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Obama’s Health Policy Options: 3 Scenarios

November 5th, 2008

Barack Obama won the presidency campaigning on a promise substantially to expand health coverage. His ability to achieve this promise rested on the capacity to raise and spend about $1.6 trillion over ten years to subsidize private coverage for individuals and small businesses that could not otherwise afford to buy it themselves, as well as to mandate that all but the smallest businesses give coverage to their workers.

There are two major constraints to achieving his promise: the federal fiscal outlook and the ability of business to afford an employer health mandate. In both cases, there are significant complicating factors that will force Obama to set priorities and decide how urgent and immediately achievable his health reform promises are. This essay offers three possible scenarios for implementing Obama’s plan given those complications.

The federal fiscal outlook is the grimmest since the depth of the 1981-82 recession. The federal government faces as much as a $1 trillion deficit, or about 7% of gross domestic product (GDP), including the cost of the financial industry refinancing passed by Congress in October. This deficit could grow yet more, because it does not factor in the cost of any new fiscal stimulus program Congress may devise, nor the substantial new federal spending initiatives Obama promised during the campaign — clean energy subsidies, housing and energy support for lower-income Americans, tax relief to “95% of Americans,” increased foreign aid, etc. A lengthy and deep recession, which is a possibility, would further enlarge the federal deficit. $1 trillion looks more like an opening bid than a final figure.

A more significant barrier may be the impact of an employer mandate on restoring job growth in the private economy. Obama ran on an aggressive platform of mandated cost increases to private business: a $9.50 minimum wage indexed to inflation, “play or pay” health insurance coverage, expanded paid sick leave and parental leave, comparable-worth pay standards for women, a 10% increase in the tax rate paid by S-corporations, and expanded unionization.

The combined effect of implementing all these promises would be substantially to increase the cost of employment for American business, trading off richer benefits for current workers (for example, higher wages and benefits) against cash flow for expanding employment — the same trade-off that has stifled job growth in the EU countries like France, Sweden, and Germany. It is hard to image a less likely formula for climbing out of a recession. Thus, both fiscal constraints and economic constraints impose limits on the ability of the new president to fulfill his campaign promises.

President Obama has (at least) three broad policy choices on the timing/financing of health reform, each of which will be explored below. They are:

1) Finish the New Deal
2) Braveheart
3) Wait and Lay the Groundwork

Let’s look at each of these and see what they involve.

Finish the New Deal. Sen. Ted Kennedy will probably not survive long into the new Congressional term. His staff are drafting health reform legislation on the premise that Congress will wish to memorialize Kennedy’s passing by implementing what is, in effect, the dying wish of the godfather of congressional health policy. Kennedy actually voted to enact Medicare in 1965, as part of a wave of legislation in the wake of the assassination of his brother, which legislation came to be called the Great Society.

Rather than the Kennedy perennial “Medicare-for-all” health plan, the Kennedy proposal could look a lot like Massachusetts’ play-or-pay initiative with both individual and corporate mandates. Supporters will probably argue for financing the extensive federal subsidies required with steeper tax increases on the “wealthy” and corporations.

Congressional Democrats could press for implementation of the full range of Obama’s domestic spending initiatives, particularly infrastructure, clean energy, and health reform, on “emergency grounds.” Someone will invent a New Deal/Great Society label for a host of progressive domestic reforms (let’s have a contest!) and argue that concerns about the deficit simply do not matter, given the gravity of our economic problems. Newly minted Nobel laureate Paul Krugman recently made such an argument.

In the last resort, if tax increases don’t cover the cost of all these initiatives, advocates of the new program will argue for financing the resulting $2 trillion deficit by issuing a ton of new debt and printing a ton of new dollars, risking igniting a run on the dollar and a ruinous new round of inflation by doing so. It’s a big gamble, but as numerous people will undoubtedly argue, desperate times require desperate measures. It’s time to finish what Roosevelt and Johnson began, and a lot of Democrats will argue that the time is now.

Braveheart. This option is premised on the idea that putting new dollars into a health system that already consumes double per capita what any other country spends is questionable in the midst of an economic emergency. If we cannot afford a 10% of GDP type federal deficit, perhaps an wealthy and resource-rich health sector could fund most of the cost. It is, after all, a $2.5 trillion industry, and you only need to find about $150 billion a year to fund Obama’s program.

Obama took the largest single funding source off the table during the campaign: the estimated $240 billion tax preference for employer-paid health insurance. Union opposition to taxing any portion of their rich benefit packages will probably doom this approach, although Obama could sneak back into this lucrative funding source by capping the employee deduction for the “wealthy” (those making more than a Detroit auto worker).

However, there are other possible “inside the envelope” funding sources: ending the tax exemption for nonprofit hospitals and health plans, eliminating the extensive Medicare and Medicaid subsidies for medical education and disproportionate share (this latter source was the funding engine for the Massachusetts health reform), aggressively reducing Medicare prescription drug spending, levying a surcharge on health insurance premiums financed by capping their medical loss ratios, and whacking the big-ticket items in the current hospital and physician Medicare payment schedules.

This approach would be incredibly costly politically, and would require wading into a dense of mass of alligators, snapping turtles, and industry lobbyists and aggressively reallocating dollars from the wealthy and privileged portions of the health care industry to fund coverage for the uncovered. It would look a lot like the famous climactic battle scene from Braveheart, but, again, someone will argue that desperate times require desperate measures. If Obama does not wish to put off implementing a coverage expansion, this is a way to do it that does not require him to postpone the other items on his ambitious domestic agenda.

Wait/Lay the Groundwork. The third broad approach is to postpone coverage expansion until the economy and fiscal outlook improves, but set the stage by fixing the immediate constraints on expanding coverage. When Massachusetts implemented its health reforms, newly insured citizens discovered an acute shortage of primary care physicians and lengthy waits for appointments. Other states with larger numbers of uninsured residents would have much more serious capacity and access problems than Massachusetts did.

Obama could move aggressively and quickly to expand primary care physician payment under Medicare (through a version of the Medical Home idea), double federal funding for community health centers, and create a medical student loan forgiveness program for students entering geriatrics and primary care specialties. He could also expand clinical information technology subsidies to safety-net providers and implement new administrative cost reductions by requiring all Medicare-contracting private health plans to use a single, end-to-end electronic payment process for all of their business, federal and nonfederal. He could launch a new federal Comparative Effectiveness Institute along the lines of the British National Institute for Health and Clinical Excellence (NICE). And he could do all of the above for less than $10 billion a year.

And finally, he could create a bipartisan Commission on Health Reform to explore what other structural and payment system reforms would be require to make efficient use of new federal funding when fiscal conditions permit. He could use the reauthorization of the State Children’s Health Insurance Program (SCHIP), which expires conveniently in March 2009, to take the aforementioned steps, reserving until the economy resumes growing to actually implement his campaign promises, by which time his commission provides him the political cover to do so.

Both the new administration and Congress are going to shortly discover a major bandwidth constraint in addressing the numerous domestic policy challenges they inherit from the previous regime. Although there is tremendous pent-up demand for solving numerous domestic problems, the new president will be severely limited in his options if he cannot move quickly to restore economic growth. What priority health reform has in this complex mix of policy challenges will be a major question for all stakeholders in the health system.

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3 Trackbacks for “Obama’s Health Policy Options: 3 Scenarios”

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4 Responses to “Obama’s Health Policy Options: 3 Scenarios”

  1. nmcharney Says:

    It is interesting to me that all the responses suggest that we can not afford to provide health care for all and imply the trying to do so would bankrupt the system.

    I ask, How are we paying for what we have now? We have an inefficient Medicaid system where care is episodic and not comprehensive. We have emergency rooms being utilized as primary care centers that offer no follow through and the resources in many cases are wasted.

    In addition, we have general care that is either overused or underused. Add to that the misuse of care and the administrative duplication that occurs and we have a ton of money that is spent and wasted.

    A study done by the Midwest Business Group on Health calculated tlhat upwards of half of the health care dollars spent were wasted. Add to that the cost to the economy by loss of productivity and you have an enormous amount of money that could easily fund a health care for all program.

    I would like to hear from anyone why there isn’t enough money to do it right whaile we wast tons of money doing it wrong and we want to continue that spending?

    One of the speakers at the health policy forum, Ron Goetzel would be able to confirm my assertions and probably be able to give you the exact sums that would be available to fund the new system.

    Don’t tell me there is not enough money to do it right. The data as I have seen it sluggests otherwise.

    Norman M. Charney
    Health Care for the 21st Century

  2. Christopher Hughes Says:

    csvennix said: “The Finishing the New Deal Scenario would be fiscally irresponsible, and I hope it won’t happen…the end result for universal coverage would be good, but paying for it is a problem.”

    Irresponsible how? Penny wise and pound foolish? Too long term oriented? I don’t understand that comment and the comment about “paying for it is a problem.”

    It seems some people think that health care dollars not spent by the government don’t count. So the 15K a year I pay for insurance is “off the books” as far as national health care expenditure is concerned. That’s why we look at spending per capita and as a percent of GDP. We do horribly in both these measures, and yet some worry that decreasing the amount we spend in the long term is “fiscally irresponsible” and we won’t be able to pay for it.

    What are you saying?

  3. csvennix Says:

    Personally, I would support the Braveheart scenario, but I have my doubts that Obama would risk his popularity like this. We’re not sure yet of all Obama is about, but one thing that seems important to him is his popularity. The Finishing the New Deal Scenario would be fiscally irresponsible, and I hope it won’t happen…the end result for universal coverage would be good, but paying for it is a problem. The Braveheart scenario has its problems, but at least it would make a heroic attempt to pay for implementation of the program. The Wait/Lay Groundwork scenario is safest for Obama, and I suspect what he is most likely to do, as both other options will risk popularity. He could try to Finish the New Deal since it would be historically significant, but I would challenge him to find a Braveheart way to pay for it.
    Craig Vennix

  4. bett martinez Says:

    As a veteran of many sides of the issue, health policy wonk, professor/educator and insurance broker, I would like to represent just one piece of a very complex puzzle –

    it could be called Utilization, or Cost Control, or a host of other names. Let’s start with these two.

    In the early seventies as a government planner, it seemed the answer was going to be a sort of HMO arrangement, and I was in on New Haven Health Care, modeled after Kaiser at that time.

    HMOs were seen by large segments of the public as something people were being forced into, to save employers $ and reduce CHOICE. Imagine America being told you have to see a gatekeeper in order to get referred, and then you have to WAIT. This did not play well with Red or Blue.

    Some learned to accept the trade-off as a way to get richer benefits as PPOs moved from an indemnity model to skimpier fare.

    But HMO rates kept going up to where Kaiser is now offering PPO and HSA type plans!

    And now we have a new SOLUTION: Medical Homes. At first I thought this was some sort of Long TErm Care. Reading more carefully it sounds to me like an HMO with Caring. Or something.

    And it’s going to bring costs down HOW???

    Let me move to utilization. As a broker who’s faced with helping small businesses, largely under 20 “lives” find affordable coverage, and avoid the pitfalls of great-sounding deals that come out Year 1 and by Year 2 offer 17-35% rate increases (talk about government oversight – are the DOI commissioners asleep when they look at the first submission, or what? Don’t they realize in the first place?! What happens here to allow approval of a plan in the first place, and then a rubber stamp for rate increases in Year 2?

    And then there’s Utilization by the consumer. What the consumer/employee with decent health coverage doesn’t understand is that while they are going merrily along utilizing whatever they are offered (oh, I hurt my shoulder and my insurance will cover 15 sessions of physical therapy with no copay? Well, let’s have it then – and an MRI to be sure sure nothing’s torn, and chiropractic – is it covered? – why not?). Then the employee is downsized, or decides they’ve had it with cubicle life and wants to do contracting or gardening or something.

    They call someone like me – if they are lucky and get referred by someone who knows the ropes – and they are astounded to find they’ll have to finish up COBRA and get on Guarantee Issue coverage for $800+ per mo till the shoulder issue goes away when they’ve had a year or more treatment free.

    Both you and the client may be thinking this is mean-spirited and maybe Hillary will make it go away. But fellas and gals, get out your calculators. It’s not just the humongous overhead. Even if you take away the millions earned by some CEOs, you are left with the issue that Mary’s PT, Chiro, MRIs, GP and specialists visits cost a lot more than her company paid out in premium and when you multiply that by many employees…

    So I’m bringing up a couple of issues relating to cost control, utilization, and the Uninsured Problem. Thank G-d my client has her car almost paid for, so she will have to spend that $ on health coverage now in order to afford the Guarantee Issue plan.

    If employees knew about these issues, maybe utilization would go down.

    But I also feel there’s another “remedy” being proposed by a few far-thinking docs who are not busily involved with buying and paying for more and more technology by referring all their patients (insurance insider view. not really accurate).

    It’s called Slow Medicine. That’s the name at the moment, but it’s a mindset that is just now developing and evolving.

    bett l. martinez, m.ed., broker/consultant/advocate; 510-526-0312

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