Tuesday, June 10, 2008

A Detailed Analysis of Senator John McCain's Health Care Reform Plan

A Detailed Review of Senator John McCain's Health Care Reform Plan

McCain’s thinking on health care couldn’t be more different from Democrat Barack Obama.

McCain very rightly points to health care costs as the biggest health care issue, "We are approaching a 'perfect storm' of problems that if not addressed by the next president will cause our health care system to implode."

Therefore, his focus is on the health care costs that make health insurance so expensive that many individuals can't afford it for themselves, employers can't afford to provide it to their employees, and government can't afford a wider safety net for the poor and long-term solvency for senior benefits.

He also reminds us that costs can't be improved without dealing with quality in tandem.

His plan would also provide very strong incentives for employers to transfer the primary responsibility for purchasing health insurance from the employer to the individual health insurance market. His plan is very much about individual choice and responsibility and the conservative view that consumer control is critical to cost containment.

While McCain’s conservative credentials have been questioned during the campaign, there is no doubt his health plan reflects a strong conservative ideology.

Senator McCain's health plan clearly reflects a belief that we need to put as our first priority getting at the things that make health care so expensive and frustrating for consumers rather than, as he would put it, promising everyone a painless access to a system that isn't working.

In his words:
"For all the grandiose promises made in this campaign, has any candidate spoken honestly to the American people about the government's role and failings about individual responsibilities? Has any candidate told the truth about the future of Medicare? Its costs are growing astronomically faster than its financing, and leaving its structural flaws unaddressed will hasten its bankruptcy. Has any candidate warned that we have a personal responsibility to take better care of our children and ourselves? Yet that is the only way to prevent many chronic diseases. Has any candidate insisted that genuine and effective health care reform requires accountability from everyone: drug companies, insurance companies, doctors, hospitals, the government, and patients? Yet that is the truth upon which any so-called solution must be based.

Democratic presidential candidates are not telling you these truths. They offer their usual default position: If the government would only pay for insurance everything would be fine. They promise universal coverage, whatever its cost, and the massive tax increases, mandates, and government regulation that it imposes. I offer a genuinely conservative vision for health care reform, which preserves the most essential value of American lives—freedom.”
So, how effective would Senator McCain's plan be in making health care, and health insurance, affordable and better? Let's take a look at his very brief outline:

Allowing people to buy health insurance nationwide instead of limiting them to in-state companies.

His focus here is on making individual health insurance lower in cost so people can buy it. Creating one national health insurance policy form, which would save insurers the need to comply with insurance regulators in each of the states, would make things more efficient. However, this tackles only the non-medical expense portion of a health insurance policy and only a small part of that.

Non-medical policy expenses
(overhead) increases each year with inflation—maybe 3% a year—while by far the larger portion of individual health insurance--medical costs--have been trending at 10% or more in recent years. While making the distribution of insurance more efficient is a good thing, it is the far smaller part of the problem—and it's a one-time fix. Often when we hear of these proposals, we also hear that the states should continue to do the consumer protection work since they tend to be closer to their citizens than one big national regulator could ever be. McCain is not clear on this.

Apparently, McCain would also attempt to do away with many of the state benefit mandates that are often pointed to as a cause of higher health insurance costs by giving consumers a federal policy option. Some states are estimated to add as much as 30% to the cost of a policy by loading on the mandates.

While many of these benefit mandates do unnecessarily jack up the cost of a health insurance policy, most are fairly common sense--requiring a policy to cover a mammogram or to cover adult children while they are in college, for example. If McCain believes he can substantially reduce the cost of health insurance by eliminating benefit mandates he needs to also tell us which ones he could exclude. My experience is that when you see the list of the really "unnecessary mandates" the impact of this reduction shrinks substantially.

By creating an optional federal health insurance regime in addition to the various state rules, McCain would also set up a market where national health insurance products would compete with existing state products. That could easily set-up a situation where the federally regulated product could "cherry pick" business from the more regulated state product. The healthiest consumers would tend to gravitate to the more stripped down federal policy while sicker people who used more benefits would tend to stay in the more benefit rich state plans. This could create some very serious anti-selection problems between state and federal markets that could have very negative consequences.

But McCain’s market proposals would create a more vibrant individual health insurance market and reenergize what has become a smaller portion of the business.

In this context, we also sometimes hear proposals to give insurance companies greater freedom to set policy and rating provisions . That begs the question, would McCain allow insurers to have greater flexibility in rating the healthy versus the sick and allow insurers to continue to be aggressive in applying pre-existing condition provisions?

It will be most important for McCain to make the individual health insurance system more workable than it is now. The McCain campaign has made reference to providing assistance on a “cost adjusted basis” to older and sicker people but they have not detailed this idea.

It is not entirely clear how Senator McCain will make the individual market more viable and robust beyond dealing with the marketing expenses and streamlining regulation.

And he would have to make huge strides with individual market reforms to make individual policies more expense competitive. Individual health insurance tends to have expense factors of 25% to 30% of premium--leaving only 70% to 75% of premiums for medical costs. Group policies allocate more like 12% for expense overhead. The notion that he can even make up this huge difference by streamlining the individual health insurance market is hard to see. (See also: Administrative Costs and the Individual Health Insurance Platform for Health Care Reform)

Permitting people to buy insurance through any organization or association they choose as well as through their employers or buying direct from an insurance company.

Here Senator McCain again endorses a vibrant insurance market as a way to use competition to meet the very different needs one consumer has compared to another. The buzzwords we very often hear in regard to this point are "choice" or "freedom of choice."

His mentioning of trade associations as one way to purchase health insurance reminds me of the big debate we had a few years ago in Washington about letting trade associations offer their own health plans and exempting them from certain rating and underwriting laws the rest of the insurance market had to follow. That debate led many to believe that brand of association heath plans would take us back to "cherry picking." Senator McCain needs to clarify what he means here.

Providing tax credits of $2,500 to individuals and $5,000 to families as an incentive to buy health coverage.

This provision is not unlike the proposal first made by President Bush at last year's State of the Union Address. The President called for ending the longstanding tax exemption consumers get on any health insurance benefits paid for by their employer. The President would replace that with a standard $7,500 deduction for individuals and a $15,000 deduction for families.

McCain would also end the employer tax exemption—meaning that if an employer spends the average $12,000 a year on family health insurance, the worker would now have a tax bill on the portion of the $12,000 of benefits paid for by the employer.

Like Bush, McCain would offer a personal tax offset, but he would do the new offset a bit differently than Bush.

McCain would give each single person a $2,500 tax credit and a $5,000 tax credit for a family who had health insurance. A tax credit means that when taxpayers calculate their taxes, instead of taking a deduction, as Bush would do, under McCain's plan they would subtract the tax credit ($5,000 for a family) from their final tax bill (and they would likely be able to take advantage of the credit during the course of the year to pay their monthly premiums).

By exchanging the longstanding employer tax exemption for this tax credit, McCain swaps money around and creates what should be a revenue neutral scheme in the short term. President Bush's 2008 budget numbers actually showed a lower cost program in the long run for the government as health care inflation out-striped his new deductions. But that would also mean higher costs for consumers over the longer-term. Senator McCain did not provide financial projections.

If a person is in a 33% tax bracket, McCain’s idea works out the same for consumers as Bush’s plan. But, McCain's way of doing it helps low income people the most. If a person is in a 15% tax bracket, a $15,000 tax deduction is worth only $2,200 off their taxes toward their health insurance bill. By making it a flat $5,000 credit for a family, McCain is giving low-income people more and high-income people less—consistent with a progressive tax policy strategy.

However, the real question is, will McCain's plan give people enough to be able to afford health insurance? With the average cost of employer-provided family health insurance at $12,000 a year, a $5,000 tax credit will often come up way short—especially for higher age people and those who don't have the benefit of an employer contribution. High deductibles and HSA plans will help but families who don't have employer contributions should be prepared to pay at least a few thousand extra dollars.

He calls for the states to develop a "risk adjustment" bonus for high cost, otherwise uninsurable, and low-income families to supplement tax credits and Medicaid funds. But just who will pay for this (the states alone?) and how it would close the cost gap is not explained.

Families who continue to have an employer paying a large part of their health insurance costs may actually come out ahead—at least in the early years before health care inflation erodes some of the tax credit's impact.

This kind of tax credit structure is also designed to encourage the individual market over the traditional employer-based market. Many conservatives believe the employer market has led to health coverage that is too benefit rich and shields consumers from the true costs—all of which contributes to overspending and the high health care costs we have.

If McCain were to be successful in moving the system from the employer to the individual with his individual tax credit proposals, the employer arguably would have a smaller incentive to continue providing these benefits. Many employers might simply say, "Here's the money I was paying—go find your own coverage." It may just be easier for the employer to drop the coverage and give the employee the cash value of the health benefits in the form of higher wages.

However, McCain's individual health insurance system would allow for age rating--the younger paying a lot less and the older a lot more. If an employer were to increase worker wages by the average employer contribution of almost $8,000, the younger employees would get a lot more than they needed to buy an individual policy and the older would be way short.

There is the real danger that there could be a huge mismatch of any new wage increases to compensate for the dropping of health coverage and the age-adjusted costs workers would then have to pay on their own in the individual health insurance market.

The employer would also have the new advantage of having the difference in wages go up each year by the wage rate while the employee saw his health care costs rise at the rate of health care inflation—which has averaged two to three times more than wage increases.

McCain does not have a mandate to buy insurance for individuals or employers. So, people can still opt to go without coverage.

Again, the big question is how does McCain see his individual health insurance market working. How will he deal with age rating, medical underwriting, and pre-existing conditions? If McCain does not develop an individual health insurance market everyone can access, no matter how old or how sick they are, his plan will fall way short. He needs to detail his “risk adjustment bonus” scheme for older and higher cost families.

For those that are uninsurable, McCain has suggested allowing them to join state-based risk pools or "Guaranteed Access Plans" (GAP) plans. However, state-based risk pools for the uninsured have never worked well because they tend to be swamped by people and underfunded. McCain's proposal would seem to allow health plans to insure the healthy and push the sick to state-run pools. (See also: John McCain's Health Care Plan and the Uninsurable--There Are Better Fixes Than the Ones He's Proposed)

See a detailed review of state-based risk pools: State High Risk Pools For the Uninsured--Who Would Want To Be In Them?

The use of state-run risk pools for the uninsured also sounds like a "unfunded state mandate" as the states would be forced to deal with a problem the feds won't.

Allowing veterans to use whatever provider they want, wherever they want by giving them an electronic health care card or through another method.

McCain has always had a special place for veterans and his health plan is no exception. While his goal of giving veterans access to any provider is noble, it will also be very expensive and there is no mention of what he estimates the costs will be or how he will pay for it.

Supporting different methods of delivering care, including walk-in clinics in retail outlets across the country.

McCain makes the common sense suggestion here to deliver care in more efficient places. However, there is no estimate for just how much this would save. It's like his health insurance proposal to cut administrative costs—a good idea on the surface but likely relatively small in scope. It is also not without controversy as the physician lobby has been opposing walk-in clinics that use nurse practitioners rather than physicians to deliver care.

Developing routes for cheaper generic versions of drugs to enter the U.S. market, including allowing for safe reimportation of drugs.

In fact, drug "reimportation" from Canada has dropped in half from its height a few years ago. With Part D, seniors are now able to get prescription drugs, in great part because of the managed care discounts that underlie the plan, for a lot less than before the program. Generic drugs are already very cheap and readily available. It is not clear how McCain sees any major savings here.

It is also not clear to what degree this free market conservative would use drug "reimportation" schemes to leverage-off the single-payer systems in places like Europe and Canada to negotiate his drug prices ("allowing for safe importation of drugs"). His reimportation proposal begs the question, if he believes using the Canadian government to negotiate drug prices, why not the U.S. government?

Revamping Medicare payment systems to pay providers for diagnosis, prevention, and care coordination without paying them for preventable medical errors or mismanagement.

McCain would use the Medicare program to lead the market in the development of a system of bundled service payment—often referred to by him as "coordinated care." Effectively, he would create a budget for each treatment program thereby putting providers at risk for delivering the care effectively and efficiently. He's really talking about pushing the market back toward capitation, or bundled at-risk payments for providers, as a means of controlling costs. This may be the only real cost containment proposal that any of the candidates, Democratic or Republican, has made.

However, as we learned, when capitation was in vogue in the mid-1990s, it is hard to do and providers don’t like it.

Senator McCain is a big believer in the value of "coordinated care." He would likely suggest that the Kaiser Permanente medical group is a good example of a system of coordinated care. While lots of data points to that kind of system as the best provider model to follow for both cost and quality, some doctors love it and most say they will never allow themselves to be "managed" by it.

This McCain payment system proposal needs to be developed further and McCain will have to show us how he is going to get the broad provider community to allow themselves to be put at risk once again and how we have the data and management systems to do a better job then we did the last time.

If the cheapest way to get high quality care is to use advances in web technology to allow a doctor to practice across state lines, then let them.

His proposal to let doctors practice across state lines is another idea that makes sense. However, it will be the physician community looking to protect their markets that will question this on quality grounds.

We cannot let the search for high-quality care be derailed by frivolous lawsuits and excessive damage awards. We must pass medical liability reform, and those reforms should eliminate lawsuits for doctors that follow clinical guidelines and adhere to patient safety protocols.

Senator McCain also favors medical malpractice reform that would place a cap on the damages a patient can collect. This traditional approach to tort reform went nowhere when George Bush and his Republican Congress pushed it when they controlled both the execututive and legislative branches of the government between 2001 and 2006. So long as at least 40 Democrats are in the U.S. Senate—almost a certainty during a McCain presidency—his medmal proposal will also go nowhere.

McCain would go further on tort reform by eliminating lawsuits to doctors that followed established clinical guidelines and adhered to patient safety protocols—a good idea. But here again, the details are difficult because getting agreement among doctors about "appropriate protocols" has been a struggle. The trial bar will also likely expect their Democratic allies to block it.

Senator McCain has also called for a greater use of health information technology to confront the cost and quality problems. So have about all the other Democratic and Republican candidates. While this is a good idea, these efforts have been underway in the U.S. health care system for many years. It has been slow going because like every other effort to control health care costs it’s always harder to do than it first sounds.

And like all of the other Democrats and Republicans he would promote disease prevention, healthy diets, and exercise.

So, how does Senator McCain come out toward his objective of dealing with both health care costs and quality?

Would the McCain proposal work?

Like all of the other presidential health care proposals, this is a political proposal in outline form—well short on details.

His program won't cost a lot since most of his spending comes from rearranging the existing tax exemption on employer-provided health insurance. But it is not at all clear how he would give the individual health insurance market the fundamental overhaul it would need to become the primary insurance market he would make it. How he would deal with age rating, medical underwriting, and pre-existing condition provisions are on top of that list of overhaul questions.

He also needs to show us how a $5,000 tax credit will give a near-poor uninsured family enough assistance to buy a health insurance policy with meaningful benefits when the average cost of employer-provided care is $12,000 a year. Even HSA-style employer-based plans still develop costs in the $10,000 area. Cheaper plans are available to young and healthy people in the individual market, but it will be the sick and old we will need to hear more about. And if the employer drops their coverage and gives all of their employees the same raise to compensate that will likely be far too much for the young to buy an age-rated policy and far too little for an older worker.

Any meaningful contribution McCain would make available to low-income people who do not have employer support for health insurance would drive the cost of his program way up. It may not be realistic for McCain to say he would help people who need help paying for their health insurance but that his plan will not cost taxpayers a lot of money.

He says that cost containment and improved quality are essential to a sustainable system—and he is clearly right on that point. But he has very little in the way of cost and quality improvement in his outline. The primary proposal here is to put providers at risk in Medicare by taking us back to the early days of managed care when the market believed the same thing and unsuccessfully tried to implement capitation. We need to know more about how it would be different this time.

It is doubtful McCain's cost containment ideas will accomplish any major savings.

McCain’s health reform plan is a patchwork of largely good ideas built on solid market-based principles.

He makes a good point when he says we need to fix the cost and quality problems before we just load tens of millions more uninsured people on a dysfunctional system.

Senator McCain's health care proposal is one that will appeal to conservative Republican voters as well as centrists.

The McCain proposal, unlike the Democrats’ proposals, also does more than give lip service to the marketplace. McCain is offering a proposal that would truly put the market front and center in a largely conservative prescription to solve America’s health care cost problems.

October 28 post: The McCain Health Plan's Good Idea for Health Care Reform--Likely Going Down With the Candidate

Post in response to his April 29 Tampa speech on health care:
John McCain's Health Care Plan and the Uninsurable--There Are Better Fixes Than the Ones He's Proposed

All other posts on the McCain Health Plan

A Detailed Analysis of Barack Obama's Health Care Reform Plan
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