A Health Plan for Barack Obama
One of the best kept secrets in the last election was John McCain’s health plan. When focus groups revealed that ordinary voters had a hard time understanding the McCain plan, his campaign decided it was better not to explain it at all.
Other than two editorials in the Wall Street Journal (one by yours truly), I believe no McCain backer of substance really explained the McCain plan anywhere in print. Also, the only clear explanation on the Internet of how it all might work was at my blog. This left the field open for Barack Obama supporters to distort and mischaracterize the McCain plan, including some ideas that Obama’s health advisors supported before they became Obama advisors!
This was all very personally disappointing, since the McCain plan is based on Sen. Tom Coburn’s plan, which in turn draws on an article that Mark Pauly and I wrote for Health Affairs some years ago.
Yet there may be a silver lining here after all. As it turns out, to even begin to make good on the promises he has made, Barack Obama needs key elements of the McCain plan. He also needs key elements of Mitt Romney’s health reform, about which he has already had complimentary things to say. He can also borrow an idea or two from Sens. Ron Wyden and Bob Bennett. For that matter, he needs Pauly and Goodman, too. Here is how it might work.
Note: I’ve done versions of this for the Health Affairs blog and for the National Journal’s health blog.Three Interesting Reform Plans. Mitt Romney’s Massachusetts health reform is the most revolutionary reform implemented anywhere at the state level. John McCain’s national health plan is far and away the most fundamental change proposed by any serious presidential candidate [link]. On the surface, the two plans seem very different from each other and from Barack Obama’s plan. In fact, elements of the Romney and McCain plans would make Obama’s plan work much better. And a combined Obama/McCain/Romney approach could be made better still with a few more changes.
The McCain Plan. There are two principal elements: (1) McCain would replace the current arbitrary, wasteful and unfair system of federal tax subsidies for health insurance with a system under which all families get the same tax relief for private insurance, no matter how it is obtained. (2) He would also allow people to buy insurance across state lines, effectively allowing a national market to develop. (See the NCPA analysis here.)
The Romney Plan. There are five main elements: (1) A required benefit package, defining what insurance everyone must have. (2) Subsidies for low-income families. (3) A pay-or-play choice, imposing a fine on anyone who continues to be uninsured. (4) A system parallel to employer-based coverage, in which individuals paying (essentially) group health insurance rates can choose among competing health plans. (5) The use of disproportionate share funds (previously used to subsidize care for the uninsured) to subsidize private insurance for low- and moderate-income families. (See the NCPA analysis here.)
The Obama Plan. There are four main elements: (1) Insurance required for children, but not adults. (2) Subsidies for low-income families. (3) A pay-or-play mandate for employers (and by implication their employees), but not for people on their own. (4) A system parallel to employer-based coverage in which individuals could buy insurance on their own.
What Obama Needs from McCain: A Consistent Subsidy. The greatest weakness in Obama’s approach is two completely unrelated subsidy systems: the current tax exclusion subsidy for people who continue to get coverage through an employer and an income-based subsidy for people who buy coverage in the parallel market. Because the two subsidy systems are not integrated, they can cause unstable movement back and forth — depending on their relative generosity. What McCain offers is a simple, seamless subsidy — available to all people and all forms of insurance: a lump sum, refundable tax credit of $2,500 (individual) or $5,000 (family).
What Obama Needs from Romney: A Consistent Mandate. Another weakness in Obama’s approach is the idea of imposing a pay-or-play mandate on employees (through their employers) but not on people who are not employees. As with the unintegrated subsidy, this distorts labor market choices. It also penalizes and discourages employment. Romney’s approach is better: treat everyone the same, whether employee, independent contractor or out of the labor market altogether. If you’re uninsured in Massachusetts, you pay a fine. Period.
What Obama Needs from Wyden/Bennett: A Financial Mandate. Forcing people to buy a package of benefits whose cost will grow at twice the rate of growth of their income is a formula for future trouble. Even if people can initially afford the mandated package in year one, they are likely to fall short in year two, even more so in year three, etc. [See further explanation here.] Wyden and Bennett have a better idea: Let the mandate be a financial mandate (you have to spend x dollars), not a prescribed set of benefits.
What Obama Needs from McCain and Romney: Funding Sources. The most attractive feature of the Romney plan was that it (initially) cut the number of uninsured in half without new spending. Reasonable estimates suggest that McCain’s (originally revenue neutral) plan would also cut the number of uninsured in half. Romney relied on redistributing “free care” (DISPRO) funds. McCain would redistribute existing tax subsidies. By contrast, Barack Obama would leave the current tax and spending subsidies largely in place, relying instead on the repeal of “tax cuts for the rich.” Yet those tax breaks fall short of the resources he will need by at least a factor of three, and they are scheduled for automatic expiration anyway. Plus, even that revenue source is wilting. Obama economic advisors have assured Wall Street that the new dividends and capital gains tax rates will go no higher than 20%.
What Obama Needs from McCain: Lower Regulatory Costs. By some estimates, as many as one out of every four uninsured people has been priced out of the market for health insurance by the cost-increasing effects of government regulation. By contrast, McCain’s national market would allow people to purchase insurance licensed in other states that have fewer special interest mandates. A study by University of Minnesota economists estimates that this reform alone would cut the number of uninsured by one-fourth.
What Obama Needs from McCain: Cost Control Incentives. As it now stands, the Obama plan would continue the current practice of extending tax subsidies to employer-provided health insurance — no matter how lavish or wasteful. These subsidies can amount to as much as 50 cents on the dollar. By contrast, McCain’s plan subsidizes the core insurance we want everyone to have, forcing them to buy additional insurance with unsubsidized dollars.
Additionally, the Obama approach proposes to limit the cost to people in the parallel market — probably to a fraction (say 5% to 10%) of their income. This means people would purchase core insurance with their own money and (potentially wasteful) marginal insurance with taxpayer money. The McCain approach is better: let taxpayers fund the core insurance and let people pay with their own money for the questionable add-ons.
Making the Hybrid Approach Better. All these ideas could be merged, as I have suggested here. However, a merged plan could be improved in three ways:
- Risk-Rate Insurance Premiums. The premium insurers receive should roughly equal the expected health care costs of the enrollees. Otherwise, health plans will try to attract the healthy and avoid the sick; and once people are enrolled the plans will be tempted to overprovide to the healthy and underprovide to the sick. The health plan for members of Congress and federal employees violates this principle. The Medicare Advantage plan for seniors wisely employs it. [See further explanation here.]
- Commit to Safety Net Institutions. Hospitals fear they will be required to take care of the uninsured without the resources to do so. The answer: The McCain $2,500/$5,000 amounts should be pledged to health care, not to just private insurance. If people choose not to be insured, the amounts should be made available to safety net institutions in their vicinity. [See further explanation here.]
- Adopt Roth HSAs. What is the role of Health Savings Accounts in this approach? Since the McCain tax credit causes people to buy additional insurance with after-tax dollars, deposits to HSAs should also be made after-tax. Hence, what is needed is a Roth account – with after-tax deposits and tax-free withdrawals. [See further explanation here.]
John, what you are trying to do is to get all the economic incentives right. Most people in health policy ignore incentives. For that matter, most people in health policy ignore economics.
If Obama has any sense, he will adopt you plan. More likely, he will rely on advice from those around him and nothing much will change.
Bruce, I think Dr. Goodman is right about the obstacles Obama faces. If he doesn’t borrow ideas from McCain and Romney, there is probably no way he can pull off a mjajor health reform.
I don’t think you can have a fair discussion about the employer tax subsidy without also considering the effect of group cross-subsidies (positive and negative) inherent in the employer benefits system. The two are inseparable; group coverage as we know it would not be possible without a tax subsidy, and the tax subsidy would likely not have been impervious to change all these years were it not for fear of losing the group cross-subsidy.
The bottom line for a given employee is the sum of the two subsidies. For a healthy individual, the net could be close to zero or even negative, while a high-cost worker is actually subsidized to a much higher extent that expected if you only look at the tax exclusion.
Any proposal for transition to a new system would need to take this into account, politically as well as philosophically.
Bart, I am not sure there is any more cross subsidy in group insurance as a whole than there is in the individual market.
In any insurance pool, people who get sick spend more. People who stay healthy spend less. Howvever, in other insurance markets we don’t call this a “subsidy.”
Politically, Congress did relent and gave the self employed the same income tax susidy that employer provided insurance gets. It has not extended tax relief to to others because they are not noisy enough — they have no lobbyists pushing their cause.
I believe the McCain campaign did not promote it because they recognized it was a net loser with the voting public. All the liberals had to say was that McCain wants to fully tax you on the value of your current health care benefit! Voters were no longer listening to any further explanation.
John, thanks for the response. Outside of community-rating states, the only cross-subsidies in the individual market that come to mind are guaranteed renewability clauses and prohibitions against using certain information, e.g. DNA screening, in the underwriting process. I don’t see how this comes close to group insurance that doesn’t permit underwriting and often doesn’t even segment by sex or age.
I agree that an insurance payout on an accurately-determined risk premium should not be regarded as a subsidy.
Great suggestions. I would like to add 3 more:
1. Creation of a mandatory risk equalization fund to which all insurers must contribute would enable an insurance market that actually caused insurers to want to attract chronically ill patients (this may have been what you were getting at with “risk rating”). Within this fund, the risk attributes of each insurer’s patient populations would be periodically evaluated. Those that attract sicker than average populations would receive dollars from the fund and those that skim risk would lose dollars to the fund. This would all be done behind the scenes, but could be combined with insurer developed products that reward consumers for healthy lifestyles and patient efforts to cooperate to optimize their conditions. Insurers who do the best job managing chronically ill patients will save costs through complication avoidance and will attract greater revenues through fund directed dollars. Risk skimming insurers will see a corresponding drop in revenue.
2. Refine the rules for HSAs to allow more products that create cost sharing throughout a longer period of health spending in exchange for reduced deductibles, and/or, allow richer benefits for proven interventions with leaner benefits for preference based or unproven care, and/or, have benefits scaled to income.
3. Provider payment reform is essential to sustainability. Payment models need to reward outcomes, not volumes of high profit services so providers will allocate their investments appropriately. Also, the standard for non-profit status should be tied to community health and resource use standards, not the ability to create ridiculously high charges so when they are written off it looks like a lot of charity care was provided.
John,
Happy New Year!
It was a decent plan, but they did a crummy job of explaining it.
Anyway, in an effort to help explain the plan, I published the following article. View it here.
I understand your frustration. Also I think the current meetings around America led by Tom Daschle and the transition team are interesting. It seems to be oriented toward building a consensus on elements of a health plan that they plan to submit. Not necessarily a bad thing… certainly the opposite of the closed meetings Hillary had during her shot at a national healthcare plan.
Ralph, one thing McCain didn’t explain well was his Guaranteed Access Plan (GAP). I’m still having trouble finding a good description of the GAP, even though it was the sole part of McCain’s plan to address the problem of affordable coverage for people with pre-existing conditions. All I can find are some vague statements about providing federal funding to states for the purpose of establishing risk pools. Nothing about how much, or how the money would be used.
John, thanks for continuing to fight the good fight -persistence is so critical. Here’s my deal for the devils that want a single payer. THEY CAN HAVE IT:
1)Make HSA accounts available to all Americans for any 213d item -no plan design strings.
2)Order CMS to hire all of the programmers at the CBOE to create a health care exchange. A table of allowances based (eg. on the average price of hip surgeries) will ebb and flow through the day. Exchange rules would be hammered out by market participants with guidance from a CBOE economist. Once that was done doctors and patients would collectively thumb their noses at anyone who had hoped to be a member of Daschles ‘independent’ health care board.
3)So let us have a single payer then, but based on the average marketplace price table of allowances, a minimum income specific deductible (5% of gross income), and the right to raise ones deductible up to 100% of ones income or 50% of ones net worth, whichever is greater in exchange for tax credits (lower premiums). Individuals would be allowed to keep 30% of the difference between the table of allowances and any price they can find below that (creating competition). In addition individuals could choose which 213d items they would like covered in their ‘government plan’ (fewer covered items more tax credits). Let the IRS be the keeper of what is an eligible medical expense.
In exchange the socialists in this country can have their damned individual mandate and their single payer. Number crunchers that keep the RBRVS tables will get their pink slips, and the payers like children at the beach – sand sifting through their fingers – will sit thinking what might have been had they thought of this idea first.
John
Great comment.
You have to speak out louder and clearer. You got it.
He probably needs some physician input from someone who has no ulterior motive, i.e Drs Woolhandler and Himmelstein, and I can think of no one better able to provide that counsel than me.
Cheers.
John
The McCain plan requires the tax subsidy to be spent for insurance, rather than health care per se. This dilutes the purchasing power of those dollars significantly. (Anywhere from 18% to as high as 50% for some of the least cost effective insurers). Money spent directly for care should have the same tax treatment as money spent for insurance.
Purchasing mandate free insurance across State lines is a must. Sixty plus years ago all two-party contracts had benefit dollars that could be applied at any doctors office or hospital in the country without penalty to the insured. • The Obama plan.
John, thanks for the response. Outside of community-rating states, the only cross-subsidies in the individual market that come to mind are guaranteed renewability clauses and prohibitions against using certain information, e.g. DNA screening, in the underwriting process. I don’t see how this comes close to group insurance that doesn’t permit underwriting and often doesn’t even segment by sex or age.
I agree that an insurance payout on an accurately-determined risk premium should not be regarded as a subsidy.