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Obama’s Health Plan Under the Microscope and Through a Fair Lens

Each presidential candidate offers a blueprint for health care reform. Neither can expect to see his plan enacted whole—legislators will leave their fingerprints all over any proposal. And, if truth be told, neither plan is perfect. Each proposal is blinkered in its own way; each ignores just how difficult true reform will be. I very much doubt that national health insurance will become a reality in the next year.

That said, I believe that we can take steps toward reform in 2009 if we begin thinking clearly—and honestly—about exactly what it is that we want and what it will cost. To that end, I believe that in-depth analysis of each candidate’s proposal can help underline the core ideological differences between conservatives, libertarians and progressives, and highlight the economic realities that any reform plan will have to face.

Recently, opponents of each plan have offered their critiques in Health Affairs (here and here) and supporters have defended their favorites here and here. Inevitably, many readers found the critiques too partisan. At the same time, they complained that rebuttals from the home team “read more like a stump speech with details glossed over and facts overlooked.”

Readers are still looking for an unbiased, in-depth report on the two plans that clarifies the details and the differences. Earlier this week, the Urban Institute, a nonpartisan economic and social policy research organization, published an assessment of the two proposals that sets out to do just that. Overall, the Institute’s report seemed to me remarkably fair—and certainly worth discussion.

The Strengths of the Obama Plan

First, the Institute notes, rightly, that Obama’s plan would “substantially increase access to affordable and adequate coverage for those with the highest health care needs, including those with chronic illnesses” by:

  • prohibiting insurance companies from using health status to determine price or deny coverage.  Insurers would have to offer policies to everyone in a given community at the same price. This means that many sick Americans who are now priced out of the insurance market—or denied coverage altogether—would be included in the plan;
  • expanding Medicaid and SCHIP for low-income children;
  • requiring large and medium-sized employers to automatically enroll all employees in health insurance plans, and make a “meaningful” contribution toward the cost of those plans. Employees who don’t want to pay their share of the insurance could opt out. Employers who don’t offer coverage to their own workers would pay a payroll tax as a contribution toward subsidizing insurance for families of “modest” means.  Small businesses would be exempt from these requirements. If they chose to offer insurance to their employees they would be eligible for tax credits equaling as much as half the cost of the insurance;
  • providing income-related subsides so that individuals  without access to Medicaid, SCHIP, or employer-sponsored insurance could afford coverage under the National Health Insurance Exchange. NHIE would offer a number of private plans as well as a new public plan option. Private insurers would have to offer plans that were at least as generous as the public option.

Secondly, Obama’s proposal would lift the quality of care by:

  • investing $50 billion over several years to speed the adoption of electronic medical records. Eventually, use of these records should reduce hospital errors and provide a database for comparing the effectiveness of various treatments;
  • investing in public health and preventive medicine, expanding chronic care management, and supporting an independent institute to conduct comparative effectiveness analyses on technologies and treatment. As I have written in other posts, the “comparative effectiveness institute” is key. Unbiased medical research could help us eliminate the ineffective, unproven and often over-priced treatments that now put patients at risk while simultaneously stoking health care inflation.

But if the Institute is going to lift the quality of care, its recommendations regarding the most effective treatment for patients who meet a particular profile must steer decisions about what Medicare covers. If Medicare refuses to cover drugs, devices and procedures that are no better than the less expensive products that they are trying to replace, other insurers will follow suit. (Note this is not “one-size-fits-all medicine”: in some cases the Institute might well determine that a particular drug provides the greatest benefits for one set of patients, while another drug is more effective for a second group suffering from the same disease.)

I would add that doctors and hospitals should not be forced to abide by the Institute’s recommendations. Every human body is unique and physicians need leeway to follow their best judgment in individual cases. But over time, as information about what is and isn’t effective spreads, more and more doctors would be likely to adopt the Institute’s recommendations for “best practice.”

Obama’s plan also would contain costs:

  • by repealing two very expensive planks in President Bush’s Medicare Modernization Act:  a) the ban which prohibits Medicare from using its size to negotiate for lower price on  prescription drugs and b) the windfall bonus for private insurers who offer Medicare Advantage;
  • by introducing a public sector plan into the marketplace that would have the clout to  insist on value for its healthcare  dollars. The Urban Institute’s analysts note: “if the public plan…offered is an attractive product and can contain costs because of its bargaining power with providers, other insurers would have to compete more aggressively than they do today. We believe this is an essential part of this plan.” The analysts add that “the lack of true competition in a large number of U.S. health care markets” is the “result of extensive provider consolidation. This consolidation, particularly among hospitals, has resulted in serious constraints on the ability to contain costs. As we have written elsewhere, we do not believe a public plan would dominate the market and drive out private competition, but we do believe it could have a great influence on this market.

“The public plan is unlikely to use all of its market power,” the Institute adds,  “because of political pressures and caution regarding the ability to maintain access to a high-quality health care system. But a public plan and the competition it would engender could certainly lead to savings relative to the current system. In our view, today, insurers are either unable or unwilling to use market power to constrain rates of payment to dominant hospital or physician systems. The public plan would provide the countervailing power the market needs”

I agree that, today, many insurers simply pay whatever providers ask—and pass the costs along in the form of higher premiums. I would add that the public plan could spur competition that leads to higher quality care  at lower prices—but only if regulators insist that insurers must offer benefits that are at least as  generous as the public sector plan (as Obama proposes) and if they are not allowed to  sell inexpensive “high deductible” plans that many customers then cannot afford to use.

Not long ago, Consumer Reports told the story of a low-income woman who had a plan that required that she pay down a $5,000 deductible before using it. When she had a miscarriage, she could not afford to seek medical help. “I just laid in bed for three days,” she reported, “and tried not to move around too much.”

Private sector insurers must be tightly regulated so that they are forced to compete with a public sector plan on a level playing field.

  • by using comparative effectiveness information,  preventive care and chronic care management to reduce waste and provide timely care before patients become seriously ill. We now spend just $1 out of every $25 healthcare dollars on preventive care.

The plan’s architects believe that, all told, they could trim health care spending by 8 percent. The Urban Institute’s analysts comment: “We agree that cost containment must be pursued on multiple fronts, and, if pursued aggressively, they would eventually achieve savings of the magnitude they envision.”

The Problems With Obama’s Plan

Under Obama’s plan all children must be insured, but adults are not required to buy insurance. While large and medium-sized employers must offer insurance, employees who don’t want to pay their share of the premium can always opt out. As a result, the Urban Institute estimates that about 6 percent of American citizens (or half of all adults who are currently uninsured) will remain uninsured.  Granted, this is a significant step forward; today 17 percent of the population is “going naked.”

But the number is still too large, and as a result, the plan will be more expensive for the rest of us because:

  • if those who choose not to buy insurance suddenly become ill or are in an accident, the rest of us will wind up paying for their care. (We’re just not a society that is willing to leave bodies stacked up on the sidewalk outside of a hospital).
  • those who do enroll will tend to be those with the greatest health care needs, boosting  premiums for everyone in the pool. Meanwhile, young, healthy Americans who are too wealthy to qualify for subsidies will be most likely to opt out. If they were in the pool, their contributions would help spread the cost, lowering premiums for everyone.
  • the only way to encourage more young, healthy citizens to buy insurance would be to make the subsidies very generous, and offer other sweeteners such as discounts for younger customers.  Efforts to lure young immortals into the program will add to overall costs.
  • we will still need safety nets to cover the 6 percent who remain uninsured as well as the undocumented non-citizens not covered by Obama’s plan.  (Our ER’s and hospitals are required to “stabilize” non-citizens, even if they don’t treat them, and they are expected to provide medical care to mother and child during childbirth.)  As a consequence, the Urban Institute notes “the inefficient and costly safety net system” that we now have “will need to remain in place.”

Not everyone agrees with the Urban Institute about the need for mandates.  Free marketeers, libertarians and others who oppose mandates point out that in states where there are mandates of one kind or another, insurance is more expensive. The Healthcare Blog’s Matthew Holt sums up their claim: “For $90 a month a 30 year old in California can buy the same coverage that costs $500 in New Jersey.”

Holt then destroys the argument: “the difference is not because of mandated benefits, but because plans in California are allowed to underwrite” — or “cherry-pick” patients. This means that they can shun the sick by denying coverage to patients with “pre-existing conditions,” or charging them far more than they can afford to pay.  In other words, a healthy 30–year-old in California can buy that cheap coverage but a sick one can’t.  As Holt puts it: “insurance is less expensive if you live in a state where many of the sick can’t get insurance.”  In a state where everyone must buy insurance, healthy 30-year-olds help pay for sick thirty-year-olds, and the wisest are happy to do it, knowing that “there but for fortune…”

Moreover, Obama himself understands that if he is going to insist (as he does) that insurers must offer everyone in a community the same insurance at the same price—regardless of pre-existing conditions—then eventually,  everyone must be enrolled. Otherwise, people will wait until they are sick before purchasing insurance, secure in the knowledge that insurers have to take them and cannot charge them more. In that scenario, only the sick and the elderly will buy coverage—and premiums would sky-rocket.

This is precisely what happened in New Jersey when, as part of the “New Jersey Individual Health Coverage Program,” the state passed legislation which forced insurers to sell policies to anyone who applied at the same price.  After the law was passed in 1993, more and more healthy individuals decided to postpone buying insurance until they became ill. As a result, Princeton economist Uwe Reinhardt observes, enrollment in New Jersey’s Individual Health Coverage Program plummeted. In 1995 186,130 New Jersey citizens had been enrolled in the program; nine years later 84,968 were covered—and since so many were sick, premiums had spiraled two to three-fold.

Obama understands this logic.  One of his chief healthcare advisers, David Cutler, made it clear to me more than a year ago that while Obama hopes everyone will sign up voluntarily,  if they don’t, ultimately we’ll need something like a mandate.

Unfortunately, the argument over “mandates” became the one way that Obama could differentiate his health care proposal from Hillary Clinton’s—and given the fact that his political base skewed toward younger voters,  his rejection of mandates found strong political support.  Thus he became stuck with the pledge to avoid mandates. Politically, it made sense. But as a matter of policy, it doesn’t.

Obama’s Plan Invites opposition:

  • From employers. As the Institute notes, Obama’s approach relies on “an employer mandate, which could increase costs to some businesses and engender the same political opposition that has contributed to the defeat of past reform efforts.”

I would add that by requiring large and medium-sized businesses to either offer insurance to all employees—or pay a payroll tax—Obama would expand employer-based insurance. Yet the benefits of having one’s insurance tied to one’s employment are not at all clear. And the downside is substantial: if you lose your job—or just decide to change jobs—you lose your insurance. As a result some workers find themselves hand-cuffed to a job they don’t like while others find themselves simultaneously out of a job and uninsured.

Rather than asking large and medium-sized employers to go into the healthcare benefits business—a business that they don’t know and, in many cases, don’t want to know—it would be far simpler just to require that they make a contribution to the program through a payroll tax.

  • from hospitals, physicians, or pharmaceutical and medical device manufacturers because the plan would succeed only by trimming their revenues. “For example,” the Institute observes, “interoperable electronic medical records partly achieve savings if they reduce duplication of tests and other services, with these reductions lowering provider revenues. The same is true of more efficient management of care of the chronically ill, lower drug prices, and evaluating the cost-effectiveness of new technologies and reimbursing for the most cost effective treatments.  Consequently, aggressive cost-containment initiatives virtually guarantee concentrated resistance on the affected part of the provider community.”

The Institute is right—but this is not a failing of Obama’s plan. We must reduce the waste in the system. At the same time, one man’s ineffective over-treatment is another man’s income stream. The lobbyists will howl—and reformers will have to stand up to them. Voters can help by insisting that legislators put their interests ahead of the lobbyists’ interests.

Finally the plan’s cost estimates are very optimistic because

  • “the savings from many of the cost-containment provisions could take a number of years to materialize.” Short-term, the Urban Institute points out, costs will outstrip any savings. For example, a comparative effectiveness institute will require funding; we might not see significant savings for several years.

And while repealing the windfall for Medicare Advantage insurers will lead to immediate savings, that money will go to Medicare (which sorely needs a cash infusion) not to the national program.  Similarly, giving Medicare the power to negotiate for discounts on drugs will only help Medicare—unless the public sector plan follows Medicare’s lead, and private insurers also demand discounts.  This will take time.

Preventive care and better chronic care management do create savings—but down the road, when the woman who went for mammograms doesn’t develop breast cancer and the diabetic who stuck with his program doesn’t require an amputation.

And while competition from a public sector plan may encourage private insurers to become more innovative, this, too, is a process that will unfold over time.

  • Finally, while the Obama plan investing in electronic medical records as a way to contain costs, a conservative critique of his plan published in Health Affairs rightly points out that “The Congressional Budget Office (CBO) has analyzed the likely savings from the adoption of health IT and found that “the adoption of more health IT is generally not sufficient to produce significant cost savings.”

Indeed, the experience of medical centers that have installed healthcare IT shows that electronic medical records improve the quality of care long before they save money. As an article in the September/October issue of Health Affairs notes: while Geisinger Health System has had great success in using electronic health records (EHRs),  “only within the past few years has Geisinger begun to leverage key benefits from its electronic infrastructure—after a long period of implementation, adoption and usability comfort was created among users. Much of today’s policy discussions imply that EHRs will rapidly transform care delivery. The Geisinger experience suggests that this is not the case but, rather, that EHR adoption is the beginning of a long care-transformation journey.”

  • short-term, the Obama plan is depending on money that already has been spent five times over.  In a New England Journal of Medicine interview published this week, Obama healthcare adviser David Cutler acknowledges that “Senator Obama has proposed a very, very generous set of tax credits for people who are low- and middle-income so that they can afford to have health insurance. That’s expensive. In the short run, it’s going to cost money…But,” he assures his listeners,  “Senator Obama has identified the source of money that he would use for this, the [repeal of the] tax cuts that President Bush enacted for people earning over $250,000 a year.”

Unfortunately, as the Urban Institute points out, “there are many other claims” on the money that will be saved by reversing those tax cuts— for example, rebuilding the military, improving the nation’s infrastructure, addressing the problems with the alternative minimum income tax…” And then, of course, there’s that financial meltdown that we have been hearing about.

Here, the Urban Institute makes a suggestion: “An alternative strategy would be to cap the employer tax exclusion for health insurance contributions.” Today, the amount that an employer pays toward an employee’s health insurance is not counted as part of the employee’s income—and he pays no tax on it. Typically, employers pay as much as $6,000 to $12,000 toward a family plan. (A surprising number of employers pay the full premium for many of their better-paid employees.)  The Institute is not suggesting eliminating the exclusion altogether, but capping it at a certain dollar amount and requiring that employees pay taxes on the value of benefits that exceed that cap. This “would result in substantial revenues,” the Institute suggests, “that could help pay for the coverage expansion.”   This would not be a popular proposition, but it would be fair. Today, those who benefit most from the tax exclusion are upper-income employees who typically receive the rich health benefits.

Finally, the Urban Institute points to the many unknowns in Obama’s plan that make it impossible to estimate the cost. How rich will the subsidies be?  Will middle-income families earning less than $60,000 qualify?  What about families earning less than $70,000?  If employers are required to make a “meaningful” contribution to employee plans, just how much is meaningful?  Alternatively, they will pay a payroll tax—how high will that tax go? Finally, just how generous will the benefits be in the public sector plan?

Obama has compared the plan he would offer to “the plan available to members of Congress” under the Federal Employees Health Benefits (FEHB) program. But what many don’t realize is that FEHB offers a menu of plans. The most popular, the Blue Cross Blue Shield Standard Option, offers a broad array of medical services with modest cost sharing (including a $600 deductible and $15 co-payments for doctor visits). In 2008, the full monthly premium charged by that plan was $1,027.95 for family coverage. The federal government contributed $713.48, and the enrollee paid the remainder.

But many median-income families would not be able to afford $500 a month—or $6,000 a year—for health insurance. They would need partial subsidies, making Obama’s plan that much more expensive.

Alternatively, the government could offer a cheaper FEHB plan like the “Mail Handler’s value option.” It costs less than half the price of the Blue Cross plan, but it carries a $1,000 deductible plus 20 percent co-pays on hospital and physician’s services. A $1,000 deductible could lead many families to put off preventive care. And a 20% co-pay on a $80,000 hospital bill—plus a string of $400 doctors’ bills–would be out of reach for many middle-class families

As Obama’s conservative critics observed in a recent Health Affairs article, while “a lower-value plan might be a more feasible standard, it is probably not what the candidate’s political base thinks he has promised.”  They are right. And in fact, there is every indication that Obama intends to offer all Americans insurance that is equivalent to the packages that upper-middle income employees now receive from large employers.

But the tab for that insurance—plus subsidies that will make it affordable—not to mention investments in electronic health records, comparative effectiveness research, preventive care, and chronic care management will add up. While Obama’s advisers put the “net cost” of his plan (cost after savings) at  $65 billion the Urban Institute reports that the Tax Policy Center estimates the plan will cost $86 billion in 2009 and $160 billion in 2013 (when the plan is rolling and more Americans have signed up.)

Unlike Obama’s advisers, the Tax Policy Center does not factor in savings from Obama’s cost-containment programs, presumably because they believe those savings will be realized only in the long term.

There is much to like about Obama’s plan. It covers those Americans who most need insurance; it promises to replace waste with value; and it strives to spread the cost.  But it still doesn’t confront the full price of meaningful reform. This, I would suggest, is its Achilles heel.

Here, I would direct readers back to earlier HealthBeat posts on the reform plan that  Dr. Ezekiel Emanuel proposes in his book, Healthcare Guaranteed. (See part I and part II of these posts here and  here).

In many ways, Emanuel’s plan resembles Obama’s. It regulates private insurers, insisting that they offer the same rich package of benefits to all Americans at a single price. It also stresses the need for unbiased research comparing the effectiveness of various healthcare technologies.

But Emanuel also confronts the cost of his plan and acknowledges that it will require fresh funding. (I explain how he finances his plan in Part II of my post.) Moreover, his proposal avoids the problem of requiring Americans to buy insurance. Even better, his scheme for funding the system insulates the health care system from both lobbyists and Congress.

On the other hand, Obama’s plan forces private insurers to compete with a public sector plan, and I agree with the Urban Institute that this will spur insurers find better values in the marketplace.

Over time, I can see elements of each proposal coming together to create a rational, equitable and sustainable national healthcare system. I say “over time” because I don’t think we can expect wholesale healthcare reform in the next two years.  Moreover, I’m becoming convinced that we shouldn’t rush into providing health insurance for everyone until we’re sure that we’re offering Americans health care. Any plan that looks both simple and affordable will not be worth the paper it is written on.

Nevertheless, I’m hopeful that in the coming year, a new Congress will enact some pieces of Obama’s proposal. In part II of this post, I’ll take a look at McCain’s consumer-driven plan.

Maggie Mahar is an award winning journalist and author. A frequent contributor to THCB, her work has appeared in the New York Times, Barron’s and Institutional Investor. She is the author of  “Money-Driven Medicine: The Real Reason Why Healthcare Costs So Much,” an examination of the economic forces driving the health care system. A fellow at the Century Foundation, Maggie is also the author the increasingly influential HealthBeat blog, one of our favorite health care reads, where this piece first appeared.

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kevin
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kevin

Was part II (review of McCain’s plan) ever published or is it slated for a future article? Thank you.

alex
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alex

Health care, everyone’s talking about it. But is anyone doing anything about it? The first step to heath care is your medical history and your medical records. Where are your medical records? What’s your medical history? Well now the first step to your heath care is now being taking care of with the MedeFile Card. My name is Alex Papas the creator and the developer of the prepaid phone card in the United States. I have just created a new medical breakthrough called The MedeFile Card. The MedeFile Card is a centralized, confidential electronic portfolio that gives you 24/7 access… Read more »

Maggie Mahar
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Toyote and rbar– Thanks for your comments. Toycote– First, on your ideas: “doubling community health centers (to care for the non-citizens who will never get vouchers to enroll in Wellpoint, as well as those who do not wish to endure the welfare indignities of Medicaid/SCHIP), dramatically improving primary care physician comp, and covering the oldest and sickest uninsured by enabling Medicare enrollment as early as age 55. We could do a ton of good for less than $10 billion.” #1 is definitely a good idea. #2–I agree that we should dramatically improve primary care compensation. But that won’t bring droves… Read more »

rbar
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rbar

I wonder whether Obama could start a Health Care improvement initiative, which could focus – with great fanfare – on the insurance question and:
-strengthening PC (by increasing reimbursement)
-implement EHR
-some meaningful kind of tort reform, which may sweeten the deal for HC providers (but will be hard for the dem constituents)
-promote best treatments (basically EBM), for instance by promoting a government/NINDS website for physicians and patients
Maybe a concerted plan is the kind of change that the US public could handle if it was packaged the right way.

tcoyote
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tcoyote

Leaving aside the infeasibility of financing his plan any time soon, which Maggie acknowledges, what Obama has proposed isn’t insurance- it is a government mandated service benefit paid for by employers out of their cash flow- the stream of earnings they will need to create new jobs. Let’s stop calling it insurance, because that just isn’t what it is. Maggie acknowledges the problem w. the rich benefit package. The real problem is that, like Clinton’s plan before it, Obama’s is an exercise of government authority without responsibility that treats all users (us) as if we have the same needs. Better… Read more »