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The Obama-Romney-McCain Health Plan



November 21st, 2008

What are the prospects for health reform? That depends on how flexible the new president turns out to be. Although Barack Obama was highly critical of John McCain’s health plan during the election, he actually needs key elements of the McCain plan. He also needs key elements of Mitt Romney’s health reform enacted in Massachusetts, about which he has already had complimentary things to say.

Three Not Necessarily Inconsistent Ideas. Mitt Romney’s Massachusetts health reform is the most revolutionary reform implemented anywhere at the state level. John McCain’s national health plan is far and away the most fundamental change proposed by any serious presidential candidate. On the surface, the two plans seem very different from each other and from Barack Obama’s plan. In fact, elements of the Romney and McCain plans would make Obama’s plan work much better. And a combined Obama/McCain/Romney approach could be made better still with a few more changes.

The McCain Plan. There are two principal elements: (1) McCain would replace the current arbitrary, wasteful, and unfair system of federal tax subsidies for health insurance with a system under which all families get the same tax relief for private insurance, no matter how it is obtained. (2) He would also allow people to buy insurance across state lines, effectively allowing a national market to develop.

The Romney Plan. There are five main elements: (1) A required benefit package, defining what insurance everyone must have. (2) Subsidies for low-income families. (3) A play-or-pay choice, imposing a fine on anyone who continues to be uninsured. (4) A system parallel to employer-based coverage, in which individuals paying (essentially) group health insurance rates can choose among competing health plans. (5) The use of disproportionate-share funds (previously used to subsidize care for the uninsured) to subsidize private insurance for low- and moderate-income families.

The Obama Plan. There are four main elements: (1) Insurance required for children, but not adults. (2) Subsidies for low-income families. (3) A play-or-pay mandate for employers (and by implication their employees), but not for people on their own. (4) A system parallel to employer-based coverage in which individuals could buy insurance on their own.

What McCain Does For Obama: A Consistent Subsidy. The greatest weakness in Obama’s approach is two completely unrelated subsidy systems: the current tax-exclusion subsidy for people who continue to get coverage through an employer, and an income-based subsidy for people who buy coverage in the parallel market. Because the two subsidy systems are not integrated, they can cause unstable movement back and forth depending on their relative generosity. What McCain would offer is a simple, seamless subsidy available to all people and all forms of insurance.

The McCain plan would offer everyone a lump-sum, refundable tax credit of $2,500 (individual) or $5,000 (family). Middle-income families who turned down the credit and refused to insure would pay $5,000 more in taxes than they otherwise would. On the other hand, everyone could have at least $5,000 of private insurance at no cost to themselves. This play-or-pay choice (the “tax price” of uninsurance versus the “tax reward” for insuring) is much stronger than what Romney has created in Massachusetts.

What Romney Does For Obama: A Consistent Mandate. Another weakness in Obama’s approach is the idea of imposing a play-or-pay mandate on employees, but not on people who are not employees. As with the unintegrated subsidy, this distorts labor-market choices. It also penalizes and discourages employment. Romney’s approach is better: treat everyone the same, whether employee, independent contractor, or out of the labor market altogether. If you’re uninsured in Massachusetts, you pay a fine. Period.

What McCain Does For Obama: Lower Regulatory Costs. By some estimates, as many as one out of every four uninsured people have been priced out of the market for health insurance by the cost-increasing effects of government regulation. By contrast, McCain’s national market would allow people to purchase insurance licensed in other states that have fewer special-interest mandates. A study by University of Minnesota economists estimates that this reform alone would cut the number of uninsured people by one-fourth.

What McCain Does For Obama: Cost-Control Incentives. As it now stands, the Obama plan would continue the current practice of extending tax subsidies to employer-provided health insurance no matter how lavish or wasteful. These subsidies can amount to as much as 50 cents on the dollar. By contrast, McCain’s plan would subsidize the core insurance we want everyone to have, forcing people to buy additional insurance with unsubsidized dollars. Additionally, the Obama approach proposes to limit the cost to people in the parallel market probably to a fraction (say, 5% to 10%) of their income. This means that people would purchase core insurance with their own money and (potentially wasteful) marginal insurance with taxpayer money. The McCain approach would be better: let taxpayers fund the core insurance and let people pay with their own money for the questionable add-ons.

What McCain And Romney Do For Obama: Funding Sources. The most attractive feature of the Romney plan was that it (initially) cut the number of uninsured people in half without new spending. Reasonable estimates suggest that McCain’s (originally revenue-neutral) plan would also cut the number of uninsured people in half. Romney relied on redistributing “free care” (DISPRO) funds. McCain would redistribute existing tax subsidies. By contrast, Obama would leave the current tax and spending subsidies largely in place, relying instead on the repeal of “tax cuts for the rich.” Yet those tax breaks fall short of the resources he will need by at least a factor of three, and they are scheduled for automatic expiration anyway. Plus, even that revenue source is wilting. Obama economic advisers have assured Wall Street that the new dividends and capital gains tax rates will go no higher than 20%.

Making The Obama/Romney/McCain Approach Better. All three plans could be merged, as I have suggested here. However, a merged plan could be further improved in four ways:

1. Avoid a Mandated Benefit Package. There is no reason for government to tell people what insurance product to buy. Once it begins to do so, special interests will seize the opportunity to bloat the package. Indeed, for most Massachusetts residents, not a single mandated benefit was repealed at the time the Romney reform was adopted. Plus, health care costs are rising at twice the rate of growth of income. So even if people can initially afford the mandated package in year one, they are likely to fall short in year two, even more so in year three, etc.

2. Risk-Rate Insurance Premiums. The premium insurers receive should roughly equal the expected health care costs of the enrollees. Otherwise, health plans will try to attract the healthy and avoid the sick; and once people are enrolled, the plans will be tempted to overprovide to the healthy and underprovide to the sick. The health plan for members of Congress and federal employees violates this principle. The Medicare Advantage plan for seniors wisely employs it.

3. Commit to Safety-Net Institutions. Hospitals fear that they will be required to take care of the uninsured without the resources to do so. The answer: The McCain $2,500/$5,000 amounts should be pledged to health care, not to just private insurance. If people choose not to be insured, the amounts should be made available to safety-net institutions in their vicinity.

4. Adopt Roth HSAs. What is the role of health savings accounts (HSAs) in this approach? Since the McCain tax credit would cause people to buy additional insurance with after-tax dollars, deposits to HSAs should also be made after-tax. Hence, what is needed is a Roth account with after-tax deposits and tax-free withdrawals.

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1 Trackback for “The Obama-Romney-McCain Health Plan”

  1. A Health Plan for Barack Obama | John Goodman's Health Policy Blog
    January 2nd, 2009 at 3:54 pm

10 Responses to “The Obama-Romney-McCain Health Plan”

  1. acavale Says:

    Christa: Mr. Goodman’s WSJ article has many fantastic ideas. I doubt that any of them will see light of the day. What I meant in my earlier comment was that there has been no effort by anyone in government or NGO to involve practicing physicians in designing a new method to deliver and pay for health care. If we leave it up to the govt or insurance companies, we will get more of the same.

    Catherine: The comment is good on face value. The devil is obviously in the details. Again, I find it “interesting” that the blog on Nationaljournal that you mention, allows participation only by invitation. What this tells me is that its the same crowd of ivory tower insiders that are involved with the discussion. They don’t truly want to hear about different ideas – just want to continue the usual bickering amongst a familiar few. Again, hardly any physicians participating (or invited?)

    That’s why I applaud Health Affairs that allows free flow of ideas, irrespective of where they are coming from….

  2. Catherine Daniell Says:

    Senator Max Baucus, tells us more about his ideas at the National Journal’s blog today. While not going as far as John Goodman suggested, he seems to partially endorse the idea of
    redistributing tax subsidies for employer-provided health insurance from higher income to lower income workers.

    Link here: http://healthcare.nationaljournal.com/contributors/Baucus.php

  3. Christa Bieker Says:

    Acavale made the comment “Finally, it is very distressing to note that none of the proposals makes any effort to involve physicians in any sort of constructive manner.”

    John Goodman describes on his blog why a restructured subsidy would help liberate the doctors to repackage and reprice medical services in innovative and patient-pleasing ways.

    http://www.john-goodman-blog.com/mccain-vs-the-critics-part-i/#more-659

  4. DONALD STROMBECK Says:

    Health care costs are close to 20 percent of our gross national product and are increasing. The only way to slow this down and possibly reverse the increase is to make people accountable for their health. With 8 of the 9 leading causes of disease and death caused by human behaviors why does almost everyone ignore the need to introduce incentives for preventing disease rather than providing more band-aids for treatment. This will require measures that many will hate because it will cost them. More can be seen on this as http://www.healthcareforall.us

  5. acavale Says:

    John Goodman’s ideas are quite logical and possibly implementable. A few points to ponder, however. It is naive to expect decreasing utilisation of health care services as the overall population ages. It is more naive to ignore the real probability that incidents of frivolous law suits will increase under the umbrella of a Democratic administration and Congress. Combine these two processes, and it is a recipe for marked increases in “cover-your-back” practices among physicians, hospitals, etc. Whether one likes it or not, the truth is that is far more expensive to fight even a winning law suit than overutilising medical services. Therefore, significantly stronger legal protections will be necessary (at federal and state levels) for healthcare providers who are mandated by government to minimise utilisation of services.

    Unfortunately, Jonathan Ross’ idea sounds very familiar to the current (and failed) SGR formula that Medicare uses and is likely to meet a similar fate.

    Another important decision to make will be whether the business of providing medical care will be a “nationalised” one or a “free market” process. The current system being “one-size-fits-all, rate-fixed, volume-based, unincentivized” does not serve any purpose other than fill up insurance company coffers at the expense of everyone else (patients, physicians, employers). The ability of a healthcare consumer to purchase medical services based on need, and pay for it based on the quality of care provided, must be the fundamental idea. “Universal coverage” as a policy must be eliminated unless the administration wishes Mediocrity for everyone. It would be helpful to read the most recent article by Cunningham and O’Malley in Health Affairs on why the Medicaid system is failing in some states and not in others.

    Finally, it is very distressing to note that none of the proposals makes any effort to involve physicians in any sort of constructive manner. Romney’s MA program has run into the same problems – not enough participating physicians to actually provide care for all the “newly insured”. Lest we forget, there will be no health care system without physician participation.

  6. SauerC Says:

    Taxpayers don’t deserve more of the same old thing, as much of the Obama Health plan would employ, like maintaining the current tax system that rewards employees with extravagant high cost plans more of a tax break than an employee with basic plan. As Goodman points out, incentives need to be re-aligned in health care policy to lead to good and productive choices, not avoidance and extravagence.

    That said, health care programs need to be reformed. I can only hope that they listen to people like John Goodman when they finally sit down at the table and attempt reform.

    @Robert,
    “This system works well, and there is no reason to scrap it. No one has more stake in an individual’s health than his employer, and this is a vital link.”

    I understand that an employer based system feels comfortable and safe, but employer based health care shouldn’t feel comfortable and doesn’t provide a safe medical home. Most employees don’t stay with one employer for very long (I myself have had 4 employers in 5 years…..with good recomendations), and I only maintained the same insurance plan once. This means that the insurance company had no incentive to keep me healthy until I was fifty, they only needed to make sure I was healthy for a year.

    A beneficial incentive of privately held insurance is that an insurance company benefits from life long health and would act accordingly with preventive care, testing, etc.

  7. Johnathon Ross Says:

    Is anybody else having problems conceiving of what kind of a sickness care non-system is being proposed here? 300 million different health insurance policies seems like a jobs program for insurance bureaucrats and brokers to me with no possibility of coordinated improvement of care.
    How about this for straight forward and simple:
    To control costs, we set a generous national health care budget and stick to it.
    Public boards will request and allocate funds for capital expenditures in local health systems service areas. These public funds could be used as challenge grants to encourage local charitable giving to hospitals and other providers for their capital projects.
    The same boards will review hospital and other care facility operating budgets. Once operating budgets are approved, the facilities receive a monthly operating stipend. Failure to stay on budget means mandatory new management.
    Physicians and other direct care providers will be paid on a negotiated fee schedule within a budget for their services. If they begin to exceed the budget before the end of the year, fees get clawed back to stay within budget.
    Utilization rates of providers are monitored and publicly available so that those that over utilize will be identifiable to their peers and the public.
    We raise the revenue needed for this system with a combination of graduated income taxes, sales taxes and sin taxes and place it in a national health trust fund.
    We hire the insurers to just process bills as they do for large companies that self insure. Since everyone will be covered there is no underwriting or risk rating insurance function. We will be self insuring as a country.
    We reward all providers together when they reduce the rates of disease, disability and costs. We pay for system performance not individual performance.
    We all will reap the benefits or pay the costs of a high or low performing health care system.

    This proposal is about 250 words and simple enough for anyone to understand. It is a national health insurance program like that proposed in HR 676. This is an improved and expanded Medicare for all. It will save hundreds of billions of dollars and save tens of thousands of lives. We must develop the political will to overcome the greed that grips the current system and stands in our way.

  8. Devon Herrick Says:

    Robert Burney states…”No one has more stake in an individual’s health than his employer, and this is a vital link.” Yet, the Obama plan may well weaken that link. Barack Obama has repeatedly said if you like your employer’s health plan you will be able to keep what you have. But, this is unlikely to be the case. Analysis by Roger Feldman (http://www.hsinetwork.com/Obama_HSI-Assess_08-21-2008.pdf) of the University of Minnesota found that a likely outcome of Obama’s Health Proposal is that 70 million workers would leave their group HMO or traditional PPO. Some would enter a different PPO while 57 million would join a “public plan”. Some of those projected to leave their employer plans will be forced to switch when their employers drop coverage. Stuart Butler of the Heritage Foundation made a similar argument NPR (http://www.pbs.org/newshour/bb/politics/july-dec08/healthagenda_11-20.html).

  9. Brian R Williams Says:

    There is virtual unanimity that all federal health care programs are broken, in need of some sort of reform. Medicare is unsustainable, unable to collect enough revenue to meet its costs in the long run. Medicaid is perpetually underfunded, with states increasingly demanding a bigger federal payment to make ends meet. SCHIP inefficiently distributes benefits, sometimes to adults well above the poverty level, while failing to enroll qualified poor children. The Indian Health Service and VA systems can’t meet demand. Locally, The Washington Post recently ran a series of stories about filthy hospital rooms and leaky surgical rooms in federal military hospitals.

    What makes us think that the federal government is competent to deliver health care? Expanding federal health care programs – or, worse yet, creating a new federal health care program, will only make the current problems worse.

    The best thing to do is what John Goodman suggests. President Obama should work with Congress to restructure the tax code to give consumers an incentive to be involved in their own health care spending decisions.

  10. RobertBurney Says:

    McCain lost. Get over it. One of the (many) reasons he lost was that people didn’t like his proposal for healthcare. Most people don’t appreciate any tax advantage to their health insurance. I have my 2 week pay slip in front of me: there is a deduction of $90 for Medicare and $145 for health insurance. No mention of any tax credit. One of the problems with McCain’s proposal was that it would eliminate employer sponsored health insurance. This system works well, and there is no reason to scrap it. No one has more stake in an individual’s health than his employer, and this is a vital link.
    The biggest problem in US healthcare is that it costs too much. Correcting this will require a direct attack on costs through price competition for individual healthcare services.

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