Two statistical “events” catalyze a lot of health reform debate every year: the Census Bureau’s annual estimate of those without health insurance, and the Centers for Medicare and Medicaid Services (CMS) actuary’s estimate of the percentage of gross domestic product (GDP) devoted to health care. We can argue about whether these are the two most important items on our societal health dashboard some other time. Nearly all the editorials on our health care “crisis” seem to have been written in advance, with slots for the new data to be added. When statistics fail to confirm further deterioration, as they did this year, it creates a curious uncomfortable pause in the narrative of decay.

Nothing here is meant to minimize the extent of this problem. It isn’t acceptable for a wealthy country like ours to have 45.6 million uninsured people. The fact that the number of uninsured people dropped a half a percentage point to “only” 15.3% of the U.S. population should not lessen anyone’s sense of urgency about reducing the yawning gap in coverage. Yet it is interesting what the detailed data show us about the changing face of the uninsured.

Changes In The Types Of People Who Are Uninsured

For one thing, the population of uninsured Americans seems to be getting both older and richer. The number of uninsured people under age 45 decreased in each age class from 2006 to 2007- by about 1.5 million people. However, the number of uninsured boomers actually rose modestly, and the number of uninsured seniors went up by 27%, to almost 2% of the over-65 population. Self-congratulation on our achieving universal coverage of the “elderly” needs to be tempered in light of this growth.

Another interesting change from 2006 to 2007 is that the number of uninsured noncitizens declined by almost 500,000, as did the number of uninsured Hispanics. It has not been clear how accurately the “noncitizen” part of the census estimates tracks the illegal immigrant population, but the collapse of the Sun Belt’s construction industry and slowdowns in tourism and the service industry could herald an even sharper decline in the number of “noncitizens without coverage” next year, washing out a lot of the growth we could otherwise expect from citizens who lost their health insurance coverage with their jobs. Illegal immigration remains intertwined with this problem.

The Massachusetts Contribution

Several commentators have observed that Massachusetts made a nonincremental contribution to the modest national improvement in coverage in 2007. It could be that as much as 25% of the 2006-2007 national improvement in coverage came from one small state that took a big political and fiscal risk. The commonwealth estimates that it has added 439,000 formerly uninsured people to insurance rolls, largely through heavily or completely state-subsidized coverage. What this proves is that policy intervention can, in fact, move these numbers. Bigger states could have had a bigger impact. Unfortunately, the skyrocketing cost of Massachusetts’ plan and the fiscal crises in most large state budgets make further state-level coverage expansions unlikely until the economy recovers meaningfully.

Affluence Of The Uninsured

Perhaps the most troubling change last year was the growing affluence of the uninsured population. The number of uninsured people with household incomes under $50,000 fell by almost 1.2 million, while those earning more than $50,000 essentially remained flat. Those with household incomes over $50,000 — the top half of households in the country — account for 38.5% of the uninsured, continuing a pronounced upward shift in the income characteristics of the uninsured from the previous year.

The upper half of the U.S. income distribution accounted for 93% of the increase in the number of uninsured people from 2005 to 2006. Ideological posturing about free riders, including by Democrats, hasn’t helped solve the problem; the growing number of higher-income uninsured Americans is obviously related to the increasing unaffordability of private coverage. These numbers are not going to improve meaningfully until real household income resumes growing and until there are convincing solutions to making private health coverage more affordable.

As both Senator McCain and Senator Obama have argued, you cannot realistically mandate that people simply buy coverage in the present system. Lowering the cost of health insurance would not only increase the voluntary uptake of coverage, but would also reduce the amount of public subsidies required to extend coverage. It would also affect how far above the median income one needs to go in offering public subsidies. Once public subsidies are in place, they cannot help but rise, and withdrawing them from politically potent middle-class constituents will be far stickier and more troublesome than cutting Medicaid. They will be largely irreversible.

Candidates’ Proposed Solutions

Neither presidential candidate has yet proposed convincing solutions to the affordability question. Both candidates’ proposals to accelerate adoption of health care information technology (IT) will save actual dollars only if self-referral incentives for diagnostic testing or the profitability of fee-for-service payment for diagnosis, or both, are eliminated. Excessive “duplicative” testing is driven by profit-making opportunities for providers, not the inability to capture the results electronically. Though there is justification for public subsidies based on reduction of medical errors, enterprise health care information systems are still far too expensive both to install and to maintain to generate meaningful reductions in provider operating costs.

Disease management, while promising, remains to be shown to reduce per capita costs even for the sickest Medicare patients, let alone the younger and healthier privately insured population. While there is unquestionably a lot of waste and excessive cost from poorly coordinated care, it is far from clear how the federal government’s actions could actually reduce these costs for employers or individuals.

It takes no courage to both candidates to pledge a fresh attack on “waste, fraud, and abuse”; there’s still plenty of all three. Applying this to private insurance, however, will require statutory innovation. Both candidates have proposed changes in how the sickest Americans are covered. Senator Obama’s reheated John Kerry’s 2004 proposal to federalize so-called shock claims and simply shifts the cost from employers to the federal government. Senator McCain’s proposals to federally underwrite shaky state-level high-risk pools, which cover only a little more than 200,000 people nationwide, could prove very expensive if they are to make coverage for the currently uninsurable that much more affordable

The most disruptive cost-reduction proposal in either candidate’s armada is Senator McCain’s controversial proposal to federally preempt state insurance regulation, including service-specific coverage mandates, to enable a national, Internet-based coverage market. This is also not a new idea; it has been in the congressional hopper for going on five years (Rep. John Shadegg [R-AZ] was the original proponent).

These proposals face stiff opposition from state insurance commissioners protecting their turf, and from lobbies that have used mandates to assure providers or product companies they represent a guaranteed income by forcing health insurers to cover services that people might not otherwise choose themselves. Large employers evade these mandates through self-funding, leaving small employers and individuals stuck with the tab. Massachusetts pointedly failed to dent its significant coverage mandates — leaving in vitro fertilization, chiropractic and podiatric care, and other services imbedded in the cost base.

By fostering Internet-based purchasing of health insurance, this proposal also threatens an important, largely overlooked, but very powerful middleman: the nearly half-million insurance brokers who now control access to small-group and individual health insurance. These brokers are highly vulnerable to disintermediation in any case; health plans have quietly begun offering direct access to enrollment but have been reluctant to publicize that access for fear of driving the brokers away from their companies.

The reduction in transaction costs and enabling people to buy coverage that better fits their actual needs could meaningfully reduce the cost of health insurance, though it is not clear how much “lift” this mechanism would create in the voluntary uptake of coverage. It requires a considerable leap of faith to believe that even with a huge increase in individual-market enrollment, costs will fall enough to match current group rates.

The Economic Context

It is hard to think of a less auspicious time to be launching a new middle-class entitlement. The federal budget deficit for FY 2009 could approach $500 billion, not counting the cost of the war in Iraq or the projected $700 billion bailout of our mortgage financing system now under debate. The time to approach coverage expansion is at the top of the economic cycle, when both government budgets and employers are throwing off cash.

To put it mildly, that is not where we are now. It is ironic that the Republicans in this election cycle seem to be favoring preemption of state regulation as a major component of their strategy, flying in the face of decades of advocating devolution of authority from the federal government. It is less ironic that the Democrats propose a huge expansion of federal authority and spending; it is a familiar theme and there’s a lot of pent-up demand for it from key Democratic constituencies.

Neither candidates’ proposals credibly solve the main problem of the voting public, 93% of whom already have health insurance: how to afford health coverage for their families. Both candidates have embroidered gracefully all the way around the most difficult issue: how and how much to pay the hospitals, doctors, pharmaceutical companies, and medical suppliers who generate most health costs.

The key leverage point in containing cost is Medicare payment. Where Medicare chooses to reduce spending, private insurers will quickly follow, as evidenced by their quick reactions on “never events” and imaging payments. The silence about Medicare reform in this election cycle has been deafening. Until we hear more convincing solutions to the cost problem than a tattered Uncle Sam writing middle-class voters a large subsidy check and beseeching the Chinese to buy more of our bonds, it is hard to imagine voters storming the polls for either candidate based on their health reform proposals.

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