Remember pensions? The big differences between Obama & McCain’s health care plans

This election is different than any other on the issue of health care because both candidates are giving us serious blueprints to reorganize America’s health care system and those blueprints are very very different.

As voters, you have a huge and critically important choice on health care.

There are dozens of details upon which they differ and for those I would point you to my comprehensive posts on the McCain Health Care Plan and the Obama Health Care Plan.

But to understand their big idea differences, I would point you to our pension system to better understand where McCain and Obama are going on health care. Back in the 1960s and 1970s, it was common for workers to have what is called a defined benefit pension plan.The worker got a promise from the employer that when retirement came he’d get a certain monthly benefit — often about 60 percent of his final average earnings. That might be $2,000 a month — every month for the rest of his life. Therefore, a defined benefit.

But starting in the 1980s, employers came to find that they couldn’t
afford these very expensive defined benefit pension plans. Employers
started backing away from these plans often by no longer making new
employees eligible for them or simply terminating them and freezing the
benefits for those who had been participants.

Instead, employers more often offered a defined contribution plan–usually in the form of a 401(k) plan. A 401(k) pension plan is generally dependent on employee
contributions that are made pre-tax. Often, the employer matches the
employee’s contribution at some percentage of what the employee
contributes–a defined contribution plan.

401(k) plans are popular with employers because they have no big
funding requirement — defined benefit plans required them to contribute
whatever it costs to keep the expensive benefit promise. Now, the risk
of having enough money to retire on was shifted from the employer to
the employee.

With workers changing jobs more often than in the 1960s and 70s,
employees also had a portable plan. Defined benefit pension plans have
vesting schedules so a worker that stayed less than 10 years perhaps
left with no pension benefit. With a 401(k), the employee leaves with
all of his contributions and investment earnings as well as most or all
of the employer’s contributions. The departing employee can roll his
account over to his own IRA or his new employer’s plan and continues to
accumulate toward retirement.

401(k) plans are popular with workers because they own them, control them, and make investment decisions for them.

The pension plan story is what the big idea difference between McCain and Obama’s health plan is really about.

Obama: Do we continue down the same incremental line with health care
reform–building on the employer-based system where the employer
provides so many of us with generous defined benefit health insurance
plans that the employer continues to pay most of the cost of no matter
how expensive they are?

McCain: Or, do we change the health insurance focus from relying on the
employer to relying on individual responsibility and a structure that
enables the individual to build their own health care security, often
with an increase in wages to replace the health insurance benefit, and
not having to rely upon the generosity of one employer or another to
provide a fixed and comprehensive plan?

Just as we have learned from our pension experience, one approach is
not necessarily good or bad. Both have some very important advantages
and some very important disadvantages.

Liberals often believe that the best way to provide health care is via
a large group. Lots of people coming together to spread the risk and
cost of insurance has worked well for consumers. The great health
benefits most of us get from our employers may be the best thing going
in our problematic health care system. The worry is that if we push
people out of these plans and into the individual health insurance
market to fend for themselves consumers will be subject to the vagaries
of the market that include underwriting limitations and health
insurance premiums in the thousands of dollars.

But conservatives often worry that the employer-based system is at the
heart of why our costs are out of control. A third-party, the employer,
pays for care the doctor and the patient demand. There is little in the
way of incentives for the buyers to care much about costs. American
employers are also saddled with by far the most expensive health care
system in the world as they try to shoulder those costs and still be
competitive in a global market–the cost of health care that goes into
the cost of making an American car is much more than the cost of steel
in that car. Conservatives also argue is is unrealistic to think the
employer-based system is anymore sustainable than the old pension
system was.

Conservatives also worry that Obama’s endorsement of the defined
benefit approach also applies to government making even more
unsustainable entitlement promises than it does now by guaranteeing
more access to government plans and promising expensive subsidies so
everyone can get into a health insurance plan. That is a legitimate
concern particularly in the light of Massachusetts enacting an
Obama-like plan last year that is proving to be giving us an incomplete
result toward getting everyone covered for an unsustainable cost.

But liberals counter that McCain would "shred" the traditional
employer-based system of health care and push consumers into a very
expensive and even less regulated health insurance marketplace with a
reputation for wanting to cover only healthy people.

Liberals believe we have a moral imperative to get everyone covered
sooner rather than later–in Obama’s case by spending many billions
upfront. Conservatives believe we have a moral imperative to avoid
making promises we can’t keep if the system isn’t made to be affordable

In my mind, both sides have legitimate points.

I also believe either system can work–how well is a matter of what the
details look like. The most important of these details is how costs
would be controlled. When the day is done, controlling costs is what it
is about so we can get everyone insured, sustain that, and make America
competitive in the global economy.

So it all comes down to the security afforded by employer-provided
defined benefit group plans (Obama) versus the potential for cost
savings and the advantages of portability that come with a defined
contribution approach (McCain).

In many ways, Senator McCain makes the more radical proposal–not what
you would expect from the Republican on health care. But with our
system as unaffordable and globally uncompetitive as it is that is by
no means a criticism on my part.

As a voter, you have a big decision to make in November when it comes to health care.

Obama has a defined benefit health care plan that asks us to give up
less–but will it get the job done in making health care more
affordable and will the program be sustainable for us? Under Obama’s
health care plan that continues to rely upon the employer, will
America’s products and services be more competitive in the world?

McCain asks us to make the biggest health care leap with him and give
up the security we have had under employer-based health care–but a
security that may not be sustainable anyway.

Boy! Do you have a big decision to make.

8 replies »

  1. It never ceases to amaze me, the amount of energy that can go into a project just to avoid doing the right thing. The best, simplest, least costly, most effective thing we could do is expand what has been working so well for years, Medicare. You get sick, you get care, and the caregiver gets paid. Nothing could be simpler.
    But follow the money and you’ll find why the politicians don’t like it a bit. They get their money from insurance interests.

  2. Matthew – Agreed. It is a shame that the reasonable and pragmatic piece of legislation that Wyden worked largely got relegated to the dustbin. Been that way with just about any piece of pragmatic legislation though in Congress for quite a while now and largely explains why the American public overwhelmingly views Congress negatively and as a ineffective body.
    This is a very bad and troubling development since it has allowed the Executive Branch to acquire more and more power and doesn’t bode well for American democracy in the longer-term.
    One subplot that is going to be

  3. Quick question for Robert Laszewski or anyone who wants to defend McCain’s proposal: Is there a developed nation on Earth that has made something like this work, keeping quality and access high, and costs reasonable (say, 12% of GDP or less)? A single one?
    Switzerland is not an answer, because Switzerland has many controls (including benefit mandates and guaranteed issue) that are Democratic rather than Republican in nature.
    It is true, as many have pointed out, that the cost control measures in Obama’s plan are pretty minimal. However, I am comfortable with that for the following reason: you need to get significant industry support to get any form of universal health care (UHC) passed. If you propose measures that will result in massive cuts, you will get opposition from every segment of this very powerful industry. At the same time, once UHC passes without significant cost controls, and taxpayers see the money come out of their paychecks and see it go up for a year or two, a whole new set of brakes will arise on the industry’s out of control costs in the form of legislation. The forces for reform in that environment will be far stronger than they are now, tapping into the taxpayer’s indignation at high government spending. This is true, by the way, for a multi-payer system as well, because such a system will have to rely on large subsidies for the working poor to afford coverage.
    I’ve argued this before and we’ve gone through the debate here several times. There are indications that Massachusetts is starting to show this secondary cost control effect in the form of lobbying coalitions and new bills designed to curb cost increases. But it is still too early to tell how it will play out. If Obama wins in November, it would be very, very timely if next summer there were good data that MA had begun to bend the cost trend down to encourage lawmakers to pass UHC before major cost controls. But the evidence shouldn’t be too good, because that would bring the industry out of the UHC camp and stop the spending reforms before the pressure can build for them to happen.

  4. And while MG is right in that McCain’s plan lacks the necessary insurance reforms (which are in Obama’s plan) to make his plan honest or workable, (and therefore it’s built on a lie about insuring the sick), neither one has a rats arse’s chance of passing.
    Meanwhile Ron Wyden’s rather more sensible plan gathers dust…

  5. Obama doesn’t have any serious cost controls in his health plan but McCain’s health care plan is what I would call “intellectually dishonest.” McCain has been very vague about how his tax credits would ensure that those who are sick/older would be able to afford health insurance or not be denied coverage out right. Additionally, he brings up other vague or failed concepts like “select high risk pools” and “voluntary associations” which would artificially form.

  6. I would amend your definitions:
    Liberal: Can’t we do what other countries have done by assuming we have a collective responsibility to each other? That taking care of someone else means they will take care of us? And how can we politically do this against a stubborn belief in “free” markets? Let’s face it, the value of a doctor’s care when one is having a heart attack is infinite. How can we pay that?
    Conservative: We can’t allow those less deserving to drag the rest of us down. We must make sure that the undeserving don’t get benefits. We must make sure that there is corporate reward for taking the risk of insuring people. We must make everyone pay for his or her misfortune, uninformed decisions, and long-term outcomes that no one can guess. Only then can we assure short-term growth that might trickle down in the form of a doctor’s attention.
    This is according to my jaundiced view, mind you.
    Define “more affordable?”
    In an era where “rich” means “have lots of paper worth phony money that only has value so long as we don’t all try to redeem that paper at once,” “more affordable” really translates to “slightly less ruinous to the average paycheck-earner.”
    The average Joe and Jane sweat over whether the 10-year-old Ford’s transmission really will cost them $2000 to replace when they have $159 in the bank. The average of us see a less-than-major operation costing tens of thousands of dollars as fly-to-the-moon territory. We simply don’t have the money. We likely never will. Never mind something catastrophic.
    According to some, we simply must work harder and pay more. But there’s a problem: if everyone is “rich,” then no one is, right? It’s like everyone being above-average. For our culture to work, there has to be a gap. Someone with a few million earned won’t sweat that transmission, that operation, that kid’s cough. Good for them. And the rest of us? Isn’t this a form of rationing? Nah. It’s the “Free” market in which we charge what it will bear and let people die instead of caring.
    I would go so far as to say there are some extremists who believe that there are people you see every day who don’t deserve to live. They haven’t become “rich” enough, by their own fault, lack of drive, or incorrect belief. They must be punished for not having the right attitude. Therefore they must hand over all their earnings for the next ten years to pay for that car accident.
    Does this seem fair? I do hear that “life isn’t fair,” but, really, in situations like this, isn’t it really that we choose not to be fair. We wake up every morning and accept that there are people unworthy out there.
    We treat people like things, and things like people.
    I can’t help think that what’s missing is that sanctity of life thing. Dignity, too. Everyone deserves that.
    Let’s start from there.
    Yeah, I know. Naive. Idealistic. But we haven’t really tried, have we? We’ve certainly tried it the money way. How’s that working for us?