Now that the Senate's Obamacare replacement bill is out, the spotlight is squarely on what it's going to take to get the measure passed in a divided Senate with a small GOP majority. The spotlight is even more focused on four conservative Republican senators who say that they cannot vote for the bill as it stands now.
That's giving those four senators, namely Ted Cruz, Rand Paul, Mike Lee, and Ron Johnson, a lot of leverage right now. So if they want to use that leverage give Americans a bill that will actually be an improvement on Obamacare and not doom their party to electoral disasters in 2018 and beyond, they should continue to hold out until they get at least three changes in the bill:
1) Instant elimination of essential benefit requirements
The top reason Obamacare has failed to keep insurance premiums down is simple: the ACA requires insurance companies to provide more expensive plans filled with so-called "essential benefits." These plans cost more because they provide more; insurance companies have no incentive to reduce fees because no one can offer scaled down plans at lower prices.
Yet, every single version of the Republican Obamacare replacement plans in the House and now the Senate has refused to simply nix the essential benefits requirement and allow people to buy many more kinds of plans at the greatest possible range of prices.
Critics often say that eliminating those essential benefits and the insurance mandate that required everyone to get coverage will result in too many people opting for no coverage at all. That was a big problem before Obamacare that often led to higher costs for everyone else.
But the problem with that assumption is that even before Obamacare, most states had similar restrictions on the kinds of insurance plans companies could offer. And insurance companies, then and now, were restricted from selling across state lines. The fact is, we still haven't seen a real free market for health insurance in America. Repealing the essential benefits requirements of Obamacare could get us a lot closer.
Instead, a complicated and most likely ineffective state waiver process has been substituted for a clear repeal. This reluctance to cleanly kill off such a key reason for health coverage cost inflation sure looks a lot like crony capitalism on behalf of protecting the bigger health insurance companies against newer and smaller competitors.
But here's the bottom line: Renewing and boosting real competition into the insurance coverage market is the only way any kind of Obamacare replacement can work for the American people. The GOP holdouts must reject any bill that continues to leave this out.
2) Replace pre-existing condition coverage requirements with massive risk pool system
It's estimated that the sickest 5 percent of Americans are responsible for more than 50 percent of our annual health care spending. And that leads to the second biggest reason health coverage prices are rising out of control under Obamacare. The Affordable Care Act put these people with pre-existing conditions in our general insurance pool and made the insurance companies cover them at the same average premium costs as everyone else.
This may sound compassionate, but it was effectively quite mean especially for the rest of us who are relatively much more healthy. As long as insurance companies are required to cover the most expensive patients at the same premium prices as healthy people, those costs will continue to be passed on to everyone else at a rate that's unaffordable.
Holdout Senator Ted Cruz and others have called for separating the sickest Americans into risk pools where states and insurance companies combine their resources to make sure they can get care. People in those risk pools are required to pay more when they can, (truly poor people will get help from Medicaid), but prices are still capped. Now don't be fooled, funding these risk pools and making them effective will not be cheap. But the savings will be enormous when compared to what keeping people with pre-existing conditions in the general insurance population is costing everyone.
Right now, the Senate bill calls for giving $138 billion to the states over 10 years to fund risk pools. That simply isn't going to be enough. The overall cost of health care spending in America is $3.4 trillion per year right now. That means that those sickest 5 percent are responsible for $1.7 trillion annually. Knowing this, Cruz and the others should make the argument for as much as $300 billion in funding for the risk pools to go along with whatever money comes in from higher-but-still-capped premium costs paid for by the risk pool members themselves.
3) Reduce, not expand, subsidies that inflate insurance premium prices
Whether you call them tax credits or outright subsidies, when the government spends money to help people buy insurance plans, insurance companies have a powerful incentive to keep prices higher. That's exactly what Obamacare has done and exactly what the current GOP Senate bill continues and even expands in some ways.
Reversing this problem is contingent on the senators getting item #1 above agreed to first. But when and if they do convince Senate Majority Leader Mitch McConnell and company to allow for real insurance plan competition, then there will be much less need for subsidies because cheaper insurance plans will be available to more people.
If going cold turkey is too politically scary for the Republicans, phasing the subsidies out over time is an acceptable second option. But the days of the insurance companies using the government as an ATM need to end.
Of course, the Republican holdouts in the Senate may want a number of other changes to the GOP bill. But without all three of the above changes, health coverage costs will continue to go up and the GOP will likely bear the brunt of the blame for it. That includes the White House, which should push for these changes too if the Trump team is serious about getting costs down and keeping its political fortunes alive.
Commentary by Jake Novak, CNBC.com senior columnist. Follow him on Twitter @jakejakeny.
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