Cost containment is the missing link in Obama’s health plan

Barack Obama’s health care plan follows the Democratic template—an emphasis on dramatically and quickly increasing the number of people who have health insurance by spending significant money upfront.


The Obama campaign estimates his health care reform plan will cost between $50 and $65 billion a year when fully phased in. He assumes that it will be paid from savings in the system and from discontinuing the Bush tax cuts for those making more than $250,000 per year.

That the Obama health care reform plan would cost between $50 and $65 billion a year is highly doubtful. Obama claimed his plan was nearly identical to Hillary Clinton’s and her plan was projected by her to cost more than $100 billion a year.

By contrast, the McCain Republican strategy for health care reform
would first emphasize market reforms aimed at making the system
affordable so more Americans can be part of the system and he claims
that there would be no additional upfront cost.

Obama breaks his health care reform plan down into three parts
saying that it builds “upon the strengths of the U.S. health care

The three parts are:   1. Quality, Affordable & Portable Health Coverage For All   2. Modernizing The U.S. Health Care System To Lower Costs & Improve Quality   3. Promoting Prevention & Strengthening Public HealthObama claims that his health care reform plan will save the typical family up to $2,500 every year through:

  • Health information technology investment aimed at reducing
    unnecessary spending that results from preventable errors and
    inefficient paper billing systems.
  • Improving prevention and management of chronic conditions.
  • Increasing insurance industry competition and reducing underwriting costs and profits in order to reduce insurance overhead.
  • Providing reinsurance for catastrophic coverage, which will reduce insurance premiums.
  • Making health insurance universal which will reduce spending on uncompensated care.

Will Obama be able to cut the typical family’s health care costs by $2,500 a year?Well, yes and no.All
of the candidates, Republican and Democratic, called for most of what
is on the Obama cost containment list; expanding health information
technology, improving prevention and better management of chronic
conditions, and a more vibrant health insurance market.Obama is
unique in calling for catastrophic reinsurance coverage in order to
reduce the cost of family health insurance. Really, this is not a cost
reduction but a cost shift. This idea, first proposed by Senator Kerry
in his failed bid for the presidency, would have the federal government
absorb a large portion of the highest cost claims thereby taking these
costs out of the price of health insurance. That would reduce the price
of family health insurance but would also increase federal spending by
the same amount. It would also water down the incentive for insurers
and employers to manage these claims since most of these costs would be
transferred to the government.Obama’s assertion that covering
more people would reduce the overall cost of insurance is likely
correct because it would mean less uncompensated care that would have
to be shifted onto the rest of the system. Since the McCain health plan
emphasizes making the insurance system affordable before ensuring
widespread coverage as the first priority, one could argue that Obama
would make gains toward near universal care well before McCain.In
the end, Obama’s claim that he would save families $2,500 every year
are based upon a number of initiatives that McCain also argues he would
undertake. More, these ideas, such as health IT and prevention, are
under way in the market anyway.Obama’s claim that he would save
$2,500 per family beyond a simple cost shift to the federal government
of large claims is unsubstantiated and highly doubtful.Let’s take a look at the three main parts of the Obama health plan:1. “Quality, Affordable & Portable Health Coverage For All”Obama
follows the Democratic health care template by building on existing
private and public programs such as employer health insurance, private
individual health insurance, Medicare, and Medicaid. This is unlike the
Republican approach that would refashion the private market by
providing incentives to encourage a reinvigorated individual health
insurance platform focused on personal choice and responsibility (see
McCain post).Obama’s key components here include:

  • Establishing a new public program that would look a lot like
    Medicare for those under age-65 that would be available to those who do
    not have access to an employer plan or qualify for existing government
    programs like Medicaid or SCHIP. This would also be open to small
    employers who do not offer a private plan.
  • Creating a “National Health Insurance Exchange.” This would be a
    government-run marketing organization that would sell insurance plans
    directly to those who did not have an employer plan or public coverage.
  • An employer “pay or play” provision that would require an employer
    to either provide health insurance or contribute toward the cost of a
    public plan.
  • Mandating that families cover all children through either a private or public health insurance plan.
  • Expanding eligibility for government programs, like Medicaid and SCHIP.
  • Allow flexibility in embracing state health reform initiatives.

Obama would also mandate guaranteed insurability, a generous minimum
comprehensive benefits package such as that required for federal
workers, the ability to take their policy from one job to another
(portability) when it is purchased through the new Medicare-like public
plan or the "National Health Insurance Exchange," and he would require
providers to participate in a new plan to collect and report data about
standards of care, the use of health information technology, and
administration.Obama would provide premium subsidies to
individuals and families who are not eligible for employer-based care
or a government program. Just how much these subsidies would be is not
indicated. In Massachusetts, thousands of families have been exempted
from that state’s mandate to buy coverage because subsidies are
inadequate for those making too much to qualify or too little to still
afford coverage.How would Senator Obama do on improving coverage for all?This is the section that separates him most from Senator McCain.In
Europe they have a way of explaining the general philosophy toward
universal health care for all. You often here the term, “solidarity.”
The concept implies that everyone is in it together — all are covered
in the same pool and share the burden equally.Democrats, like
Obama, tend to make an Americanized attempt at health care solidarity
by crafting a structure that ensures everyone will be covered, not by a
single government-run plan but by guaranteeing access to a mix of
government and private plans. Obama understands that the vast majority
of Americans are not ready to give up their private health insurance
plans and that creates a political imperative to continue making
private health insurance a part of any “unique American solution.”Republicans,
like McCain, on the other hand, build their health reform plans on the
classic American foundation of “rugged individualism” promoting choice
and personal responsibility.Therefore, Obama puts as his first
priority getting everyone in the system by spending lots of money up
front to ensure that everyone can afford a benefit rich traditional
private plan—or have access to a public plan.McCain argues that
we already spend too much on health care and says his plan will not
cost more than that since he will rearrange existing tax benefits to
provide the incentives and support necessary for a more efficient
system. It is hard to see how McCain can rearrange the existing
employer tax benefits those who are insured now get, reapply them on an
individual basis to those same people and also have extra money to
provide assistance for the millions of uninsured who don’t get these
employer tax benefits today.Obama sets as his goal quality, affordable, and portable coverage for all.Let’s take them one at a time:

  1. Quality – Obama’s quality initiatives look a lot like
    McCain’s as well as those things that are going on in the market
    anyway. All good points—but no advantage here or expectation there will
    be quick savings.
  2. Affordability is more about shifting the cost of insurance
    to the government then it is making a more efficient U.S. health care
    system. Health insurance is more affordable for people because he
    spends many billions of dollars subsidizing access for everyone.
  3. Portable Health Coverage For All: While Obama does not have
    an individual mandate to purchase health insurance; it is likely that
    he would cover most of those who are uninsured today because of his
    generous subsidies for low-income Americans. Compared to McCain, he
    puts far more emphasis on getting people covered upfront.

Obama would be successful in getting most of the uninsured covered
and securing coverage for those that now have it. But when it comes to
crafting a system that will not continue to outstrip the rest of the
economy in what it costs, I see no evidence that he has tackled the
drivers in health care costs—in fact he has likely poured some highly
inflationary “gas on the fire” by adding tens of billions more to the
system with no effective cost containment features to offset the new
inflationary pressures.The Obama health care reform plan is
very similar to the new Massachusetts health care reform plan that was
first implemented a year ago. The Massachusetts plan is proving to be
falling short of covering everyone for an affordable cost. It’s
second-year costs look to be coming in 50% higher than were projected
when the plan became law in 2006 and its insurance is still
unaffordable for most families making between $60,000 a year and
$110,000 a year. See: First Year Results in Massachusetts’ Health Care
Reform Undercut Barack Obama’s Health Care Reform Strategy2. Modernizing The U.S. Health Care System To Lower Costs and Improve QualityObama
would argue that I am wrong about the notion that he has no effective
cost containment ideas. In this section of his plan he argues he will
contain, if not reduce costs, with a long list of proposals.He
would reinsure employer plans for a portion of their catastrophic
costs. This would reduce employer costs but it would do so by simply
shifting them onto the government. He runs the risk of shifting these
costs away from a market that now has incentives to manage them to a
big government program that likely will not have the same incentives to
confront and manage them. I don’t see this as cost saving as much as
just cost shifting.Obama goes on to outline a long list of
quality initiatives that include disease management programs,
coordinated care, transparency about cost and quality of care, improved
patient safety, aligning incentives for excellence, comparative
effectiveness reviews, and reducing disparities in health care
treatments for the same illness.McCain has virtually the same
list—all good ideas and all things the market has been tackling for
years with only incremental success. The notion that Obama will
suddenly make any or all of these more successful than others have with
all the billions spent on such programs in recent years constitutes a
leap of faith. Why will Obama be any more successful in this area than
any other candidate or than those who have been tackling these things
for years—no new ideas here and no cost containment “silver bullet?”Obama
would also reform the medical malpractice system by strengthening
“antitrust laws to prevent insurers from overcharging physicians for
malpractice insurance.” Clearly a malpractice reform strategy supported
by the trial bar! He also makes a vague pledge to “promote new models
for addressing physician errors that improve patient safety.”Obama
makes investments in health information technology an important part of
his cost containment strategy. This is something every other candidate
supports and is generally regarded at the heart of what’s needed to
improve both cost and quality. And it is something the market has been
spending billions at for many years and has shown only slow but steady
progress on.Obama would make the insurance markets more
competitive and efficient by creating the “National Health Insurance
Exchange” to promote more efficient competition and he would set a
minimum health cost ratio for insurers—not defined in detail. Reducing
insurance company overhead is important but constitutes only a small
percentage of costs and those overhead costs have been increasing at
the rate of general inflation while health care costs have been
increasing by two to four times the basic inflation rate in recent
years. The biggest cost containment challenge is in the fundamental
cost of health care itself.He would legalize drug
reimportation. However, the amount of drugs imported from Canada, for
example, has fallen by half in recent years, as this once popular
scheme hasn’t produced the savings to even maintain itself at past
levels. Somewhat surprisingly, even Republican McCain favors drug
reimportation.He would emphasize the use of generics by making
it harder for drug companies to payoff generic makers to stay out of
their markets—a good idea that also has bipartisan support.He
proposes lifting the ban on Medicare being able to negotiate drug
prices—including those for the senior Part D program. However, recent
Democratic proposals to do so do not allow Medicare to take a drug off
the Medicare formulary when the manufacturer is not willing to reduce
its prices. If Medicare doesn’t have the power to walk away from a drug
maker, its power to negotiate is a hollow one. Obama does not tell us
if he would give Medicare the leverage it would need to get real
results.When the day is done, Obama gives us a list of
generally good cost containment ideas that are more often than not also
in Senator McCain’s health proposal and have been part of a market
struggling to bring costs under control—nothing really new and nothing
that promises to get better results than each of these cost containment
ideas are going to be able to get us anyway.What would it take to really contain costs?McCain
would say a more robust market and more reliance on personal
responsibility and consumer choice to make the market work better.Obama,
like McCain, has come up with the same generally good list of things
that are underway in the market anyway with only a limited success to
point to so far.To really get at costs you have to gore some very powerful political oxen among all of the key stakeholders.McCain
won’t do it because he simply doesn’t believe that a direct assault on
the market players is the right thing to do—put market incentives in
place and it will encourage and reward efficient behavior.Obama
won’t do it, not because he doesn’t like government intervention, but
because he doesn’t want to offend key stakeholders who could derail any
meaningful health care reform effort.The Democrats learned a
very powerful lesson in 1994 when many of the special interests all
united in opposition to the Clinton Health Plan.Capping or even
reducing costs means you have to cap or reduce costs. There are no
magic bullets that reduce payments without doctors, hospitals,
insurers, and lawyers getting less than they would have gotten. All of
the health IT, prevention, wellness, and the like will not reduce costs
by any big amount at least in the short term.McCain avoids the
notion that aggressive cost containment is important because he just
doesn’t believe in it—a vibrant market will do the job.Obama
avoids the notion that their cost containment list will be inadequate
because it is politically expedient to do so—they aren’t going to risk
their health care reform proposals by taking on the big stakeholders
head-on.I have been convinced for some time that we will
actually do health care reform in two parts—access first and cost
containment second.This Democratic proposal is all about
access—getting just about everyone covered. Getting everyone into this
unsustainable system will then make things even more unsustainable
creating an imperative for a second wave of real cost containment when
the feel good list of cost containment proposals now in their plans
falls short. My sense is that most Democratic health policy experts
already know this but see no other political alternative.3. Promoting Prevention & Strengthening Public HealthAt
the core of this Obama health care proposal is the notion that, “Each
must do their part…to create the conditions and opportunities that
allow and encourage Americans to adopt healthy lifestyles.”Obama
lists employer wellness programs, attacking childhood obesity in the
schools, expanding the number of primary care providers, and disease
prevention programs as part of his effort.Again, his emphasis on healthier lifestyles is embraced by all of the other candidates and doesn’t give him an advantage.Perhaps
the most important thing a new president can do in this regard is to
use the “bully pulpit” to place far more emphasis on just how unhealthy
Americans are becoming. We can pass all of the health care reform
proposals we like and spend many more billions of dollars each year but
that will do little as we watch our youngest generation on its way to
becoming the first in American history to be less healthy than the
prior generation.Will the Obama health reform plan work?The Obama health reform plan would get most of those who are now uninsured covered.The
Obama plan focus is on access by making it possible for everyone to
have coverage in an existing private or public plan and by making a
Medicare-like program also available for those who don’t have private
coverage.The Obama plan is not really a universal health care
plan. A universal plan, like those in Europe and Canada, start out by
including everyone in a plan they are automatically enrolled in and
that is paid for by various mandatory taxes. While people in these
truly universal systems can sometimes opt out for a private plan, as in
Britain, they are in one on day one. As the Massachusetts plan is
showing us, Obama’s plan structure will still leave a significant
number of the uninsured without coverage.Obama builds on the
American tradition of people having to buy their coverage. He claims to
make it affordable to buy—but the consumer must make the purchase.
Obama makes that an option for adults. In the end what matters is not
the mandate but whether coverage is in fact affordable to everyone.McCain
takes a completely different view continuing to build on options and
choices and relying upon the market to do the work in creating an
affordable system.Would the Obama health care system work?It would clearly get most of the unisured covered sooner rather than later.The
real question is how would it be sustained. Are his cost containment
strategies going to support a system that is affordable in the long run?No.As
the Massachusetts plan is showing us, the Obama health care reform plan
would likely have an incomplete result for an unsustainable cost.The
Obama cost containment proposals are only incremental cost containment
proposals that are layered over $100 billion of upfront spending to
cover tens of millions of more people—far too little cost containment
for the new massive injection of money, almost overnight, into the
health care system.Obama offers us a long list of good cost
containment ideas—most of which he shares with McCain. Most have been
underway in the market for many years with limited success.
Undoubtedly, a government infusion of resources or requirements aimed
at a more efficient system would have a positive impact but it is hard
to see how they would be enough fundamentally alter things and bring
the system under real control.More likely, a $100 billion
infusion of new health care spending by an Obama health plan would
actually increase the rate of health care inflation and ultimately
create an imperative for more draconian government intervention in the
health care markets Obama would preserve.Cost containment is the big missing link here.The
big question John McCain has to answer is how will his health care
program cover everyone—particularly the older and sicker—and how will
he be able to provide enough assistance to those who are now uninsured
by simply redistributing the tax breaks now only enjoyed by those
currently covered?The big question for Obama is not in how he
will get almost everyone covered—his plan spends enough money up front
to likely do that—the question for Obama is how he will create an
affordable and sustainable health care system with only minor
incremental cost containment ideas?