Editor’s Note: Last week Health Affairs published critiques of the health plans put forward by presidential candidates Barack Obama and John McCain. Health Affairs also published a third paper outlining how the two plans might be blended in a compromise. Here, three of the authors – Wharton economist Mark Pauly, Harvard economist Katherine Swartz, and economist Gail Wilensky, senior fellow at Project HOPE and a volunteer adviser to the McCain campaign — further discuss the plans. Below is the transcript of the phone call moderated last week by Health Affairs Deputy Editor Parmeeth Atwal.

PARMEETH ATWAL: We appreciate you all joining us today.

When we look at the papers and the critiques of both candidates’ health plans, it looks as though the critiques center on different values. For example, Gail, your paper’s critique of the Obama plan seems to center around the cost containment component and how the Obama plan will or will not — will not, obviously, according to your analysis — really speak much to cost containment issues. Whereas, Kathy, your paper really looks at the coverage issue when it comes to the McCain plan.

So I’d like to have you guys engage on the issue of whether these plans are talking past each other. Do they just reflect the different values of the candidates and what they want to emphasize?

Differences And Agreement Between McCain, Obama Plans

GAIL WILENSKY: Well, I think that there’s at least one other area that has a significant difference. But before I start I want to emphasize something that we said in our paper, and that needs to be acknowledged, whether or not it’s in newspapers: There are areas of agreement on ways to improve the delivery system, although they are at pretty high levels of generality such as disease management, chronic care, prevention, more information, and transparency in price and quality.

So it’s not like we are completely talking past each other, but there is a big difference on where we place first emphasis. In our critique of the Obama plan, we have raised two big issues. The first is the vast increase in regulation in terms of what coverage can be offered — the actuarial equivalence of the national plan, and other regulations associated with insurance going forward.

The second issue, as you’ve correctly identified, reflects serious questions about whether or not the underlying drivers of health care spending are being addressed, and whether or not there is any approximate reality to the cost estimates that are provided.  These estimates rely on substantial short-term savings from changes that reflect appropriate improvements in the delivery system but where short-term savings are highly unlikely. But even more important are the underlying cost drivers that we don’t think are addressed. You can say that’s a value difference, but it’s more than just a value difference.

ATWAL: Kathy.

KATHERINE SWARTZ: As Gail just said, we do agree on a variety of things, and I also want to emphasize that Tom, Sherry, Anne, and I wrote this not necessarily as strong Obama supporters. We did this as an academic exercise, and we did it in part because there had been very little analysis of the likely effects of the McCain plan, whereas the Obama plan had been pretty well discussed during the Democratic primary season.

That said, I think that your question about whether or not there are different values, or at least emphases, is probably right. We — at least speaking for the four of us — felt that it was important to acknowledge the distributional effects that are likely to come out of the McCain plan.

We didn’t set out to analyze the Obama plan, so the only thing I would say in response to Gail and her colleagues’ belief that the Obama plan would lead to more regulations is that I don’t think the Massachusetts situation is so heavily regulated. There’s a lot there that’s left for the insurance plans to be working with the Connector people about. So I personally don’t think that this [Obama’s plan] would necessarily lead to a lot of regulations.

But what I am concerned about with the McCain plan is the distributional effects of removing the current tax-preferential treatment for employer payments for health coverage. This would really be a radical change in how and where we all get health insurance. While our estimates are — and we were trying to be very conservative with our estimates — that initially it would be a wash in terms of the number of people who would lose employer-sponsored coverage and the number of people who would take up coverage because of the tax credits, we are concerned that within five years there would be many more uninsured people because a lot of employers would be likely to no longer sponsor health insurance. People would be thrown into the nongroup market, which the McCain plan would really make into a national market, with a lot less regulation and far less protection of consumers. People who have been quite sick in the past are going to face very high premiums. We’re very concerned about the distributional impact of this kind of a plan.

Elements Of Compromise

MARK PAULY: My attempt was to compromise, and I think my view is, Par, what you said about the emphases are right, but these are not mutually exclusive, so the best kind of plan would try to combine both features. The main cost containment feature in the McCain plan that differentiates itself from the Obama plan is the attempt to curtail and even breathtakingly eliminate, the tax subsidy. As an economist I’m programmed to believe that would have an effect on the level of health spending, which would be socially desirable.

On the other hand, I think that targeting whatever kind of subsidy vehicle is used toward the uninsured, in a way that will pick up the largest number of uninsured people and reduce that number, is probably subject to a better design in the Obama plan. In the Obama plan, you’re trying to put most of the money in terms of your subsidies in the segments of the population that have the highest proportion of uninsured, as opposed to doing a flat credit across the board, a la McCain.

From the point of view of economic design, as opposed to political philosophy, I don’t see any real clash between, on the one hand, directing subsidies much more carefully toward the people who need help in obtaining health insurance and, on the other hand, putting a limit on the tax breaks that are given to us upper-middle-income people in the current arrangement. I will say I’m glad that Kathy is trying to protect the $6,400 less in taxes that I figure I pay because of the tax break, but, you know, my view on that is take my subsidy, please.

WILENSKY: If it turned out that the Obama plan was more in the spirit of the Massachusetts plan — though I think at this stage the Obama plan looks actually substantially more regulatory than the Massachusetts plan, and in terms of the suggestive benefit package, substantially greater — that would begin to alleviate some of the concerns about the regulatory nature of what is being proposed. Also the changes in employer behavior Buchmueller et al. have suggested for mid and large employers seems very unlikely. The estimates that were made [in the Buchmueller paper] were primarily focused on removing the tax exclusion, but not putting anything in its place that is like the kind of sizable credit that has been proposed.

The notion that Mark has raised in terms of attempting to target more is something that is actually already part of what McCain has proposed in a more narrow way, which is special or additional help for low-income populations who are in the GAP [Guaranteed Access Plan] plans. So asking about a flat credit versus additional targeting is a legitimate question to ask.

But relative to where we are now, a flat credit is so much fairer that the current inequitable tax exclusion, as Mark has indicated. Now the more you earn, and the more generous your insurance, the more valuable the exclusion is to you. That means a flat credit is incredibly more progressive than what we have now under the tax exclusion, but it could be made even more progressive if that was desired.

SWARTZ: Can I just add one point, though? Our point was that the amount of money that Senator McCain has talked about for the high-risk pools is really totally inadequate to help very many people. Mark’s point that one wants to have a subsidy that is targeted at low-income people who don’t have health insurance is correct, and I don’t see that the money put forward for the guaranteed access plans and the high-risk pool is going to do that.

ATWAL: Kathy, why don’t you continue on for a second the thread of looking at the compromise components of Mark’s plan that he put in his paper. What do you think about the elements outlined by Mark?

SWARTZ: I agree with Mark that what we ultimately have to do is take the best ideas that are being put forward by Democrats, Republicans, everybody else who may not want to call themselves a Democrat or a Republican, if we’re going to make any headway at all on substantially reducing the number of people without health insurance and slowing down what is way too high a rate of increase in health care spending. So I liked what Mark had written in his paper — saying “Look, let’s take this and this, and this is why this is good, and under some circumstances some parts will be good, and they might not under other circumstances.” Mark was very good at pulling together the ideas that could be in a bipartisan health plan.

The “if only” savings that I think both the McCain plan and the Obama plan, and a lot of us, have talked about in relatively loose terms — whether you talk about it as IT or disease management or creating medical homes for people — all of those are important, but it’s doubtful that any one of those things, or even a bunch of them together, are really going to save us a lot of money. They’re things that have to be done for both efficiency and probably better quality of health care, but I agree with Mark that most of us don’t think these are going to produce huge savings.

PAULY: They’ll probably just improve quality.

SWARTZ: Right. And so ultimately we’re really going to have to be talking about something that to me personally is more of a national plan that says under these circumstances we’re not going to pay for X, Y, and Z — they are not cost-effective or however we want to talk about this. But we are not going to be able to slow down health care spending and have a system that everybody has access to with a plan like the McCain plan, where I think people who have been very sick in the past are not going to have access, and low-income people are not going to be able to afford it.

ATWAL: Gail, is that your sense as well?

WILENSKY: Well, I’ll go back and comment on Mark’s proposals first. Mark has proposed a staged way to move to a tax credit — in his case maybe a tax credit that would inversely vary with income — by having a tax exclusion that is capped and then reduced over time. That would be OK but only if the stages were put into statute. Otherwise I think politically it is very naïve to believe that you’ll ever get beyond stage one, since the current system is so destructive to any kind of a slowdown in spending.

The second point I wanted to raise is whether or not it will be possible to have public plans within the same market offerings as private plans. It may be that it’s possible, but I think it’s a question, especially if they’re heavily regulated public plans, pricing-controlled public plans. Whether or not public and private plans can exist side by side is a question that’s been raised by Laurence Baker and others, and I think it’s something that we need to explore. The concern is that the public plan will dominate the market, which I don’t think is what Mark was trying to advocate.

Politics And Implementing Health Reform

PAULY: I think the point you raise, Gail, and I suppose it’s appropriate for economists to raise this, is how we can constrain the politicians, whether it’s statutory or even quasi-constitutional. You would like to think of — at least I would like to think of — a neutral arrangement for offering a variety of plans, public and private. But there’s always the fear that the government will come to favor its own progeny over others. Exactly what a level playing field would look like, and how you could keep it level and keep it from being tilted, is an interesting question. It’s more of a question in political economy than in economics per se, but I think it’s an important question.

I am convinced both personally and philosophically that I don’t want politicians choosing my health insurance. I’d rather choose my own, and in some cases maybe pay my own costs if I make an unwise choice. But both the power to try to gain political advantage and, of course, the power of vested interests on the providers’ side to try to make sure that whatever else happens, at least their services have got really good coverage that nobody can avoid, is an ever-present danger.

WILENSKY: And that’s, of course, our experience, that’s how we have all the state mandates that we have now. McCain has talked also about not paying for “never events,” and the need to change how we reimburse. The question going forward, and unfortunately campaign talk doesn’t begin to allow this, is how do we actually begin to drive the delivery changes that we need to have? How do we improve what we reimburse, how we reimburse, and what we have in the way of new information?

There is agreement on the importance of these changes, but how you actually implement them is something that will require post-election focus. One of the concerns I have is that you spend the last six months of the election period, and in this case really starting in November 2006, battering each other up the side of the head, and then comes December and January of 2009 and you’re supposed to learn how to play nicely together.

Solving our health care problems will require changing the delivery of health care in a way that produces more efficient and effective care. There is, in principle, substantial agreement on this part — I think. It’s sometimes hard to tell.

Employer Role, Saving Money: Some Assumptions

ATWAL: OK. Mark, what do you think about the assumptions, somewhat heroic assumptions, that might underlie both candidates’ plans? Which assumptions do you think are infeasible to rely on, and which do you think are fair?

PAULY: Well, I don’t know whether it’s an assumption or a postulate, but the idea that employment-based health insurance is paid for by the boss tends to be a proposition that economists don’t accept — at least in the long run, although we argue a little bit about whether it might be true in the short run. I am very concerned about a plan like Obama’s that has as a central feature an employer mandate or a play-or-pay feature, which would be a payroll tax topped off with a head tax by any other means. So I don’t buy the assumption that we — or at least what’s in these plans — can either get the employer to pay a lot more than they are now, or are letting employers off the hook if you talk about the McCain plan.

The other assumption, that we’ve already talked about a bit, is whether there are some devices like IT and the medical home that can save money as well as improve quality. This seems like a great thing for a market to settle –- God bless any plan that wants to try these, and some should be encouraged to do so — but betting the future of a program to reduce the number of uninsured or to curtail health care spending on those features seems to me to be betting on fairly tenuous assumptions.

I do favor the general assumption, which I’d like to read into both plans and I think I do, which is we don’t want to offer just one plan for everybody, or a plan which is directly under governmental control with a fixed governmental budget. Those are assumptions, and, I guess, value judgments both, but certainly ones I agree with.

Risk, Taxes, Individual Markets, And More

ATWAL: Kathy and Gail, we asked you to talk in your papers about how the candidate’s health plan you analyzed could be improved. Do you have any reaction to the improvements suggested in each other’s paper?

WILENSKY: The first issue that’s raised is the notion of either a publicly funded reinsurance program for the nongroup market or a system of risk adjustment. I personally prefer risk adjustment. I don’t like the publicly funded reinsurance program for the nongroup market. It shifts costs, but it doesn’t lower or mitigate costs, and the payments can occur in a very unfair way. Adjusting for different expectations of risk is, I think, a much more reasonable and appropriate strategy. As was mentioned, that was part of the first President Bush’s plan, which I was involved with, so maybe that’s why I find it more appealing.

The notion of having the credits inversely related to income is not in the present plan but is consistent with the treatment in the guaranteed access plan, where there would be additional subsidies for lower-income individuals. It is at least worth considering.

I don’t agree with indexing the tax credit to health care expenditures. It is intended to be indexed to the consumer price inflation, but we know what happens if all we do is increase funding to match increased spending. You certainly can’t have it remain a constant-dollar amount, unindexed over time, but indexing it to health expenditures is too much capitulation in the fight to moderate spending.

ATWAL: Kathy, how would you respond to that?

SWARTZ: I want to repeat that we did not analyze the Obama plan. We analyzed the McCain plan. But the inefficiencies and inequities in the current tax treatment of health insurance and the inequities that all three of us would talk about — that higher-income people receive more benefit from the tax-preferential treatment of employer payments — that is something that I would expect would be worked out in any kind of compromise if Obama is elected.

The second thing I would like to say is that the criticism of the Obama plan, or the points for how to improve it, are still directed at trying to move us towards a nongroup market. It seems to me, and I don’t want to speak for all of my colleagues, but certainly our point in critiquing the McCain plan was that it is clearly radical in terms of pushing us into a world where everybody, or most people, will be getting health insurance as individuals, and we know that the individual nongroup market does not work well. It is more expensive and has higher administrative costs.

I also disagree with Gail about reinsurance: I think that if you have a government-sponsored reinsurance program, it will create efficiencies in the nongroup market. So that was part of why we put that into what could help the McCain plan.

Regarding the point in Gail and her colleagues’ paper about the Exchange within the Obama plan: She and her colleagues are the ones who say it would be heavily regulating the market. I don’t know that. I observe what goes on with the Connector here in Massachusetts, or what goes on with Health Pass New York, and I think that both of those are successful examples of, essentially, Exchanges. So I’m not ready to assume that it will be heavily regulated.

PAULY: I wouldn’t want to call tax-neutrality or moving from where we are to tax-neutrality as a push. I guess it’s a question of what you mean by these words. But my general belief is, of course, tax-neutrality — you pay the same taxes regardless of how you arrange your health insurance — is a good thing. At least my expectation is, even if I was 28 again, I’d do much better getting my health insurance through the university, which has a really good benefits department and tries to manage things carefully, as compared to going to the individual market. If I have a $2,500 credit, the group insurance is still going to be a better deal for me than the individual insurance, because I get the same credit regardless of which one I choose.

So on a priori grounds, I don’t see that changing from where we are now, where the tax break is present, to a world where the tax treatment would be neutral, would really be called a push. It’s just allowing people to make their own choices based on relative costs. For most people in group insurance that’s run pretty well, and as Kathy said, is much better than even well-run individual insurance — it’s just cheaper to buy things in bulk — why wouldn’t people stick with what works as opposed to moving to something that doesn’t?

WILENSKY: I want to emphasize that. This notion that most people are going to be in the individual market, and employers are just going to walk away, is contrary to what would make sense going forward. Employers, except for the very smallest, which is where the problem is already, are going to continue to offer insurance as a strategy to attract good employees. This is the employee’s money, after all, and the employer is trying to arrange a purchase that in the past had allowed employees to take advantage of the tax subsidy, but now that will be made neutral. This notion that you’re pushing people to the individual market, it’s very odd, at least for an economist.

SWARTZ: I’ll jump in on that. I’ve talked to a wide range of employers, particularly when I was writing my book, and definitely small employers are looking for any excuse to no longer have to worry about what health insurance is going to cost in the future. Under the McCain plan, employers would see the removal of the tax treatment of employer payments for coverage as a green light to stop paying for coverage, since it will be the employees who will pay the premiums and get the tax credit. Employers that will still sponsor and pay for employee coverage will be employers that either are in a very tight labor market or are going after highly skilled people who assume they will get health insurance from their employer.

Other workers, I think, are going to be in trouble — they are less likely to be able to obtain group insurance from their employers. The McCain plan’s tax credit provides an incentive for healthy and typically younger people to obtain nongroup policies — leaving older and sicker workers or workers with sick dependents in the employer groups. But no insurance company is going to provide insurance to a group where there isn’t some minimum — usually 70 to 75 percent of all the people in that group — signing up for that coverage. That’s just inviting adverse selection in the groups. And that’s what worries me and others.

The McCain plan to eliminate the current tax treatment of employer payments for coverage could be the push on a “tipping” situation. Right now we’ve got 61 percent of people covered by employer-sponsored coverage. Will it go down? I worry a lot that this proposed tax change could be the catalyst that greatly reduces employer-group coverage.

An Area Of Compromise

WILENSKY: Employer-sponsored insurance has declined for 20 years, and it’s going to continue to decline unless employers are required to offer the coverage. But as Mark’s indicated, what you’re doing then is, in a mobile labor economy, forcing employers to take a portion of the employees’ compensation and to provide it as health insurance, which has all kinds of other ramifications.

SWARTZ: Oh, absolutely. We all know this. That’s why I think that one of the points from this exchange is Mark’s point, that a lot of health economists and health policy analysts share a lot of very similar concerns, so I think there could be compromise if we wanted to do this.

PAULY: On the high risks, I believe there’s a way to handle that without going to complete and total control of the health care system, or without leaving them in the lurch at the other extreme. After all, this isn’t some kind of reverse Lake Wobegon where everybody is riskier than average. There are a relatively small number of people — of course, they matter year over year in terms of claims, but they do switch their identities a lot.

As I mentioned, I think there is a two-prong strategy. One is for the people who have already become high risks. You need some way of directing a more generous subsidy toward them for their health insurance, whether it’s before the fact or after the fact. The other point is you can prevent people from being in a situation where they’re being charged high premiums because they’re high risks with guaranteed renewability, and unfortunately that only exists for individual insurance and not for small group insurance in particular. It’s easy to lose your small-group coverage, and if you get sick at the same time you’re out of luck.

WILENSKY: And Mark, I thought your discussion about how you can do it before the fact or after the fact was very good. You point out that there’s no free lunch here, and there are issues with both options.

PAULY: Yes, I can see arguments both ways.

Health Reform And The Election

ATWAL: Let’s close on a broad contextual question. It seems as though in this election cycle, this discussion notwithstanding, there has been less talk in the public space about health care issues, despite the fact that voters and readers consistently rank health care fairly high in importance. Why do you think there seems to be less talk about health issues in the general election cycle, as opposed to the primary process when there was a little bit more back and forth among the Democratic candidates? And what do you think that portends for anything happening on the health care reform front when we have a new Congress and a new administration next year?

WILENSKY: The first part is easy to answer. It comes up a lot in the primaries, particularly the Democratic primaries, because it’s an issue that is especially important to many Democratic voters; they choose among candidates based on their positions on health care as well as one or two other areas. So it is always an issue in the Democratic primaries.

What has happened in the general election is that in October of 2007, health care was the number two issue after Iraq both for Republicans and Democrats. But with the concerns about the economy, and concerns about gas prices, this issue is not as salient for most voters as the economy, and that is why we are hearing much less about it.

Going into 2009, legislation on health care will depend very much on what the Congress looks like. If you assume, as I do, that you are not likely to get 60 “sure votes” in a single party, passing health care legislation will require a bipartisan effort. The legislation probably won’t be able to cost nearly as much as I believe the Obama plan is likely to cost, because I don’t think that money is going to be there, even granting increased taxes on those above $250,000 and increased capital gains taxes. Those revenues have been promised too many times, and major coverage expansions are too expensive. It may be possible to get some delivery system changes and some targeted expansions in coverage.

SWARTZ: I personally find it frustrating that health issues are not being talked about more seriously by the candidates. I think there are a lot of Independent voters out there who are very concerned about health, as well as Republicans and Democrats. My own sense, like Gail’s, is that Iraq and the economy, gas prices, and hurricanes have diverted the attention of the media.

I will say that this is a difficult set of issues to talk about in any kind of sound-bite way. I think the candidates can do much better in trying to get a sense from the public of what they want, and explain to the public what their thinking is, in small group settings, with thoughtful questions and answers. Health issues are raised in those kinds of settings, at least the ones that I’ve seen. But at the moment, I agree with Gail. It is not a good sign for 2009, if people start getting locked into particular positions. I think the public does want a better discussion of this, and I’m hoping that, at the presidential debates, the questioners will ask good questions and give the candidates time to answer.

PAULY: My take on this — and maybe it’s just wishful thinking — is that voters are much more skeptical of claims that we’re going to improve health care and it’s not going to cost you anything. Certainly that’s explicit in McCain’s plan: If you look at abolition of the tax subsidy, it’s an enormous tax increase. Of course, it’s offset by a credit, but even so. The Obama plan has less of an explicit text increase, but if you offer some skepticism about the savings from these other devices, you get up at least above $100 billion.

To say to the public, Yes, we will cover a lot more of the uninsured, but it’s going to cost you, is not the thing that politicians most want to say. I do believe and maybe hope that in the debates there will be some nondemagogic treatment of this, and — I guess this is asking for too much — the candidates will sound like economists and talk about trade-offs and options and things like that, not doing magic as a way of solving the problem. But as for the belief that the political system can come up with a health care fix that will be a surefire winning strategy because it has no downside, well, that belief is diminishing day by day, along with our beliefs in a lot of other optimistic things.

WILENSKY: I think the public is very concerned about the deficit. Just to add to Mark’s point about the skepticism, it’s hard to talk about something that will “fix the problem” when everybody knows it’s going to cost us more and we already have this ballooning deficit, and we’re worrying about what Medicare will do to that, not to mention the war.

PAULY: Yes, unfortunately there was a window open for a while to do this. It was like four or eight years ago, and it’s pretty well closed at the moment.

ATWAL: Thank you all for a very interesting discussion, and thanks again for joining us.