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.