We took a look at Sen McCain’s health reform plan last week, aided by an analysis published on the web by the journal ‘Health Affairs. Today it’s Obama’s turn.
Unlike Sen McCain’s plan, Sen Obama’s plan maintains employer-based coverage (something most Americans want), prohibits medical underwriting and cancellation of policies and establishes a minimum set of benefits to prevent ‘back-door’ medical underwriting, and requires employers to contribute to employee coverage or pay a tax.
Estimates indicate Obama’s plan will add eighteen million Americans to the rolls of the insured over the near term, with some likelihood that there would be increasing incentives put in place to encourage more and more folks to buy health insurance coverage. Obama has resisted (although not too strenuously) calls from many to establish a universal mandate, thereby requiring all to have health insurace, noting that it is more important to first control costs and only then expand coverage.
He’s right. Unfortunately Obama’s plan doesn’t do enough to control costs.
Perhaps the most significant cost-oriented part of Obama’s plan is the ‘stop loss’ coverage whereby the government will agree to “reimburse employer health plans for a portion of the catastrophic costs they incur above a threshold if they guarantee such savings are used to reduce the cost of workers’ premiums.” For truly catastrophic claims there’s certainly lots of precedents for this type of coverage – for years self-insured smaller employers have purchased stop loss coverage for high-cost individual claims for years. The question is how much of the claim cost will the Feds assume, and how much it will cost to do so (someone’s got to come up with the dollars, and if the Feds do that ‘someone’ is the taxpayer; it looks like the Chinese are done funding our deficits for a while). But while this will reduce the cost of insurance, this does nothing to address health care costs per se.
The only other solid part of the plan that addresses cost is the call to negotiate drug prices. That may well lower trend rates somewhat, but drug pricing seems to be rather flat these days, so the change may not be all that beneficial over the near term.
Neither of these policy ideas will do much to address costs. That’s because US health care costs are not high (relative to other countries) because care is better, or we live longer, healthier lives, or Americans have more access to expensive medical technology or drugs, or there are proportionally fewer folks dieing of cancer or heart disease or AIDS. US health care costs are higher because for two mostly unrelated reasons – higher unit prices and wildly varying, and inconsistent, medical treatment.
Unit prices for medical services are higher in the US than in other industrialized countries. Office visits, diagnostic imaging, lab tests, hospital stays, surgery, brand (but not generic) drugs – almost are are more expensive – on a per-service basis – in the US than elsewhere. Those higher unit prices mean more profits for manufacturers, higher wages for clinicians and support staff (and consultants) and more cash to use to build even more medical facilities and buy medical machines.
Sounds simple, because it is.
The not-really related issue of practice pattern variation (a technician’s term for different physicians in different geographic areas using different medical care to treat the same condition), and the increasing evidence that this variation results in far too much useless or potentially harmful care may be even more of a problem. Practice pattern variation has been shown to result in far too many hospital admissions in Boston, prostatectomies in Alaska, hysterectomies in parts of Maine, and back surgeries in southwestern Florida,. There is absolutely no evidence that these additional medical procedures deliver longer/better life, or even that they represent appropriate care. On the contrary, these additional procedures add cost and complicate treatment with no apparent benefit.
These two issues are not addressed adequately by Obama (or McCain either, for that matter). However, as Obama has correctly stated that expansion of coverage must be preceded by cost control, this oversight is more obvious in his plan.
Obama has called for the establishment of a Federal Agency to oversee effectiveness assessment – to help determine what medical care works best for what patients. Yet the proposed funding for this agency appears grossly inadequate. It is also instructive to remember what happened to the ‘old’ Agency for Health Care Policy and Research, a body that was emasculated after angering physicians and other stakeholders by pointing out the inconsistencies in treatment for back pain across the country.
As I noted last week, taking on the medical establishment, which is what the next President and Congress must do if they are to rein in health care costs and expand coverage, is going to be a brutal and bloody war. Big pharma, medical device manufacturers, physicians, hospitals, ancillary providers, health plans, nursing homes, medical gas suppliers, distributors, states, attorneys, and consultants will all be vociferous in their defense of their critically important, and therefore financially-deserving role. Health care accounts for a sixth of the US economy, which means that very few would be untouched by a major restructuring of the health care system. While it is understandable that Obama would not tip his hand, thereby opening himself up to the inevitable assault from those whose oxen slated to be gored, it is also unfortunate that the ‘change’ candidate won’t reveal more of his plan than the usual ‘reduce cost through elimination of waste fraud and abuse’.
Solving the health care crisis will absolutely require attacking price and practice pattern variation. This should be the core of any health reform program, for without cost control universal coverage will rapidly drive up costs, crowding out investment in plant, labor, technology and education. We should know where the candidates stand, what they are prepared to do, what groups they will take on and how they will do it. Yet neither candidate has the political courage to take a stand.
Obama’s platform falls well short on the most important issue.

Sen McCain has modestly noted economics is not his strong suit. Examining his health reform plan provides additional insight into that assessment.
“Achieving Senator McCain’s vision (for health reform) would radically transform the US health insurance system…The decline in job-based coverage would force millions of Americans into the weakest segment of the private insurance system [emphasis added] – the nongroup market – where cost sharing is high and covered services are limited. Senator McCain’s proposal to deregulate this market would mean that people in it would lose protections they now have. These changes would diminish the security of coverage for most Americans, especially those who are not – or someday will not be – in perfect health.”
That’s how Health Affairs summarized the impact of GOP Presidential candidate John McCain’s health reform platform.
I’m at a loss to understand how McCain and his supporters could think that a free market in health insurance would actually help resolve the health care crisis, cover more of today’s uninsured, and provide insurance for those who need it – the folks with chronic conditions.
There are two very simple reasons the free market will not solve the health care crisis. First, private industry is in business to make money. And insuring high cost people is not how insurers make money. Auto insurers refuse to cover drivers with bad records; home insurers won’t insure houses on flood plains, liability insurers won’t provide coverage for companies run by convicted felons, marine insurers won’t write ships operating in a war zone. Ask homeowners on the Gulf Coast about their ability to buy wind and flood insurance – if the various states don’t force insurers to provide the coverage, it is incredibly difficult to find any insurer willing to take the risk.
Second, most health care dollars are spent on/by relatively few people.

One-tenth of Americans incur two-thirds of all costs. One-twentieth drive half of all costs, and a mere one percent drives over twenty percent.
In a free market, insurance companies would absolutely refuse to cover anyone on the left side of the graph, and they’d work very hard to tweak their underwriting so they only insured folks in the far right column (where half the population incurs less than four percent of costs). That’s not an indictment of insurance companies, it is a statement of fact. Even in today’s regulated markets, fully one-third of individuals seeking coverage in the individual market (the only market that would exist in McCain’s world) were “denied coverage or charged more because of a pre-existing condition…nearly half found it difficult or impossible to find affordable coverage” (Health Affairs).
McCain proposes an expansion of state-run high risk pools to help deal with these folks, but his plan only provides funding for three million potentially high risk people – less than one percent of the population. That leaves (at the very least) fourteen percent of the population without coverage, yet needing care. Who’s going to pay for their health care? Sure some of it would be paid by each person, but few individuals can afford to write a check for a couple days in the hospital. The result? A huge rise in the number of charity cases seeking care at emergency rooms, a rise that would quickly bankrupt many providers.
There’s a further problem with McCain’s plan; the deregulation of insurance would mean that any insurance company would be able to cancel anyone’s policy as soon as they were diagnosed with a potentially costly condition. That is not the case today, where in most states once you’re insured, the insurance company can’t single you out for a premium increase or cancel your policy; the practice, known as post-issue medical underwriting, is illegal in most jurisdictions.
So just as some auto insurance companies cancel policies after an accident or ticket, under the McCain plan health insurers could – and would – do the same.
Then there’s the cost. McCain wants to cancel the tax exemption for employer-based health insurance plans, replacing it with a refundable tax credit of $2500/individual or $5000 per family to help them buy insurance (note – the average individual policy now costs over $4000 and the average family policy cost exceeds $12,000). The Senate Joint Committee on Taxation’s report on the McCain health plan estimates the cost of the tax credits would be $206 billion in FY 2009 and $3.6 trillion over 10 years.
The McCain plan works just fine – in a world inhabited only by free-market economists where no one gets sick or hurt. Except when it comes time to pay for it, or when any of our economists does get ill and finds him/herself seeking care at the doors of a bankrupt hospital.
As Bob Laszewski points out, if McCain is elected, there is absolutely zero chance his plan will be passed. That being the case, why waste my time writing about it and yours reading? Because it shows McCain’s complete lack of understanding, his total ignorance of the workings of one-sixth of our economy. Then again, he’s been covered his whole life by a government plan, so he has had zero exposure to health care in the real world. Come to think of it, he hasn’t had any exposure to the real world in recent memory, as he has been in Washington for the last thirty years.
McCain said it himself – economics is not one of his strong suits. His health plan proves it.
Next week I’ll examine Obama’s plan to see how he deals with the real world. For starters, what about cost inflation, Senator?