Dissecting the Democratic Front-Runners' Health Care Plans

By: Abhas Gupta

My classmates recently held a "presidential debate" on health care where each of the candidates was represented by a student. The Republican "candidates" were hysterical, both because the student performances were extraordinary and the Republican plans themselves are laughable. I represented Senator Obama in the debate and while hope-mongering, I found that many students had broad misconceptions about the differences between Senator Clinton's and Senator Obama's health plans. I tried to address the issue of mandates in my previous post, but in my fit of anger at Krugman, I didn't communicate my views very effectively. Here's my second shot. This post examines mandates as well as other less-publicized aspects of the candidates' plans.

Cost-Containment

Although cost is an important component of any policy, I do not believe it is as important here as the candidates' measures to control cost growth*. The candidates' plans are very similar†. They both support prevention and chronic care initiatives. They support the government's right to negotiate drug prices and they want to level the payment gap between Medicare Advantage and traditional Medicare. They both support legislation to limit insurance companies' latitude in denying coverage to individuals. They both wish to create a national health insurance pool that is overseen by the public, similar to the Federal Employee Health Benefits Plan. Despite these commonalities, the candidates' plan do differ on several important points:

• Insurance Industry Regulation - Obama supports the formation of a 'National Health Insurance Exchange', which is hands-down the biggest difference between the candidates' cost-cutting plans. Obama wants this central group to establish coverage criteria, even going so far as to set a minimum on the portion of premiums that must be paid out in benefits. The elements of disclosing cost and value to consumers is hinted at by Clinton's "Best Practices Institute" (discussed below), but the extent of insurance regulation is far more aggressive in the Obama plan. His plan could quickly cut tens of billions out of cost while simultaneously drawing attention to the gaps and inconsistencies in private insurance plans


• Health Care Quality and Value - Clinton supports a "Best Practices Institute" with the goal of helping consumers make the "right care choices." Obama explicitly requires that hospitals and providers need to publicly report measures of cost and quality. I expect both proposals have the same end goal, but Clinton wants this to be a government-run effort whereas Obama enables outside groups to take on the task


• Malpractice Reform - I previously commented on Clinton and Obama's joint letter to NEJM on making patient rights the centerpiece of malpractice reform. Clinton's plan only mentions additional physician protections, whereas Obama endorses "new models", presumably the ones they jointly outlined in the NEJM article and MEDiC bill. I previously expressed my strong support for systems-based approaches to malpractice reform. I am at a loss for why Clinton left this out of her plan‡


• Drug Prices - Both plans want to promote generic drug use. Clinton explicitly wishes to alter patent protections to favor generic drugs. Additionally, Clinton wishes to limit (but not eliminate?) direct-to-consumer advertising, an impressive undertaking, but I'm skeptical about its legality and prospects on the floor. Obama supports the reimportation of drugs, another laudable undertaking, but I am again skeptical of its prospects


• Electronic Medical Records - Both support a "paperless system", but Obama calls for an immediate $50 billion investment ($10 billion over 5 years) towards EMR adoption

Both plans have impressive approaches to limiting costs. I believe the insurance exchange proposed by Obama fairly and practically addresses the need for public oversight of a privately operated insurance system. Such an exchange would have dramatic, immediate savings in health care costs and create greater competition among insurance plans.

Coverage

"47 million Americans do not have..." - I'm sure you've heard the stump speech. The candidates have squabbled about whose plan covers more Americans, acknowledging, though, that they both are aspiring to a truly universal health care system. Mandates often come up in the discussion of coverage--Clinton supports a mandate that all Americans purchase coverage and Obama supports a mandate only for children--but there are broad, false perceptions that the lack of a mandate implies an aversion to universal coverage. Before we get into the specifics, let's take a look at the make-up of the 47 million uninsured:

• Duration: 45% of the uninsured remain so for less than four months
• Age-distribution: 25% are under 18 and 14% are under 25
• Income: 75% are under twice the poverty line
• Employment: 46% are part-time employees, 10% are unemployed
• Employer: 59% are employed at small businesses of less than 100 employees
• Health: 86% consider themselves in good to excellent health

Now let's break down how the candidates cover each of the uninsured segments...

• Children and Young Adults (Under 25, 39% of the uninsured) - Both plans expand SCHIP to cover all children under 18, but differ in their approach to the 18 to 25-year-olds. Obama's plan is relatively simple in this regard: He enables this group to be covered under their families' plans and he expands SCHIP to cover those still uninsured. Clinton applies her health care mandate to 18-25 year olds, so these adults would have to purchase individual health insurance. Although these individuals utilize only a few billion dollars of health care annually, they will be asked to pay out tens of billions under the Clinton plan. I find this position difficult to justify, but I suppose one can argue that the development of chronic illnesses is shaped by factors early in life and thus all ages should bear an equal share of the health care pie


• Small Business Employees (59% of the uninsured) - Both Clinton and Obama allow small businesses to pool their risk by buying into a national, public-moderated plan. Clinton mandates all small businesses to purchase health insurance, except if it has less than 25 employees. She offers tax credits to help offset these purchasing costs. Employees of small businesses with less than 25 employees would have to purchase individual insurance and would also be given tax credits to help shoulder the cost. Obama offers similar tax incentives to small businesses, but does not institute a mandate. I believe this decision is rooted in Obama's philosophy that businesses and individuals would buy health insurance if it was affordable. Assuming this is true, I suspect Obama wants to show businesses that his cost-cutting policies can slow the growth of health care costs or even reduce them. Businesses could then budget and purchase health insurance without fear of exploding benefits costs. Small businesses would then buy health care to attract competitive employees and the issue of a mandate would be subsequently moot


• Poor Americans (75% of the uninsured) - both candidates will raise Medicaid's eligibility requirements, but neither offers any details on how many individuals will be covered. A Clinton mandate would require those who are ineligible for Medicaid (because they make slightly above the minimum income) to purchase health insurance

I find a mandate to be simply unconscionable right now given rising health care premiums, gloomy economic projections, and rising inflation. Some harbor fears that without a mandate, the nations' healthy would elect out of insurance plans, thereby raising the premiums for everyone else. I find this claim to be unsubstantiated--there is no mandate in place now and yet the number of uninsured have largely remained steady. Also, I do not understand the rationale behind instituting a health care mandate on one hand an economic stimulus plan on the other, but I will differ to the real economists to better explain this§. I feel mandating health care would be a tremendous shock to the presently uninsured small businesses, young adults, and part-time workers. Such a plan would need to be phased in over a few years, the end result of which would not be any different than Obama's plan (assuming of course that his plan is able to control rising health care costs). Obama's advisers have stated that a mandate may be a possibility later when health care costs can be controlled.

Like I said before, both candidates' plans are very similar, yet I am inclined to more strongly support Senator Obama's plan. I firmly believe that greater private competition in a public-defined playing field is what's needed to improve our health care system--the Obama plan's National Health Insurance Exchange most closely captures this sentiment. I also strongly oppose a mandate as a matter of principle, but more importantly, because we are likely facing a recession and a mandate would only serve to exacerbate our economic troubles.

* I expect that both plans will probably cost within $50 billion of each other. This is rather insignificant when we are spending $2 trillion on health care and our costs are growing at 7%+ annually
† Obama released his plan in May 2007 and Clinton released her plan in August 2007
‡ I suspect that Obama led the effort behind the NEJM article. The thesis of the article--making patients the centerpiece of any reforms and framing physician and litigators positions around patients--has Obama's signature all over it
§ Real economists unlike Krugman, who's at it again: in the same article, he mentions both Obama's and Hillary's economic stimulus packages and hints at their health care plans, yet he conveniently does not mention impact of a mandate on economic growth

References:
1. Health08.org, 2008 Presidential Candidates Health Care Proposals: Side-by-Side Summary. The Kaiser Family Foundation. September 5, 2007
2. Health Care Spending and the Uninsured. Douglas Holtz-Eakin. Congressional Budget Office, January 28, 2004
3. Plan for a Healthy America. Obama for America. http://www.barackobama.com/issues/healthcare/
4. American Health Choices Plan. Hillary Clinton for President. http://www.hillaryclinton.com/feature/healthcareplan/

‘Crisis of Abundance: Rethinking How We Pay for Health Care’

By: Arnold Kling
Reviewed By: Abhas Gupta

When I first cracked open this book and realized that it's published by the Cato Institute, I immediately became wary. If you are not familiar with the Cato Institute, it's a libertarian think tank that has a long history of advocating for free markets and limited government. Their recent agenda has included discrediting global warming and privatizing social security. Nevertheless, I have been eager to hear a different perspective on health care economics and Dr. Arnold Kling came through on that front. He argues that there are three central "Health Care Narratives" about why health care finance does not work in the U.S.:

1. Private health insurance breaks down - healthy people avoid insurance and insurers select against sick people. This results in many left uninsured and considerable dollars wasted on adverse selection and administrative costs. The solution would be a single-payer system (the government being the payer), but Kling indicates that there is no reason to believe that Medicare, and thus the government, is more efficient or able to control costs better than private insurance


2. Health care providers overcharge for their services - Kling quickly debunks this narrative with a crude financial model, concluding that "the increase in total health services consumed was slightly larger than the increase in the relative cost of health care services." Translation: health care costs are skyrocketing because of higher consumption and not higher prices


3. Premium medicine accounts for the rise in health care costs - described in greater detail below, premium medicine is the "greater use of specialists and advanced technology" with negligible increase in health care outcomes (life-expectancy, in particular). Kling believes that this narrative is the most persuasive and he offers his thoughts on how to revise our health care system

If you are wondering about other common narratives--high malpractice insurance or high drug costs--together these causes contribute to less than half of 1% of the GDP (health care spending being about 15% of the GDP). Of course, this contribution does not include the effect on physician diagnosis and treatment practices.

Physicians today rely more heavily on expensive diagnostic techniques (MRIs, CT scans, etc), thus contributing to the rise in premium medicine. Kling acknowledges that this trend is in part due to the culture of modern day medicine--physicians are expected to definitively determine the cause of illness and treat the causes directly. Moreover, Kling states premium medicine is compounded by redundancy--devices/approaches that provide negligible increases in diagnostic/treatment ability but are significantly more expensive. So why are such service overuses not controlled by the current reimbursement restrictions of private insurance? Kling believes that insurance companies are so overwhelmed with frivolous claims that they cannot effectively regulate "gray area" claims-reimbursement requests for approaches with incremental benefit and a substantial price tag. Moreover, denying "gray area" claims exposes insurance companies to negative publicity, lawsuits, and so on.

Kling contends that a perfect health care system would accommodate three central principles: 1) Unfettered access (health care is readily available to everyone); 2) Insulation (patients are removed from the financial burden of care); and 3) Affordability (society is able to bear the cost). However, these three qualities are not compatible with each other and a perfect health care system is therefore unattainable. One could achieve two of the three principles, but not all three. For example, ready access to care without regard to cost is possible, but it would quickly make health care unaffordable to society.

Nevertheless, Kling suggests numerous steps that we can take to improve our current health care financial system:

• Remove patients' insulation from average health care costs - making individuals bear the cost of their care forces them to shop around for the best price. Physicians will reciprocally be much more cost-conscious in their diagnostic and treatment recommendations. Eradicating patient insulation can be achieved by increasing deductibles to a sufficiently large number ($10,000) and encouraging personal savings through tax-deductible health-savings accounts


• Discourage employer-provided excessive coverage - such coverage fosters health care overuse and inflates health care spending. Instead, cap the amount of insurance that employer's can provide tax-free or even tax the employer-provided insurance as employee income


• Introduce a national commission to standardize best practices - such a commission would define protocols for diagnosis and treatment. These protocols would in turn dictate physician reimbursement and mitigate physician's exposure to malpractice risk


• Phase-out Medicare - Presently, Medicare makes up more than 80% ($68 trillion) of the federal government's unfunded liabilities (services the government has promised but does not have the funds to support). What does this mean? Medicare is unsustainable and we must either a) get rid of it gradually, or b) raise taxes immediately. Kling suggests eliminating it altogether. Instead, he proposes that individuals should be mandated by the government (through taxation) to accumulate at least $100,000 in personal savings for health care costs over the age of sixty-five. A quarter of these savings would used towards premiums for "Catastrophic Coverage"--insurance for very expensive treatments with a high deductible ($75,000)--and the remainder for typical costs and paying the high deductible


• Ease licensing restrictions - In line with simple supply and demand principles, increasing the number of available practitioners (physicians, assistants, therapists, etc.) will decrease the cost of services and thus the cost of care overall

There you have it folks: a plan to reform health care that is endorsed by the Cato Institute. I remain confident that these recommendations will not become policy anytime soon. Nevertheless, they highlight trends we can expect to see in the very near future; in particular, patient deductibles will steadily increase (making basic care more consumer-driven) and Medicare will be slowly phased-out (by pushing the eligibility age further and further back). Also, a national commission to standardize best practices is an eminent reality as several of the Democratic candidates for President have already proposed such measures.