The House must immediately pass the Senate bill

By now, people following health reform in the U.S. will have heard that Scott Brown, the Republican candidate, has won the special Senate election in Massachusetts. Martha Coakley, the Democrat, was widely expected to win the seat as little as a month ago.

The finger-pointing has already started. Blame is already being assigned. These activities are useless. The House must immediately pass the Senate version of the bill as written and send it to the White House for signature. The Senate bill has flaws, but it is workable and it is far better than the status quo.

There are some who might say, let's do this incrementally. Let's just pass the insurance reforms. The problem is that the insurance reforms alone are most of the bill and most of the spending. If you want insurers to stop discriminating based on health status and to issue insurance to all applicants (community rating and guaranteed issue, respectively), there must be a mandate to have insurance, or else people will wait until they are sick before getting coverage. This is what's happening in New Jersey, which has community rating and guaranteed issue but no mandate. If you pull just those two levers, you're just spreading the dollars around - it will be easier for older uninsured folks to get coverage, but more expensive for younger folks. There must be a mandate, and if you want a mandate, you have to give subsidies as well. You have to pull all the levers at the same time.

And furthermore, even if those reforms are applied, insurance companies will still have incentive to avoid enrolling sick people. Those that succeed in doing so will simply make it more expensive for the insurance carriers that fail to do so, and meanwhile none of the insurers are learning how to keep people healthy. So, you need risk adjustment, and defined benefit tiers, and a lot of other complicated stuff. Trust me, much of the package is inseparable. If you skipped the reforms in this paragraph, you'd get a situation where the marketplace could eventually unravel over time.

The other option is to go with the keep-your-hands-off-my-healthcare crowd and do nothing. The problem is that if nothing is done, healthcare will continue to get more and more expensive and the entire system will unravel. Then there will come a point when it will take drastic measures, such as implementing a single-payer system and/or strict price controls, to save the country's budget. The Senate bill both has some cost controls, such as the excise tax and the fact that insurance exchanges are allowed to reject plans that are too expensive. It also sets up the infrastructure for further cost controls.

House liberals hate the excise tax and they hate the fact that the exchanges are regulated by states. As to the former point, they do not have the facts on their side. As to the latter, it's workable. Federalizing the exchanges would also create problems of its own, such as how to synchronize federal and state regulation of insurance. The subsidies are clearly inferior in the House bill, but they're what we can afford right now. Besides, the subsidies can be increased, and the excise tax modified so that it is better targeted, at a later date.

As for leaving health reform to the states, I mentioned earlier that whoever wants to reform the insurance markets has to pull all four levers simultaneously. The states have a far more limited budget capacity, so asking them to pull the fourth lever is really hard. Massachusetts did it because they had very high insurance rates to begin with and a strong economy. Minnesota, I think, could potentially pull it off by themselves; I don't know if their political economy will allow it, but they have a strong economy and low uninsurance rates. I don't think many other states could do it. Furthermore, the smaller states don't really have enough size to start a properly running insurance exchange. You want a large enough pool that's relatively stable and can achieve economies of scale; Alain Enthoven and others estimated that you'd want a minimum of 100,000 people on an exchange, and Massachusetts' exchange is actually a bit smaller. So, leaving it to the states is definitely suboptimal.

So, again, the House needs to pass the Senate bill right now. The budget reconciliation process could be used for certain elements, but those elements need to be budget-related. Using the process would also worsen the existing ill-will between the two parties. The Administration needs to reform the financial system and the immigration system and to do cap and trade. Many Republicans will simply (and foolishly) oppose anything the Democrats suggest, but there are some who are far-sighted enough to cooperate on these issues - reconciliation could damage their prospects for cooperation.