On day 1, repeal and replace.

Photographer: Win McNamee/Getty Images

Repealing Obamacare May Be Easy. Replacing It Won't Be.

Paula Dwyer writes editorials on economics, finance and politics for Bloomberg View. She was London bureau chief for Businessweek and Washington economics editor for the New York Times, and is a co-author of “Take on the Street: How to Fight for Your Financial Future.”
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The Republican-led Congress has voted at least 60 times in six years to repeal Obamacare. With Donald Trump in the White House and a Republican majority in both chambers of Congress, the next attempt may well succeed.

But what would replace the Patient Protection and Affordable Care Act of 2010? Throughout the campaign, Trump spoke of "erasing the lines," by which he meant letting insurers sell health plans across state lines to increase competition and decrease premiums. On Thursday, the president-elect's new website laid out a bare-bones health-care transition plan to do just that.

QuickTake Obamacare: What's Working, What Isn't

It makes some sense. More competition, after all, usually leads to lower prices and better products as companies compete for a bigger share of the market. For Republicans, the benefit of increased competition is an article of faith.

Except that, when it comes to the health-insurance market, the usual rules don't apply. What Trump and congressional Republicans propose wouldn't solve the problems that Obamacare was designed to fix. It might even return millions of Americans to the ranks of the uninsured.

Obamacare was created because some 42 million Americans had no insurance. They worked for employers who didn't provide coverage, or they didn't have steady, fulltime jobs. Many were older (but not old enough for Medicare) and had low to modest incomes (but not low enough for Medicaid). Many also had chronic health problems.

By insurers' calculation, these customers were super-high risks requiring super-high premiums; sometimes insurers refused to provide them coverage at all. Rather than buy prohibitively expensive individual plans, many Americans simply went without coverage. 

The 2010 law set up a three-legged stool to deal with this. It barred insurers from refusing to sign up customers based on pre-existing conditions, a rule the industry calls guaranteed issue. Its individual mandate required everyone to have insurance (or face a tax penalty), thus bringing in younger, healthier customers to help balance out the additional older, sicker ones. And it created state exchanges so insurers could group customers into manageable risk pools and individuals could shop for plans that met their health-care needs and their budgets.

As a candidate, Trump agreed with most Republicans who say Obamacare has been a disaster. He promised to begin the "repeal and replace" effort on his first day in office. While he has yet to offer a complete alternative, he will likely draw from one House Speaker Paul Ryan released over the summer as part of his "Better Way" agenda. It would end the individual mandate and the guaranteed-issue requirement, kicking two of Obamacare's three legs out from under it.

And this brings us back to erasing those state lines. Trump's pitch to motivate insurers to compete against one another on price and quality of service sounds great in theory. In fact, all insurers already can sell plans in every state. There's a good reason why they don't.

Insurance is regulated by the states, not the federal government. Each state writes its own minimum requirements for health coverage; for reserves and other solvency guarantees; for dispute settlements; and for how much plans can discriminate by charging older, sicker people more and younger, healthier people less. To sell plans in, say, Oklahoma, UnitedHealthcare, the U.S.'s largest health insurer, must follow Oklahoma's regulations. No single product would conform with Oklahoma's regulations and those of neighboring states. So UnitedHealthcare must tailor products for each.

That will remain true unless the federal government overrides state standards (which congressional Republicans are loath to do) or writes national rules for minimum coverage. Isn't that what Obamacare set out to do in the first place?

Most experts say that, in the absence of national standards, there would indeed be more competition if insurers could register in one state and sell plans into the 49 others. But it would be the states, not the insurers, that would compete -- with a goal to attract insurers, not to protect consumers. Insurers would flock to the least-regulated state much the way most U.S. businesses incorporate in states like Delaware and Utah with pro-business laws and courts.

Under this scenario, insurers could set up in Utah and offer plans with rock-bottom premiums and bare-bones coverage nationwide to attract healthier, younger customers. Some low-risk consumers would indeed pay lower premiums than they do now under Obamacare, and insurers would make decent profits off of them. This is called skimming the cream.   

For middle-aged individuals whose actuarial profiles predict they will need medical attention in the near future, premiums would rocket upward, if they could find plans at all. Insurers would do what they can to avoid such customers.

Another problem is that, for insurers to sell health plans in other states, they must have networks of hospitals, doctors and other providers in those states to attract customers. But most providers are already committed, making it difficult for new entrants to woo any. They could agree to pay providers more, but that would mean adjusting premiums upwards, which would make it harder to attract customers, and so on.

There's yet another problem with Trump's idea. He would group hard-to-insure individuals into state-sponsored pools. Before Obamacare, 35 states had high-risk pools. They didn't work very well.

By definition, the people in such pools were high risk based on their age, lack of steady employment and poor health status, so taxpayers had to subsidize the premiums. According to one conservative estimate, about 4 million people would be dumped into such pools if Obamacare were repealed. They would require subsidies of $4,300 a year on average, for a hefty $17 billion annual cost to taxpayers.

Trump's idea for an Obamacare replacement would re-create the very conditions that inspired Obamacare in the first place. Instead of "repeal and replace," his mantra should be to find the flaws and fix them.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Paula Dwyer at pdwyer11@bloomberg.net

To contact the editor responsible for this story:
Philip Gray at philipgray@bloomberg.net