Mark Pauly on the Candidates’ Health Plans
Writing in Health Affairs, Mark Pauly of the Wharton School of Business at the University of Pennsylvania makes a case for a hybrid plan between what Obama and McCain have proposed in their campaigns. He seems to like McCain's tax credit:
(A uniform tax credit) would not inappropriately push people into or away from group insurance, or bias choices for or against high-deductible insurance. Rather, it would push choices toward insurance that the consumer judges to be worth its true (unsubsidized) cost. This neutrality is important because group insurance is usually less administratively costly than individual purchase, and sometimes managed care is better than high cost sharing to limit overuse. However, individual insurance can give different individuals the coverage they want, and managed care makes some people angrier than high deductibles. Neutrality allows these trade-offs to be made properly.
He weighs in on another issue:
What are the pros and cons of a high-risk pool-guaranteed renewability combination (McCain) versus a community rating-reinsurance subsidy combination (Obama)? Community rating is equivalent to financing a subsidy to all high risks with an excise tax on insurance purchased by low risks, regardless of income. Like other excise taxes, this regulation-produced tax scores poorly on both efficiency and equity. It inefficiently induces below-average risks to drop insurance or cut the coverage they buy.
He is also skeptical of the cost savings promised by both candidates by better use of health information technology, prevention, and pay-for-performance.
There is little evidence that there are known methods to cause the (changes in) behavior to occur, and to occur quickly on a large enough scale to matter. Few of the innovations relate directly to controlling the new technology that is driving spending growth, so they cannot promise the kind of large and permanent reduction in spending growth that is needed for true cost containment.
Why do we need a hybrid? I like the Goodman/Pauly proposal that was in Health Affairs and is listed as a CDHC Classic at the NCPA’s CDHC site.
Having devised the ideal plan, why water it down?
What Mark Pauly did not say is that in the McCain plan there is an integrated approach — with the tax subsidy being the same for employer-provided insurance and individual purchase, while for Obama there is no such integration. So Obama’s approach is very unstable.
Also Obama’s plan is not really a plan at all. It is a wish list of good things with no mechanism to achieve them and no funding source to pay for them.
So when the modeler’s try to estimate the Obama plan and they make different assumptions (to fill in the blanks Obama did not fill in) they get wildly different answers.
In particular, the ten year cost estimates of the Obama plan range from $1 trillion to $6 trillion.
When Mark Pauly characterizes the community rating approach to pooling risk as ‘inefficient’ he assumes that it is the low-risk consumer who pays the ‘excise tax’ to finance higher risks. But in reality, the employer exemption approximately offsets this additional cost for low-risk individuals, while acting as a true subsidy for those at higher risk.
In other words, for low-risk individuals the choice between pre-tax group coverage and after-tax individual coverage is roughly a wash. Therefore tax equity cannot be used as a justification for extending the employment tax break to low-risk individuals purchasing individual insurance.
The only way to way to extend a tax break for individual coverage in parity with the existing employer-based system is to offer a tax credit only against the portion of the insurance premium in excess of the preferred rate.
I should add that ignoring my point above, e.g. extending a tax break to low-risk individuals with individual coverage, would create precisely the situation that Pauly describes. It would induce low-risk individuals to drop existing employer-based group coverage and switch to low-cost individual plans, thus crowding out the group plans.
On the other hand, it should be possible to extend a tax credit for group coverage only. The tax break would allow low-risk individuals to stay with the group plans as they do now, the difference being that the group plan could now be portable.
Pauly is also concerned with income levels and means-testing, but these might best be handled separately. Conflating social safety net issues with health policy will only result in a massive program with perverse incentives.