GOP needs to face reality—there's only one way to save the health-care bill

• The GOP health care bill now rides on the fate of the risk pool plan.
• Risk pools are a much better way to contain costs than Obamacare.
• Republicans better make a strong case for risk pools or their bill is dead.

Joshua Roberts | Reuters

Senate Majority Leader Mitch McConnell (R-KY) speaks during a media briefing on Capitol Hill in Washington, DC.

Now that the GOP Obamacare replacement bill's fate is firmly in the U.S. Senate's hands, reality seems to be setting in. And that reality is this: risk pools aren't just the key to saving this bill, they're likely the key to saving American health care.

When you weigh both the economic and political concerns, it starts to become clear why this is true. Politically, Democrats, Republicans, and the news media have made it clear that people with pre-existing conditions potentially losing coverage will be the No. 1 focus of the debate on the GOP bill.

The reason is clear: Millions of sick Americans losing coverage would toxic for the GOP and a weapon for the Democrats and the news media.

And there are reasons why this issue is so crucial beyond just the political optics. Sicker Americans with pre-existing conditions are a key catalyst for rising costs for everyone. Unless those costs are somehow contained, there is no realistic hope for meaningful price reductions or maintenance.

So here are the three key arguments proponents of risk pools, like Senator Ted Cruz, need to make to see passage of a credible health bill:

1) Something has to stop the bleeding

Any good crisis manager will tell you that when you have a problem that can't be completely solved, the best thing to do is contain it so it doesn't spread - similar to the way hospitals quarantine the patients with the most contagious diseases.

Spreading the pain when it comes to health costs is exactly what Obamacare did by putting the costliest health insurance customers into the general pool. And it's a big reason why we see more and more insurers pulling out of ACA exchanges - they cannot afford to keep covering their costliest customers at the same premium prices as their healthiest ones.

Obamacare advocates argued, and continue to argue, that if enough young and healthy people signed up for coverage as required by the ACA, those costs would be managed without massive annual premium increases.

But they were wrong. Even if every healthy person in America had signed up for Obamacare on day one the numbers wouldn't have added up. The reason is that the sickest 5 percent of Americans account for more than 50 percent of our health costs. That's an extremely powerful inflationary pressure on insurance costs any way you look at it. More on that in a moment.

Risk pools attack that pressure by quarantining them as much as possible. People in them have different kinds of plans, at different prices, and with different conditions.

2) Pinpointed compassion

At the last minute during the debate in the House, the GOP leaders shoved an additional $8 billion into a $130 billion fund to cover costs that include risk pools.

But without a truly separate fund for higher cost patients no amount of money will be sufficient because that sickest 5 percent will always jack the prices up for the rest of us.

In other words, the House bill repeats Obamacare's mistake mixing the sick and the healthy, and increasing everyone's load.

We haven't heard any specific numbers from the Senate yet, but we are hearing the word "robust" to describe the funding they want for these truly separated risk pools. They better mean it, because the cost will be great.

That's where "pinpointed compassion" comes in. Whether the risk pools are administered by the states or the federal government, they need to be funded very richly and used for the risk pools alone. The Senate bill will need to contain very precise wording to ensure enough money goes to precisely the right people. The political tendency to try to spread the money around to cronies and base voters needs to be avoided here at all costs.

3) Be honest: This still loses money

None of this is going to work if the Republicans pushing for risk pools aren't as honest as possible with the American people. And the simple truth is that risk pools are still going to lose money. So when we talk about big money figures like $138 billion, or maybe even twice that, we have to remind ourselves about the overall premise: containment.

First, Senate Republicans need to be honest with themselves and ditch the House bill's long list of subsidy recipients. It would be naïve to think they'll have the guts to cut all premium subsidies to everyone above the Medicaid qualifying levels, but a serious paring is in order to make more funds available for the risk pools.

Second, the GOP will have to ask participants in the risk pools to pay more for their premiums than healthy people… within reason. Capping their premium payments at two or maybe three times the price of full plans for healthy people makes sense. That, and indexing their precise premium cost within that double or triple cap is more practical and fair.

And penalties will need to be added for people who never bought insurance and only do so when they are severely injured or get sick. Thus, a significant no-penalty bonus will then be bestowed on regularly insured people who become more ill or injured and have to slide into the risk pool.

Older customers who are still too young for Medicare will also have to pay higher premiums based on their income and with similar maximum caps.

Again, this is all necessary because Obamacare's promise that people with pre-existing conditions would pay the same average premium prices as everyone else was unsustainable and basically dishonest. Republicans will get pushback for asking them to pay more and the Republicans will have to find a way to make the case that a costlier reality is better than a freebie fantasy.

And the final piece of honesty we need to hear is the fact that because of the extremely pricey nature of treating people with pre-existing conditions, risk pools still won't be self-sufficient. That's even if every participant can afford those pricier premiums and pays up with 100 percent compliance. Over time, the costs will likely rise. The best hope is to keep those increases under relative control.

Because the most recent estimates put the overall annual cost of health care spending in America at $3.2 trillion. That is a whopping 17.8 percent of our GDP. And remember, just 5 percent of the public is responsible for half of that spending, or $1.6 trillion. Given those numbers, spending even $200 billion over the course of a decade or so to keep the spread of higher risk patients' costs from affecting the rest of us and our health insurance costs would be worth it. Even $300 billion, paid for from higher premium payments by risk pool members and mostly from specifically earmarked taxpayer funding will be worth it over that period of time.

The Republicans seem to always fail when it comes to making the case that their policies are just as, or even more compassionate, than anything the Democrats promote. They need to make it clear that Obamacare failed to show enough compassion to the overwhelming majority of Americans who were being asked to foot too much of a bill for a small minority whose care costs exponentially more than the rest of us.

Risk pools provide a much saner and ultimately more compassionate approach for everyone. Now it's up to the Republicans to make that simple case. If they don't, their Obamacare replacement efforts may be dead for good.

Commentary by Jake Novak, CNBC.com senior columnist. Follow him on Twitter @jakejakeny.

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