When it comes to Obamacare’s current problems, there is a story often told at libertarian seminars that springs to mind. The story tells of a town that, plagued with a viper problem, decides to pay its citizens for the number of vipers they kill. Months later, it becomes clear that the problem has not only not been solved, but it has gotten worse. Why? Because citizens, seeking extra cash, had begun breeding vipers in their basement.

The moral of the story – that unintended consequences can be worse than the problems they are meant to address – appears wholly lost on the Obama administration. While much ink has been spilled about the precipitous fall in the polls the president has experienced over the failure of his health care law, not to mention the embarrassing public exhibitions of the Obamacare website’s failure, what no one seems to have noticed is the degree to which the law, even when functional, creates severe perverse incentives.

At Marginal Revolution, Tyler Cowen noted an article from the Financial Times pointing out that many hospitals have been buying Obamacare coverage for their terminal patients in order to stop taking on more uncompensated costs.

While a guileless observer might expect that such a move would be welcomed by the administration, given their outsized emphasis on securing care for Americans with preexisting conditions, that observer would be quite wrong. The administration apparently opposes the idea, fearing it could utterly derail the health insurance market. Seeing as the practice merely adds more risk to the insurance market, with no young and healthy customers as yet to offset it, one has to admit that they are right.

Now, it’s obvious that this response, while correct, is a blinding example of political hypocrisy. Equally obvious is the fact that this practice cannot continue over the long haul, if health insurance is to exist in any form. However, what it also suggests, albeit in a deeply impractical form, is that there may be an alternative model for providing insurance that could be exploited by either party as a fix to Obamacare.

Let’s stipulate that, barring some massive, flawless statistical shift, the model advanced in Obamacare will prove to be a failure. This leaves the question of what both parties can offer to try to fix its problems. Republicans will, naturally, offer a straight repeal, while Democrats will claim that if we’d only pass single payer, everything would be wonderful.

Republicans have no answer to this latter idea, except to recycle the same talking points they used against Obamacare, but this time with more vigor. For as long as Republicans hold even one house of Congress, single payer will never go anywhere. But the health insurance status quo of 2009 will also become synonymous with dysfunction, and will remain so the longer it remains in the rearview mirror. Make no mistake, Democrats will run on the idea of single payer in the future, and as Obamacare demonstrates, it will sell well with traditional Democratic constituencies – especially young people, who Republicans need in order to win in the future – for as long as Republicans don’t offer a competing solution.

That’s where this recent phenomenon comes in. Obamacare, whatever its flaws, was an attempt to create multiple payers into a universal healthcare system, while also shifting health insurance toward a more portable model than the at-times exploitative employer-based coverage of today. This last-ditch effort to save money by hospitals may provide another option that would accomplish the same goal, while potentially bringing down costs. That is, rather than force insurance companies to insure everyone regardless of preexisting conditions, it may be wise to allow hospitals to take on limited risk portfolios, provided patients pay them subscription fees.

This could potentially have a positive effect in at least one big area. Despite the demagoguery of the Obama administration, the fact is that health insurance companies are not the primary drivers of health insurance costs. In fact, they only account for 4 percent of all health care spending. Hospitals, by contrast, account for 30.7 percent. However, in the status quo, hospitals are completely immune to the effects of rising health care costs, rather like the administrations of colleges and universities. Allowing publicly funded hospitals to take on risk portfolios of their own would allow them to reap extra sources of profit while also exposing them to the effects which their own prices have on the insurance market. This, in turn, might limit the degree to which healthcare costs rise.

The advantage to such an approach, aside from its potential cost savings, is that it also limits the degree of coercion exercised by the federal government. Whereas Obamacare coerces every American into buying a potentially suboptimal insurance policy, even the most draconian version of a policy like this would only involve mandates levied against hospital administrators, a much smaller subset of the general citizenry. What is more, given the degree to which many hospitals are publicly funded, passing risk onto hospitals is quite clearly within the rights of the government. It would be essential, however, that hospitals not merely become high risk pools, which is why the model of out-of-pocket payment would almost certainly have to persist.

In any case, the fact that hospitals can and do act as middlemen for insurance in the present day, when it saves them money, can be a gateway to a better policy than the one currently on offer. If seeds of an idea can be found even in an approach that is presently catastrophic, one can only imagine what other seeds of hope might be found inside the Pandora’s box opened by Obamacare.

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