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Health Plan Scoring That Runs Out Of Bounds



September 25th, 2008
by Thomas Miller

Editor’s Note: Last week Health Affairs published critiques of the health plans put forward by Democratic presidential candidate Sen. Barack Obama (IL) and Republican presidential candidate Sen. John McCain (AZ). Health Affairs also published a third paper outlining a way that the best aspects of the two plans might be blended in a compromise package.

In the post below, Tom Miller, a resident fellow at the American Enterprise Institute and volunteer adviser to the McCain campaign, presents a rebuttal to the critique of the McCain plan. Elsewhere on the Health Affairs Blog, Harvard economist and Obama adviser David Cutler rebuts the critique of the Obama plan, and authors of the three Health Affairs papers engage in a roundtable moderated by Health Affairs Deputy Editor Parmeeth Atwal.

Sadly, but not surprisingly, the gravitational pull of a long campaign season has pulled more than a few purportedly nonpartisan health policy academics and analysts into a path-dependent round of charges and countercharges that mostly recycle and extend assumptions far beyond their evidence base. To be sure, it’s a target-rich environment across the spectrum, but this post (neither authorized nor pre-cleared through any campaign headquarters) aims to provide some counterbalance to several of the most glaring illustrations of empirically challenged opinion writing that mischaracterizes the McCain health plan; camouflages the flaws of the Obama health plan; and returns us to more of the same old dead-end, distorted “debate” over health policy that makes it harder to agree on more realistic and long-overdue reforms.

The rising cost of health care is indeed a big threat to growth. But misdiagnosing the underlying problem and applying another round of heavy-handed doses of government-centered distortions, rather than patient-centered “solutions,” to this chronic condition would forfeit a vital opportunity to reduce, instead of worsen, it.

A sensible health policy consensus should and could be found that focuses on (1) measuring better the performance of doctors, hospitals, and other health care providers; (2) paying for value instead of volume in health care; (3) arming consumers with the information, tools, and incentives to insist on better health outcomes at lower costs; (4) overhauling dysfunctional Medicare reimbursement formulas; (5) targeting an exhaustible supply of health care subsidies in a fairer and more effective manner; and (6) encouraging a wider portfolio of investments in methods both inside and beyond the health sector that could produce better lifetime health across the population. The McCain plan, and similar pragmatic reform proposals, embrace these key reform elements. The Obama plan once may have aspired to find at least some similar common ground, but more lately its campaign voice apparently has veered back to offering us something else, that is mostly old, borrowed, and definitively “Blue.”

Defense Of The McCain Approach

A series of overheated charges and exaggerated promises launched by Obama’s chief health policy advisor David Cutler and several coauthors just last week were built on the tenuous façade constructed by four other coauthors in the Health Affairs article, “Cost and Coverage Implications of the McCain Plan to Restructure Health Insurance.” Initial fact checking provides more opportunities for correction than space allows, but let’s starts with some basics.

* The McCain universal tax credits for health insurance, upon enactment, actually would be larger than the value of the current tax exclusion subsidy they would replace for almost all taxpayers. They certainly would be fairer to the many millions of Americans, both insured and uninsured, who today have no access at all to the current tax exclusion. Employers’ own income taxes (on either the corporate or the personal income tax side) would remain the same, because paying for their employees’ group premiums would still be just another ordinary and necessary business expense. Any alleged tax increase on employers and workers — due to making employer-paid group health premium payments subject to federal income taxes (but not payroll taxes) — remains a theoretical surmise for out-years much farther off in the future, due to indexing against Consumer Price Index (CPI) inflation of the offsetting individual tax credits. A greater tax burden on this front would only become more real if one conceded that nothing will ever stop an automatic rate of increase in annual insured health spending that exceeds real economic growth by at least two to three percentage points. Senator McCain’s plan is aimed at changing what is not, and should not become, “inevitable.” Do critics such as those in the Obama camp assume that whatever cannot go on forever will nevertheless be financed forever?

* The McCain plan would indeed move tax subsidies for health spending away from third- party payers and toward the initial choice and control of individuals and their families. But previous employer “contributions” to their employees’ health benefits, made under today’s tax exclusion, would be driven by normal labor-market competition to reappear either as similar ones in slightly reworked employer plans or in roughly the same amounts as higher wage payments to those same employees. If the latter still preferred to enroll in their employer’s group health plan, they could combine their new tax credits with those remaining employer contributions and come out ahead, and even more so if they chose more affordable, higher-value health insurance options. Obama plan advocates (like Cutler et al.) and McCain plan critics (like Thomas Buchmueller et al.) can’t seem to resolve their contradictory stances regarding the employer-group market they embrace (with reluctance) and the individual market they demonize. First, they in effect argue that the individual market is so poorly unregulated and so unattractive that (almost) no one should want to purchase insurance there. Yet they simultaneously become terrified at the likelihood they envision that millions of individuals will race to that market, once artificial policy barriers (the tax exclusion, plus tighter regulation of insurance pricing and coverage in some states) are eroded. If the individual market truly is, and would remain, such a terrible option (an oft-recycled myth not borne out by an extensive body of recently published research, by the way), why do Obama advocates and McCain critics, arguing both sides of the same coin, presume that millions of workers and their employers are waiting anxiously to drop employer coverage as soon as possible? They should in any case have more faith in both the presumed benefits of employer-group pooling they so tout and in the good sense of workers and their employers (facing normal recruiting and retention needs in competitive labor markets) in judging which insurance and health arrangements serve their particular mutual interests. The reality is that consumers will choose better value, and insurers will gain or lose market share depending on how they meet that demand.

Nor should we so fear the judgments of individual consumers if they are newly freed from the current geographic monopolies of state-based insurance regulation and allowed to seek out and purchase insurance sold in other states that provide better brands of regulation that impose fewer costs and deliver more attractive benefits options. If mandated benefits are so good, and community rating and guaranteed issue restrictions so valuable, why should Obama advocates and McCain critics be so afraid that they could not survive the independent, value-seeking choices made by American health care consumers? Could it perhaps be that less affluent and less sophisticated workers might fail to think and act like some, but not all, academic health researchers?

What is the basis for wild claims that 20 million Americans will lose their employer-sponsored coverage under Senator McCain’s alleged “radical” transformation of health care? The “study” by Buchmueller et al. briefly downloaded several other “what if” and “once upon a time” projections — primarily by MIT economist Jonathan Gruber — that were based on some questionable, embedded assumptions about how markets might work at least in theory, if not in practice, and that then failed to deal with the actual structure of the McCain plan (while ignoring any other evidence to the contrary). Neither the “tax price” health insurance models of Gruber nor those of Anne Royalty (a study coauthor) ever actually dealt with the case of a McCain tax-credit proposal that does not reduce the absolute dollar amount of tax subsidy for employer-sponsored insurance for almost all current workers but instead just partially levels the playing field between employer-sponsored insurance and individual coverage. (McCain’s plan only eliminates the income tax portion of the current tax exclusion for employer coverage, but not the payroll tax side of it). The Gruber and Royalty models assume, but don’t prove, that the elasticity effects on employer insurance offers from changes in the relative differences in the level of tax subsidy for employer coverage (compared to alternative coverage) would overpower the effects of the remaining higher absolute level of new tax subsidy for employer coverage (as well as alternatives) and its other remaining advantages in loading costs.

Moreover, the article by Buchmueller et al. failed to tell the entire story. For example, Gruber’s 2002 article even grudgingly conceded that “we have no convincing evidence to date on the elasticity of take-up of insurance with respect to its price among those who are now not offered insurance by their employer.” His 2000 National Tax Journal article noted that “doubling the size of the nongroup market . . . could substantially improve the functioning of this market, both in terms of administrative efficiency and reduced adverse selection.” He added that it was possible that “the substantial increase in enrollment in the nongroup market could lead to reductions in prices.” Gruber’s 2004 article with Lettau suggested that for changes in tax policy towards health insurance, such as removing the tax exclusion, “the impact is likely to be small relative to the reduction in spending.”

More basically, where is the actual evidence that there are legions of workers eager to escape from the clutches of employer coverage (where it still exists) and a substantial cohort of employers looking for the first additional excuse to accommodate them by dropping their existing group plans? The latter already could do so under current law, but a number of comparative advantages favor employer-based coverage, besides the net taxes paid by their workers. When added to the binding glue of inertia, uncertainty, and labor-market competition, any moves from employer to individual coverage remain extremely unlikely to evolve on anything beyond an incremental basis.

* The McCain plan insists on not leaving behind any health care consumers with high-cost, pre-existing health conditions and proposes to ensure that they have access to affordable insurance options. But instead of trying to hide and shift the costs of guaranteeing that those individuals have access to affordable health insurance by raising the costs of insurance for everyone else, the McCain plan calls for a substantial commitment of more federal funding — first to cap the maximum premiums of those eligible for such guaranteed access plan pools, and then to supplement those subsidies further based on the income levels of pool participants. In addition, current federal law would continue to reinforce risk pooling and nondiscrimination on the basis of health status in employer-group plans, while any deepening of the individual market would strengthen its underestimated current pooling of long-term catastrophic risks and guaranteed-renewability protections. Buchmueller et al. completely gloss over these essential elements of the McCain plan. The new federal funding commitment necessarily would need to be matched by state funding, as well. New research by economists John Cogan, Glenn Hubbard, and Daniel Kessler indicates that targeting public subsidies to handle the special health needs of higher-risk individuals and populations expands the size and scope of the adjacent private health insurance market, whereas less transparent regulatory cross-subsidies across a portion of the still-voluntary private insurance market tend to shrink the private market.

Despite a recycled round of exaggerated claims by Urban Institute researchers that the ranks of chronically and predictably high-cost consumers destined to be shut out permanently from access to individual insurance coverage are both vast and unaffordable, those estimates confuse standard one-time incidence with long-term persistence. They also overlook the actual findings of the most recent Medical Expenditure Panel Survey data available (for 2001) indicating that roughly 2 million people under age 65 said that they had “ever” been denied health insurance coverage because of poor health. That figure, not even anchored to a particular single year but simply applying to any time prior to the interview date, represented 0.8 percent of the total population under age 65. About 650,000 of those people were uninsured at the time of the interview, representing 1.3 percent of all uninsured people under age 65.

Critique Of The Obama Approach

Now let’s briefly look at a few of the realities of the Obama health plan. Its purported cost savings look smaller and smaller the farther one drives away from the mirrors at campaign headquarters. In-house scoring by the campaign’s own advisers, including Cutler, was built around alleged cost savings that remain more imaginative than ambitious. The Obama plan’s cost savings estimates rely heavily on health information technology, by disbursing $50 billion in federal procurement funds up front in five years, then relying on fast-forwarding savings that RAND researchers hoped might materialize fifteen years later, upon very optimistic near-full-adoption-rate assumptions. The plan also pretends that its vaguely described federal reinsurance proposal will reduce the premiums of employers with covered workers suffering from high-cost conditions. Yet even one top Obama health adviser behind the campaign’s cost estimates, David Blumenthal, conceded at a Health Affairs forum last May, “We are just moving expenditures out of the pockets of small businesses and other business on to the federal budget.” Unfortunately, risk shifting is not risk reduction, and if and when the federal reinsurance scheme unfolds, employers will find that they (or other taxpayers) will be financing their purported premium savings through higher taxes, while losing more control over their own health benefit plans to a federal overseer. The Obama plan’s other primary source for offsetting funds comes from overstated savings on administrative costs that exaggerate the real differential between those for large Medicare-like public plans and those for private insurance plans. However, an all-in calculation of both categories of those costs, including the deadweight economic losses incurred through public financing and spending, leaves them roughly at a wash, at best.

A closer look at the Obama plan’s concept of optional “pooling” for individuals and small firms reveals a troubling underlying design. It tilts the future playing field strongly in favor of substantial enrollment in a national Medicare-like public plan and handicaps private insurance competitors through rigid regulation that would raise their costs and limit their value-enhancing options. To ensure its initial market share, Obama’s national public plan would have an exclusive claim on revenue collected under his play-or-pay mandate on all but the very smallest private employers. Employers not “playing” by newly offering “meaningful” coverage or making “meaningful” contributions to their own sponsored insurance plans, or continuing to offer coverage, would be able to bail out of “paying” for more expensive coverage and instead contribute a percentage of their payroll toward the costs of the public plan. All of that money from those employers (in effect, exercising a “put” option) would be directed exclusively to funding the national public plan, and not even to other insurance plan choices in the National Health Insurance Exchange Obama also proposes.

Moreover, instead of facilitating a marketplace for expanded choices offered by any willing insurance provider, that Exchange would be a political connector to tighter regulation that restricts and reduces private insurance options and consumer choices. Eligible plans in this politically brokered pool must first follow a thick and growing set of rules written in Washington. Private plans must be at least as generous as the new national public plan. Participating private insurers must charge “fair” and “stable” premiums that would not depend on how much one’s health conditions and use of services cost the plan, and they would be required to justify in advance to the Exchange any above-average premium increases.

One could overstate this as approaching the equivalent of “everything that isn’t mandatory is prohibited.” In any case, guaranteed issue, community rating, premium price controls, and mandated coverage benefits — with a checkered history at best in state-level insurance regulation in recent decades — would go nationwide. The Exchange’s highly restrictive requirements would apply to any private insurer trying to offer coverage within its public pooling franchise. Its rules for guaranteed issue and a flat ban on any premium variation for health status also would be imposed on all private insurance plans elsewhere.

There certainly are limits to just painting a mirror image of Obama advocates’ claims that the McCain plan would destroy the traditional private insurance market, and saying, “No, that’s what your plan will do.” Nevertheless, the more serious danger remains that the underlying structure of the Obama plan’s fine print, absent explicit changes to disavow it, actually promises workers and others that they can keep the current coverage they have if they like it . . . until they can’t find it anymore.

In short, the Obama health plan might be close enough for government work (actually, a lot more government work), but it takes us farther away from dealing with the real reforms we need to improve our health care choices and their value.

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1 Response to “Health Plan Scoring That Runs Out Of Bounds”

  1. DONALD STROMBECK Says:

    The Obama Agenda
    It is encouraging to see that health care could have the highest priority for action by the incoming president and congress. But Congress is likely to piecemeal dismantle any complete, workable and effective program. Many know that current health care costs are on a path to fracture our economy. Unfortunately, the discussions on health care do not address measures and incentives to prevent health problems. With human behavior responsible for 8 of the 9 leading causes of death and disease, real incentives are essential to addressing health care problems. People must be motivated to change the way they live and not to continue their present life styles that eventually drain more from the growing health care expenditures. There are some things we can do if we have the courage. More on this can be found at http://www.healthcareforall.us

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