In my last column, I argued that for all the undeniable woes of the Republican Party, the unfurling of Obamacare represents a huge vulnerability for Democrats. The Democratic health reform bill is economically nonsensical and politically unpopular. A recent Rasmussen poll found that 54 percent believe the law will damage the U.S. health care system. Even among Democrats, support for the law is ebbing. In February, a Kaiser Family Foundation poll found that only 57 percent of Democrats (compared with 72 percent in November of 2012) support the law.

The battle over health care reform is not over. Yes, the 2012 election ensured that the law would not be repealed and replaced in 2013. But when the American people are unhappy with a policy, they find a way to alter it. Republicans can tie themselves in knots and consider abandoning their principles on abortion, taxes, immigration or marriage (and perhaps some of those positions require rethinking), but the health care issue is pitched right over home plate.

Nearly every American is intimately concerned with the delivery of health care. Choice and competition can deliver what Americans desire – a quality product at an affordable price. Before offering reform proposals, Republicans need to be clear that they are not endorsing the status quo ante.

The pre-Obamacare health care system was not a free market for health care at all but a peculiar hybrid with distorting incentives created by bad government policy. Because the government set wages and prices during World War II, employers were not permitted to raise salaries more than a set amount approved by National War Labor Board. Employers resorted to providing fringe benefits, including health coverage, and the IRS approved this workaround by treating fringe benefits differently from wages. Thus was born the link between employment and health insurance.

Because it was a form of compensation and not true insurance, health coverage became ever more expansive and expensive. Employees were shielded from the true cost of what they were consuming and accordingly failed to economize. If food were provided as a fringe benefit of employment, we’d dine on Chateaubriand every night. States compounded the problem in response to lobbying from particular providers, passing laws that required all insurance policies to cover expensive services, such as in vitro fertilization, pregnancy services, weight loss surgery and alcohol and drug rehabilitation programs. Over the past 30 years, 1800 mandates have been adopted, driving up the cost of insurance. This was bad enough for those with employer-provided insurance, but it hit those purchasing insurance individually particularly hard.

The high cost of insurance drove many who were not covered by employers to rely on hospital emergency rooms when they got sick. The federal government ratified this by mandating that hospitals treat all comers. Hospitals in turn charged more to their paying customers (i.e. insurance companies and the government through Medicare and Medicaid) to cover the costs of treating the uninsured. Rube Goldberg would be proud.

Medicare and Medicaid too have contributed to sharply rising health care costs both because the population is aging and because the programs’ fee for service structure encourages overuse.

Smart conservative health policy analysts have proposed a way to cut the Gordian knot – Remove the tax deduction for health insurance purchases from employers and give it to individuals. This was actually candidate John McCain’s proposal in 2008, though, as Yuval Levin (editor of National Affairs and one of those smart analysts) noted ruefully, “Nobody told John McCain.” As Levin explains, if individuals were given a $5,000 tax credit (fully refundable for those below the poverty line) for the purchase of health insurance, insurance companies would compete to provide excellent coverage for $5,000.

If, in addition, individuals were permitted to shop across state lines for insurance, those states with fewer mandates would be able to offer cheaper plans and would accordingly get more business. Replacing traditional Medicare with premium support would encourage competition in that market, as well.

Writing in National Affairs, James Capretta and Robert Moffit summarized the ideal Republican approach this way: “ … The essential common element is a move toward consumer control. Individuals would become active, cost-conscious consumers looking for value in the health care marketplace. This shift would, in turn, create tremendous incentives for those delivering medical services to find better and less expensive ways of caring for patients and keeping them well.”

As Obamacare’s rising costs and constricted choices alienate the American people, Republicans should be ready with an alternative that is market-oriented, assembled and on the launchpad.

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