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Health Care

The Issue

The United States is home to some of the best medical care in the world, but its financing and delivery are marred by significant weaknesses. Our health care system is too costly, complex, confusing, and inefficient. American health care is also uneven in its quality and results, and leaves far too many people without access to adequate, patient-centered care. These long-standing problems were made far worse by Obamacare, which was built on a model of centralized, top-down federal government management that is unworkable, unaffordable, and unfair. The results: higher costs, more complexity, and more inefficiency. Moreover, under President Obama, pressing problems—like Medicare’s growing insolvency that threatens its ability to pay for seniors’ care—were ignored.

As a first step toward reform, Congress must repeal Obamacare’s damaging policies by rolling back the laws’ tax increases and regulatory mandates that raise health care costs, returning to the states authority to manage their health insurance markets, and refocusing Medicaid on its original, core population of vulnerable Americans—the disabled, elderly, and children in poverty. In the meantime, President Trump’s Administration should use his existing administrative authority to ease Obamacare to the extent possible. The Secretary of Health and Human Services can and should work with states by approving state-requested waivers to ease regulations that drive up the cost of care, and reform their Medicaid programs to better serve their populations.

Reform of these issues must also address many other long-standing policies, including tax policies that subsidize health care for working Americans as well as unsustainable government programs to provide health care to the vulnerable and elderly (such as Medicaid and Medicare).

Congress’ failure to repeal Obamacare immediately in 2017 exposed a leadership vacuum on health care, and conservatives must rise to the challenge to fill it. Policymakers must ensure that reforms are made to advance a policy vision that serves all Americans.

Conservative Policy Vision for Health Care.

As an alternative to Obamacare’s failed policies, conservatives propose policies grounded in a different vision—one that is patient-centered and market-based—and rolls back government officials’ control over health care. This vision gives Americans and their families much greater control over their health care dollars and decisions. By making individuals and families the key decision makers in a reformed health care system, powerful economic incentives will realign the interests of plans, providers, and patients to maximize value by delivering higher-quality care and services at lower cost.

Achieving this patient-centered, free-market vision will require a range of actions. Congress must begin by undoing Obamacare’s damage—rolling back its higher taxes and burdensome federal mandates that raise costs, as well as rolling back Obamacare’s over-reliance on Medicaid (government-run insurance). Beyond this initial step, Congress must set right the larger problems facing the system by (1) reforming the tax treatment of health care to ensure that individuals receive the same tax breaks whether they buy insurance from their employer or on the individual market; (2) moving toward a defined contribution system for able-bodied adults who are enrolled in Medicaid, so that they can purchase private insurance; and (3) putting Medicare on a stable financial footing by better leveraging the power of private insurance plans instead of relying on government-run plans.


Undo Obamacare’s Damage. This reform is required as a first step toward larger reforms. The law created significant problems. Despite its advocates’ repeated promises to the contrary, the law resulted in millions of Americans losing the private coverage they once had, paying higher premiums, and having fewer choices. In the process, it also saddled Americans with higher taxes.

Coverage gains were due primarily to adding able-bodied adults who can work to Medicaid, a government-run health care program once intended for the nation’s most vulnerable—children, the disabled, and elderly Americans in poverty. Costly insurance mandates and regulations drove up the cost of coverage both inside and outside the government-run exchanges. The level of choice and competition within the government-run exchanges is worse than before Obamacare was implemented. Moreover, the government’s increased role in the delivery of care through rules, regulations, and red tape further frustrated health care providers, undermined the doctor–patient relationship, and trampled personal and religious freedoms.

Obamacare policies should be repealed and replaced with free-market policies that move toward greater consumer control of their health care. Policies that should be repealed are those that caused the most damage including (1) tax increases (such as the tax on insurance premiums—which directly adds about 3 percent to the cost of coverage); (2) excessive federal regulatory mandates (such as the individual mandate to buy coverage, the employer mandate to provide coverage, and the insurance mandates to specify the kinds of products that can be sold); and (3) the large expansion of Medicaid beyond its original focus of helping vulnerable, disabled, or elderly Americans in poverty.

These essential steps to undo Obamacare’s damage are only the first phase in realizing the broader conservative vision and addressing the wide range of challenges facing the health care system. Achieving that goal will require broader reforms across the health system, such as removing regulatory mandates that discourage choice and competition, reforming the tax treatment of health care, providing better solutions for low-income Americans than the Medicaid status quo, and modernizing Medicare.

Remove Regulatory Mandates that Discourage Choice and Competition. Health care is one of the most over-regulated sectors of the U.S. economy. Government often imposes regulations that are overly detailed or tilt the playing field to favor some competitors over others. Too often regulations governing the delivery and financing of medical care by doctors, hospitals, and insurers block innovations that might disrupt the long-standing business models with which the incumbent players are comfortable. Thus, the government exceeds its proper role and enacts restrictions that limit the incentives to innovate, leaving in place a system that is often outdated, inefficient, and unnecessarily costly.

Policymakers should address the supply side of the equation to complement the financing reforms—the tax treatment of health insurance, Medicare, and Medicaid—that, in turn, address the demand side of the equation. To that end, policymakers should conduct a comprehensive review and removal of those regulatory obstacles at the federal and state level that prevent a free market from flourishing.

Reform the Tax Treatment of Health Care. The current tax treatment of health insurance is largely a relic of World War II, when employers effectively avoided wage and price controls by offering health insurance to their employees as a way of increasing employee compensation. The tax exclusion of health care benefits allows employees to receive non-taxable income from their employer in the form of health insurance. There are many problems with the tax exclusion. Because the exclusion is unlimited, it hides the true cost of care and thus drives up consumption; it disproportionately benefits higher-wage workers; it ties tax relief for medical expenses to the place of work, thus undercutting portability and personal ownership of coverage; and it is only available to workers whose employers choose to offer health insurance.

True reform of the tax treatment of health insurance would give individual tax relief to workers and their families for the purchase of the health insurance plans they want. It would make the system simpler, fairer, and neutral with respect to how or where one obtains health care coverage. It would replace the current tax relief (afforded only to those workers who have employer-based coverage) with a more rational and equitable system of individual tax relief.

Transform Health Care Coverage for Low-Income Americans by Restoring Medicaid to a True Safety Net and a Path Out of Poverty. Medicaid, established alongside Medicare in 1965, is a welfare program that provides health care for certain vulnerable, low-income populations. Over the past 50 years, the program has changed significantly. Not only has Medicaid eligibility expanded, so has the scope of its covered services. As a result, mounting fiscal, demographic, and structural challenges increasingly strain this jointly funded federal–state program. Obamacare expanded Medicaid eligibility to millions of additional Americans, further straining the program. Tension over federal and state funding, a growing and diverse set of enrollees, and a delivery system that lags behind private coverage put this program, and those dependent on it, at risk.

Policymakers should reform the current financing by replacing the open-ended matching formula with per capita federal contributions to the states. The change will give states new incentives to make their programs more efficient and to minimize waste and fraud, since states that do so will reap all of the financial benefits. It will also make obsolete the various strategies that states and providers have used to “game” the matching rate formula in order to shift more costs to the federal government. Even so, because federal contributions would be on a per capita basis, states will still have flexibility to adapt to changes over time in the number and mix of enrollees in their programs.

Policymakers also should restructure Medicaid by adopting a premium support approach to transition able-bodied low-income families to the private health insurance market where they can secure superior care and coverage, while refocusing traditional Medicaid on those difficult to insure and the disabled.

Modernize Medicare to Meet Demographic, Fiscal, and Structural Challenges. Established in 1965, Medicare is a government health care program for those ages 65 and above, and some disabled. Medicare faces major challenges. It generates trillions of dollars in long-term debt. It must cope with an enormous demographic shift as America’s aging population is growing steadily; it is funded by a workforce that is shrinking relative to the size of the rapidly growing population of retirees. It is saddled with an outdated design, based on price controls and central planning, which contributes to its inflexibility and sluggishness. Incredibly, traditional Medicare still fails to meet the most basic test of insurance: the protection of patients from the financial devastation of catastrophic illness.

Policymakers should transform Medicare from its 1960s-style defined benefit structure, which is financially unsustainable, to a defined contribution (“premium support”) model of financing. Under this model, seniors would receive the value of their Medicare benefits in the form of a government contribution to purchase the private health insurance plan of their choice. It would also allow more dependable budgeting for both seniors and the government, and inject the powerful free-market forces of choice and competition into the program to meet the needs of today’s seniors.

Facts and Figures

FACT: America is home to some of the best medical care in the world, but its financing and delivery are marred by significant weaknesses.

  • The U.S. health care system is too costly, complex, confusing, inefficient, and uneven in its quality and results.
  • Far too many people are without access to adequate, patient-centered care.
  • These long-standing problems were made far worse by Obamacare, which was built on a model of centralized, top-down federal government management that is unworkable, unaffordable, and unfair.
  • Moreover, under President Obama, pressing problems—such as Medicare’s growing insolvency that threatens its ability to pay for seniors’ care—were ignored.

FACT: Obamacare’s damaging policies, such as tax increases, insurance mandates, and the Medicaid expansion, increased the cost of health insurance and hurt those who are most dependent on Medicaid.

  • The health insurance premium tax adds about 3 percent to the cost of a policy, and the 2.3 percent excise tax on medical devices and annual “fees” on prescription drug manufacturers (totaling $4 billion in 2017) is passed on to the patient and consumer by way of higher medical bills and insurance premiums.
  • Regulatory mandates also increased the cost of health insurance. The essential benefits mandates increased premiums by an average of 9 percent; the minimum actuarial value mandate increased premiums for the least expensive plans by an average of 8 percent; and the limitations on age-rating increased premiums for young adults by around one-third.
  • The Medicaid expansion moved the program away from serving its original, core population of vulnerable Americans—the disabled, elderly, and children in poverty—to providing health insurance to able-bodied adults without dependents. This change increases the cost of the program and diverts resources away from those who need them most.

FACT: Health care spending is extremely high, and is a major driver in the growth of government spending.

  • Health care spending accounts for nearly one-fifth of the national economy.
  • Federal spending on Medicare, Medicaid, and subsidized Obamacare coverage will reach 6.1 percent of gross domestic product by 2025, up from 3.1 percent in 2000.

FACT: Obamacare imposed burdensome, costly federal mandates on individual insurance markets, which historically were regulated by states—driving up costs and driving out insurers from the markets.

  • Obamacare’s major insurance mandates and regulations increased premiums for young adults by as much as 44 percent, and by about 7 percent for pre-retirement-age adults.
  • Under Obamacare, competition has fallen. The lack of insurer participation leaves exchange customers in 70 percent of U.S. counties with either no insurer choice, or a choice between only two insurers. The number of counties with insurer monopolies on the exchange increased dramatically from about 7 percent in 2016 to nearly 33 percent in 2017. There has also been a significant increase in the number of counties with a duopoly—from 29 percent in 2016 to 37 percent in 2017.

FACT: Obamacare put millions of able-bodied Americans on government Medicaid instead of mainstream private insurance, diverting the program from its original focus of helping vulnerable Americans—the elderly and disabled in poverty.

  • The vast majority of gains in coverage since Obamacare took effect were due to dramatic expansions of Medicaid.
  • Of the 15.7 million who gained coverage during 2014, 2015, and 2016, 14 million were the result of increased Medicaid enrollment with 11.7 million from states that expanded Medicaid.
  • Private coverage saw a net increase in enrollment of just 1.7 million people.
  • Total federal and state spending on Medicaid was $455.6 billion in 2013, and is expected to increase by more than 86 percent over the subsequent decade, reaching $850.1 billion by 2023, according to the Centers for Medicare and Medicaid Services (CMS) Actuaries. A large part of this increase is due to the effects of Obamacare and its Medicaid expansion.
  • Medicaid tends to provide less patient access to providers, and poorer quality of care, than private insurance. Because low-income able-bodied adults cycle on and off Medicaid as their employment and incomes fluctuate, it causes disruption in their health care coverage. Enabling them to instead buy private insurance coverage (such as through an employer plan) would improve continuity of coverage and access to higher quality care.
  • Congress should convert existing Medicaid funding for able-bodied adults and children into a premium support program for mainstream insurance plans. That would ensure that these populations are able to obtain the same basic coverage and care that more affluent people can afford, while also augmenting efforts to create more stable insurance markets.

FACT: Medicare must be reformed or it will consume more and more tax dollars and place seniors’ access to health care at risk.

  • Medicare has been running deficits since 2008.
  • Based on the most recent 75-year projection, the CMS estimates that Medicare’s unfunded liability—the dollar value of promised benefits that are not paid for—is between $32 trillion and $44 trillion for 2016. Medicare is the largest unfunded obligation of all federal entitlements.
  • Total Medicare spending will jump from $683.2 billion in 2016 to $716.8 billion in 2017, and to more than $1.3 trillion by 2025, according to the Medicare Trustees Report. Medicare is a leading driver of federal spending and debt. Over the next 30 years, Medicare will make up more than three-quarters of the increase in spending for major health care programs.

Selected Additional Resources

Boards of Trustees, Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds, 2016 Annual Report of the Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds, p. 180.

Congressional Budget Office, The 2017 Long-Term Budget Outlook, March 2017, pp. 15 and 16.

Edmund F. Haislmaier and Drew Gonshorowski, “2016 Health Insurance Enrollment: Private Coverage Declined, Medicaid Growth Slowed,” Heritage Foundation Issue Brief No. 4743, July 26, 2017.

Edmund F. Haislmaier, Robert E. Moffit, and Alyene Senger, “A Plan to Repeal and Replace Obamacare,” Heritage Foundation Backgrounder No. 3193, February 9, 2017.

Edmund F. Haislmaier, Robert E. Moffit, and Alyene Senger, “Fairness in the Federal Tax Treatment of Health Insurance: The Linchpin of Real Reform,” Heritage Foundation Issue Brief No 4659, February 24, 2017.

Edmund F. Haislmaier, Robert E. Moffit, Nina Owcharenko, and Alyene Senger, “A Fresh Start for Health Care Reform,” Heritage Foundation Backgrounder No. 2970, October 30, 2014.

Robert E. Moffit, “How States Can Get Exemptions from Obamacare’s Rules,” The Daily Signal, August 4, 2017.

Robert E. Moffit, “Medicare at 50: Reform Will Better Serve Seniors’ Health Care Needs,” Heritage Foundation Issue Brief No. 4448, July 30, 2015.

Robert E. Moffit, “Medicare’s Next 50 Years: Preserving the Program for Future Retirees,” Heritage Foundation Special Report No. 185, July 29, 2016, p. 11.

Nina Owcharenko, “Medicaid at 50: Reform Is Needed to Better Serve Low-Income Health Care Needs,” Heritage Foundation Issue Brief No. 4447, July 30, 2015.

Office of the Actuary, Centers for Medicare & Medicaid Services, 2016 Actuarial Report on the Financial Outlook for Medicaid, p. 15.

Robert Rector, “Work Requirements in Medicaid Won’t Work. Here’s a Serious Alternative,” Heritage Foundation Commentary, March 19, 2017.