real money." And Upton, the Michigan congressman, adds that "it would be a mistake for anyone to think the entirety of proposals for health-care reform are already on the table."

The bottom line: Republican proposals to control health-care costs would save the government only about $5 billion a year, or 0.6 percent.

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