How Republicans Can Fix Obamacare in 3 Simple Steps

In the words of President Donald Trump, "Nobody knew that healthcare could be so complicated."

Trump's surprise victory in November, coupled with Republicans retaining a majority of seats in the House and Senate, was expected to clear a path for a plan to repeal and replace the Affordable Care Act (ACA), the hallmark health bill of Barack Obama's presidency that's often called Obamacare. However, Republicans have struggled at every turn to pass a replacement bill.

Obamacare replacement bill efforts stall, again

In March, the House GOP introduced the American Health Care Act (AHCA), which received scathing reviews from Democrats, much of the public, and even some members of its own party. The initial version of the AHCA never even went to vote. A second version, brought to the House floor a little less than two months later, wound up adding a few new amendments and passed by the narrowest of margins. Nonetheless, the AHCA was highly unpopular with the public, and it was estimated by the Congressional Budget Office (CBO) that the AHCA would lead to 23 million people losing their health insurance within a decade.

The latest plan, the Better Care Reconciliation Act (BCRA) from the Senate Republicans, takes bits and pieces from the AHCA and Obamacare and attempts to blend them together. Like the initial version of the AHCA, it currently is lacking the support for passage, meaning the GOP's efforts to repeal and replace Obamacare could be drawn out for many weeks and months to come.

Interestingly enough, though, a solution may exist right under their noses. Namely, they could choose to leave Obamacare in place and simply fix the aspects of the law that are broken. It would mean swallowing a bit of hubris on the GOP's part, but it could resolve many of Obamacare's issues without leading to 22 million or 23 million people losing their access to affordable health insurance over the next decade.

What's wrong with Obamacare, in a nutshell

What's wrong with Obamacare, you ask? For starters, premium inflation is accelerating at a much faster pace than anyone imagined. This appears to be a result of national insurers dropping coverage in a number of markets. UnitedHealth Group (NYSE: UNH), the largest health insurance provider in the nation, reduced its coverage in 2017 to just three states from 34 states in 2016. The move was made after UnitedHealth's management cited years of unsustainable losses derived from Obamacare plans. Similar moves were made by Aetna (NYSE: AET) and Humana (NYSE: HUM), which reduced their county-based coverage by nearly 70% and almost 90%, respectively. Humana even went a step further and announced its intent to withdraw from the ACA marketplaces completely by 2018.

On top of fewer national insurers, around three-quarters of Obamacare's 23 approved healthcare cooperative shuttered their doors due to financial instability. The lack of low-cost options in the marketplace is one reason why the average benchmark premium (the second-lowest cost silver plan in each state) for the 39 states covered by federally run rose 25% in 2017.

The failure of the risk corridor was another massive disappointment for Obamacare. The risk corridor program, in its simplest form, was designed to take money from overly profitable insurers and distribute it to those who were losing money because they priced their premiums too low. Unfortunately, the risk corridor was chronically underfunded, because there were never that many profitable insurers within the ACA. The lack of a functioning risk corridor kept new insurers looking to expand their plan offerings out of the market.

Lastly, we can certainly place some onus on the adverse selection insurers had to contend with. Adverse selection describes the process whereby insurers enroll a disproportionate number of sicker patients than healthy patients. Because the ACA didn't allow insurers to turn away patients with pre-existing conditions, it meant they had to accept people who, prior to Obamacare's passage, weren't able to get insurance (at least for a reasonable price). This adverse selection, coupled with poor healthy adult enrollment and overzealous enrollment estimates from the CBO, made life very difficult for insurers.

Three simple ways Republicans can fix Obamacare

Fixing Obamacare, however, wouldn't be as impossible as some lawmakers on Capitol Hill would make it seem. Here are three solutions to fix some of Obamacare biggest problems.

1. Make the Shared Responsibility Payment work for insurers

Pretty much the biggest core issue with Obamacare is that there are too many sick people enrolling and not enough healthy people. This means insurers are seeing their medical expense ratios skyrocket, and they're reducing their coverage as a result.

Why aren't enough healthy young adults enrolling? The answer is pretty simple: They're being financially savvy by sticking to the sidelines.

The Shared Responsibility Payment (SRP) is the penalty consumers are supposed to pay for violating the individual mandate and not purchasing health insurance. Last year, it was the greater of $695 or 2.5% of household modified adjusted gross income. Based on a Kaiser Family Foundation analysis, the estimated penalty per household was $969. Though that might sound like plenty of "incentive" to get healthy people to enroll, it's not even close to the actual annual cost of a health plan.

Data from HealthPocket shows that an unsubsidized bronze plan would run close to $311 a month in 2017, or around $3,700 a year. Sticking to the sidelines if you're a healthy individual who doesn't go to the doctor would save you $2,700 -- and that's assuming you pay the SRP. The Internal Revenue Service can't garnish wages, seize property, or even turn away federal tax returns if line 61 (the line where SRP payments are reported) isn't filled in.

The solution, while certainly unpopular, would bring more healthy young people into the system and help provide some sorely needed premium revenue for insurers: Raise the SRP penalty to the match the cost of the lowest-cost bronze plan in each state. This would provide the incentive for young adults to enroll since purchasing a health plan would at least provide them with benefits. There'd be obvious pushback among young adults, but their enrollment is vital to Obamacare's success.

2. Give the OIC's some actual power

An arguably easier fix for Obamacare would be to provide more power to each state's Office of the Insurance Commissioner (OIC). Each state's OIC is responsible for analyzing why an insurance company has requested a 10% or greater increase or decrease in premiums on a year-over-year basis.

In theory, OIC's are designed to be the bargaining tool between the insurance company and the consumer, with the OIC doing its best to haggle prices down for John and Jane Q. Public. The key phrase in the previous sentence being "in theory." In reality, OIC's have been blown over by even the slightest breeze from the insurance industry. The issue being that OIC's have no real power to mandate health plan pricing from insurance companies. They can make suggestions, but if an insurance company can provide justification that its premiums need to head higher by 30%, 40%, or 50% year over year because of ongoing losses, OIC's have little recourse other than to stand by and watch it happen.

The fix? Put some meat on the OIC's bones. Give each state's OIC some power to actually negotiate with insurance companies instead of merely offering suggestions from the balcony. Given the inherent advantages drug companies enjoy in America, it's not as if we're going to see premium inflation grind to a halt, but putting some power into the hands of the OIC could chop off a few percentage points of premium inflation annually, in my opinion.

3. Reinstitute the risk corridor and provide insurer incentives

Finally, Republicans should consider finding a way to reinstitute the risk corridor to encourage health insurers to reenter the marketplace.

In 2014, some $2.87 billion in funds was requested by money-losing insurers via the risk corridor program, but only $362 million was paid to these insurers. If the SRP were amended to coerce more young adults to enroll, presumably more insurers would be profitable and the risk corridor would be fully funded.

But even if the risk corridor were still short on funding, if the federal government stepped in to cover any shortage, the corresponding payments to money-losing insurers should prop them up long enough to adjust their premiums to sustainable levels and encourage more competition, ultimately pushing premium inflation down and possibly reducing the uninsured rate. In other words, providing federal funding to the risk corridor, if need be, could be a short-term cost that leads to a number of long-term positives.

At the same time, the federal government could dangle a carrot to insurers that only allows them to participate in more populated markets if they also choose a lesser-populated market to provide coverage. This would be a means of encouraging competition in more rural communities, which in turn should make premiums more affordable for the average American.

Some of these measures wouldn't be popular, but neither was Obamacare when it first rolled out. However, if the SRP were amended, the OIC's given greater power to negotiate, and the risk corridor reintroduced, we could see a sustainable insurance market and tamer premium inflation. But that's just one Fool's opinion.

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Sean Williams has no position in any stocks mentioned. The Motley Fool recommends UnitedHealth Group. The Motley Fool has a disclosure policy.