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Column: After Obamacare glitches, the case for default insurance

By Reihan Salam

The Obamacare debate is entering a new phase. The problems plaguing the insurance exchanges have raised serious questions about the viability of the president's health reform effort. The Obama administration and its allies insist that the exchanges will soon be up and running, and that they've already been successful. Yet at least some liberals are starting to wonder if the exchange model should be abandoned in favor of a single-payer, Medicare-for-all approach. John Cassidy of the New Yorker, an occasional Obamacare critic from the left, is just one of many liberals who've touted the virtues of a single-payer system, and it is easy to imagine future Democratic presidential candidates doing the same. Conservatives, meanwhile, have tended to characterize the failure of the exchanges as a reflection of the limits of government. Patrick Ruffini, a well-regarded conservative strategist, captured the views of many on the right in a short piece titled "How Healthcare.gov Discredits Liberalism." We're nowhere near a consensus on whether the kludgy mess that is Obamacare ought to be replaced. But serious questions are being raised across the political spectrum.

One idea that hasn't drawn much attention is the role that default insurance might play in a future U.S. health system. This is despite the fact that low-cost default insurance might be the most straightforward way for the U.S. to achieve universal coverage at a price all Americans can afford.

Almost everyone, including President Obama, accepts that the process of signing up for insurance on the exchanges has proven quite difficult. But it hasn't been impossible. A decent number of determined consumers have been able to sign up for coverage after many false starts. The concern is that the most determined consumers are presumably the ones who have the most to gain from insurance coverage, which is to say consumers who expect to have high health costs. The goal of the exchanges, and specifically of the generous federal subsidies offered to low- and middle-income people seeking coverage, has been to attract as many young and healthy consumers as possible, to ease the burden of providing medical care for the old and sick. There is still time to fix the exchanges, and the experience is gradually improving. Nevertheless, the initial hiccups have led to renewed calls for delaying implementation of the individual mandate. Until recently, these calls have been limited to Republican critics of Obamacare. Now, however, Democrats like Rep. John Barrow (D-GA), Rep. Gerry Connolly (D-VA) and Sen. Mark Begich (D-AK) have joined the chorus. To be sure, these Democrats, many of whom represent Republican states, are calling for a delay if and only if problems with the exchanges persist. But the prospects for delaying the individual mandate have greatly improved. And such a delay will make it even less likely that young and healthy consumers will sign up for coverage.

This leads us back to default insurance. In their book Nudge, Cass Sunstein and Richard Thaler famously made the case for "libertarian paternalism," an approach to public policy that relies heavily on "choice architecture." Rather than explicitly mandate a certain kind of behavior, like saving for retirement, Sunstein and Thaler recommend "nudging" people towards making responsible choices by making them opt-out and not opt-in. Those of us who are too lazy to sign up for a retirement savings program, including one with a generous employer match, are also generally too lazy to take affirmative steps to disenroll from such a program. For example, Sunstein and Thaler cite a study by economists Brigitte Madrian and Dennis Shea, which found that initial enrollments in a generous retirement savings program jumped from 49 percent to 86 percent when the program went from requiring employees to opt-in to requiring them to opt-out.

Given that Sunstein was an important member of the Obama White House, having served as director of the Office of Information and Regulatory Affairs, you might wonder why the Obamacare exchanges were built around getting people to actively sign up for insurance instead of creating a Nudge-style default option. The most obvious reason is that a default option would have to be very inexpensive to avoid sparking a backlash, and Obamacare has a strong built-in bias against low-cost catastrophic coverage and in favor of more generous comprehensive coverage.

This creates an opportunity for conservative policymakers, who by and large embrace low-cost catastrophic coverage. James Capretta, a fellow at the Ethics and Public Policy Center and the leading advocate of market-driven health reform in GOP-aligned circles, argues that his health reform proposal will cost less than Obamacare while expanding coverage more. Capretta's concept has three main elements. First, all adults who aren't currently offered coverage through large employer plans will receive a fixed refundable credit that can only be used for the purchase of health insurance. Second, the Medicaid program will be transitioned into a premium support payment that will supplement the refundable credit for all Medicaid enrollees. Third, and most intriguingly, states would be responsible for assigning everyone who fails to sign up for coverage on their own to default insurance options, which would cost no more than the fixed refundable credit. Because the credit would be relatively small (roughly $2500, according to Capretta), these default plans would be barebones affairs with larger-than-normal deductibles. Yet those who are assigned to default plans would be free to purchase more generous plans of their choosing.

The beauty of Capretta's default approach is that it guarantees that even those who aren't willing to sign up for coverage will have some protection against medical disasters. The main downside of the default option, at least politically, is that it won't deliver a tangible benefit to a large swath of voters.

As much as liberal Obamacare champions dislike catastrophic insurance policies, the default option does solve a big problem that the rollout of the exchanges has vividly illustrated, namely that even the most vigorous public information campaign is never going to reach every last uninsured person.

(Reihan Salam is a Reuters columnist. Opinions are his own.)

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