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How Trump and the GOP can fix their Obamacare-replacement mess

  • Republicans will never get enough votes to repeal and replace Obamacare until they realize their real problem.
  • Moderate Republicans are addicted to Medicaid and conservatives want more free market measures.
  • There are ways to accommodate both sides and pass a bill.
Senate Majority Leader Mitch McConnell speaks with the media about the recently withdrawn healthcare bill on Capitol Hill in Washington, July 18, 2017.
Aaron P. Bernstein | Reuters
Senate Majority Leader Mitch McConnell speaks with the media about the recently withdrawn healthcare bill on Capitol Hill in Washington, July 18, 2017.

So what now?

Now that the political winds have mercifully blown away Senate Majority Leader Mitch McConnell's pork-filled, subsidy laden and just plain bad Obamacare replacement bill, the Senate and the Trump administration need to plot a new way forward.

It won't be repeal now and replace later. That idea was dead by noon on Tuesday as three GOP Senators balked. Susan Collins of Maine, Shelly Moore Capito of West Virginia, and Lisa Murkowski of Alaska said they could not vote for a simple repeal without some kind of replacement bill ready to go. A fourth Republican Senator, Rob Portman of Ohio, sounded close to joining them. Don't be surprised by more defections in the coming days.

The straight up repeal effort is suffering from the same problem that plagued the McConnell replacement bill: It doesn't understand the people it's trying to win over.

In this case, the people McConnell has been trying and failing to convince are all in his own Republican Party caucus. So let's help him identify the three major concerns his fellow GOP senators are facing and find a way to fix them. Because unless he figures out how to do that, he'll never make any progress:

1) Give the moderate 'Medicaid addicts' a way out.

Many of the "moderates" in the Senate, like Capito, Murkowski, and Portman are from states that took the Medicaid expansion. And while Senator Collins comes from a state that did not accept the expansion, she still believes the Medicaid changes contained in the now-dead Senate replacement bill would still have unfairly hurt Maine.

The Medicaid expansion not only gave billions of dollars to the states who accepted it to help pay their residents' medical costs, it also served as a major boon to the hospitals in those states. A new report and analysis in Politico this week details just how much the ACA and the Medicaid expansion have financially benefited hospitals even as they're providing less charity care to their communities.

This reality presents a double whammy for senators from Medicaid expansion and more highly Medicaid-dependent states. They aren't going to vote for a repeal or a replacement bill that ends the Medicaid expansion cold turkey or even one that sunsets it over a few years. That would not only anger constituents who might see their new benefits cut, but it would anger the major hospitals in these states that are often some of the biggest employers with the most political clout.

Some might call this a "poison pill" of Obamacare that the architects of the bill knew would make it almost impossible to repeal. But while entitlement addiction in American politics is real, there are ways to make reforms to these programs.

Seema Verma, who is currently in charge of Medicare and Medicaid, has already called for the kinds of minor reforms senators like Collins should have a harder time rejecting. Verma would like to see Medicaid recipients pay a little of their own money to remain in the plan. She'd also like to impose some work requirements to able-bodied recipients. Verma helped implement such a plan in Indiana that only required a $1 per month contribution to a special health savings account, so we're not talking big money here.

These small changes are not unlike the welfare reform measures President Bill Clinton and then-House Speaker Newt Gingrich hammered out in the mid-1990s. In other words, compromise here shouldn't be impossible.

2) Give the conservatives some free market measures.

The conservatives in the Senate, people like Senators Rand Paul and Mike Lee, are never going to support a bill that keeps all the subsidies and payoffs to the insurance companies alive without introducing free market reforms that offer more choices and competition in the health insurance market.

Unlike the Senate moderates who are often cagey about what they want, conservatives like Paul and Lee are speaking out more freely about their demands. And some of them are relatively easy to grant because they don't run afoul of the moderate senators' concerns.

Chief among those demands is Rand Paul's idea of letting any group pool its resources to get group coverage in "association health plan coverage." That includes churches and trade groups. Paul has made this such a big part of his pitch on health coverage that he'd look bad opposing a bill that included it.

Other conservatives could be lured by a bill that takes on the insurance lobby in way McConnell was clearly reluctant to do. Eliminating the mandates and the subsidies that did little but enrich the insurance companies, (did you see the blowout UnitedHealth second quarter earnings report this week?) would help, as would keeping free-market ideas like Ted Cruz's amendment that allowed insurers to sell bare-boned insurance plans and letting insurers sell plans across state lines.

The fact that insurers have pushed back on these ideas is telling in that they fear they won't serve their interests or protect their growing profits. But McConnell and President Trump don't need the insurance companies' votes here.

Finally, a lot of conservatives have long called for a simple rule requiring hospitals and other health-care providers to publicly list their prices for health procedures. Free market proponents believe this will help curb health care inflation because the public will finally see differences in prices and be more inclined to shop around. Putting that in the bill could be very popular among Republicans and Democrats alike.

Conservatives in the Senate will probably not require each and every one of the above measures to get on board with a new replacement bill. But it's not likely that any of them would run afoul of the moderates that the bill would have to keep in the fold. In fact, even Senator Collins has introduced a plan that would allow more basic health plans to be sold to the public and repeals the individual mandate.

3) Set up real risk-pool funding.

The good news is that the number of Americans with pre-existing medical conditions who could not get health insurance coverage is not massive. Remember that most employer plans cannot exclude those people, and neither can Medicare or Medicaid. But in the years before Obamacare went into full effect, a program called the Pre-Existing Condition Plan, or PCIP allowed people to sign up for heavily subsidized coverage if they had documentation proving they had been denied coverage by an insurance company and had a pre-existing condition. Then-Health and Human Services Secretary Kathleen Sebelius and some experts predicted that millions of Americans fell into this category, but enrollment in the PCIP peaked at just 115,000 in 2013 according to the Kaiser Family Foundation.

But 115,000 people is more than enough of a pool for opponents of any Obamacare reform to choose from to garner major sympathy with the public. It doesn't take anywhere near that many people speaking in front of news cameras and on YouTube to tug at America's heart strings and spell doom for every GOP member of Congress who doesn't guarantee their coverage come election time.

The best answer to this problem has always been setting up a very well-funded risk-pool system to cater to these consumers. The problem is the last version of the GOP replacement bill didn't set aside enough money and worse, it really didn't do anything to make sure the states would use that money only for pre-existing condition risk pools. The last version of the bill put that quasi-risk pool/slush fund at $182 billion. But it would probably take $300 billion to get all the understandably worried GOP senators on board.

Reality check

The final piece of this puzzle isn't a policy or a funding program. It's Republicans coming to reality. Despite what President Trump believes about how the Republicans "aren't going to own" this mess, insurance industry expert Robert Laszewski is more on the mark when he wrote Tuesday that the GOP are indeed on the hook politically.

That means the moderates who want to preserve the Medicaid expansion, the conservatives who want more free market measures, and the White House that just wants something passed are either going to either hang together or hang separately on this.

Perhaps the combination of the brutal political price they'll have to pay plus the inclusion of some or all of the above changes into a new bill will bring the Republicans to a place where they can finally meet a promise they've been making to the American people for at least seven years.

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

For more insight from CNBC contributors, follow @CNBCopinion on Twitter.