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

Access the daily updates as the Congress and President debate health care reform here.

February 26, 2009: The Obama Health Care Budget Proposal, Mr. President, Aren’t You Just Kicking the Can Down the Road?


A Review of the Obama Campaign Health Plan

Barack Obama’s health care plan follows the Democratic template—an emphasis on dramatically and quickly increasing the number of people who have health insurance by spending significant money upfront.

The Obama campaign estimates his health care reform plan will cost between $50 and $65 billion a year when fully phased in. He assumes that it will be paid from savings in the system and from discontinuing the Bush tax cuts for those making more than $250,000 per year.

That the Obama health care reform plan would cost between $50 and $65 billion a year is highly doubtful. Obama claimed his plan was nearly identical to Hillary Clinton's and her plan was projected by her to cost more than $100 billion a year.

By contrast, the McCain Republican strategy for health care reform would first emphasize market reforms aimed at making the system affordable so more Americans can be part of the system and he claims that there would be no additional upfront cost.

Obama breaks his health care reform plan down into three parts saying that it builds “upon the strengths of the U.S. health care system.”

The three parts are:

1. Quality, Affordable & Portable Health Coverage For All
2. Modernizing The U.S. Health Care System To Lower Costs & Improve Quality
3. Promoting Prevention & Strengthening Public Health

Obama claims that his health care reform plan will save the typical family up to $2,500 every year through:

• Health information technology investment aimed at reducing unnecessary spending that results from preventable errors and inefficient paper billing systems.
• Improving prevention and management of chronic conditions.
• Increasing insurance industry competition and reducing underwriting costs and profits in order to reduce insurance overhead.
• Providing reinsurance for catastrophic coverage, which will reduce insurance premiums.
• Making health insurance universal which will reduce spending on uncompensated care.

Will Obama be able to cut the typical family’s health care costs by $2,500 a year?

Well, yes and no.

All of the candidates, Republican and Democratic, called for most of what is on the Obama cost containment list; expanding health information technology, improving prevention and better management of chronic conditions, and a more vibrant health insurance market.

Obama is unique in calling for catastrophic reinsurance coverage in order to reduce the cost of family health insurance. Really, this is not a cost reduction but a cost shift. This idea, first proposed by Senator Kerry in his failed bid for the presidency, would have the federal government absorb a large portion of the highest cost claims thereby taking these costs out of the price of health insurance. That would reduce the price of family health insurance but would also increase federal spending by the same amount. It would also water down the incentive for insurers and employers to manage these claims since most of these costs would be transferred to the government.

Obama’s assertion that covering more people would reduce the overall cost of insurance is likely correct because it would mean less uncompensated care that would have to be shifted onto the rest of the system. Since the McCain health plan emphasizes making the insurance system affordable before ensuring widespread coverage as the first priority, one could argue that Obama would make gains toward near universal care well before McCain.

In the end, Obama’s claim that he would save families $2,500 every year are based upon a number of initiatives that McCain also argues he would undertake. More, these ideas, such as health IT and prevention, are under way in the market anyway.

Obama’s claim that he would save $2,500 per family beyond a simple cost shift to the federal government of large claims is unsubstantiated and highly doubtful.

Let’s take a look at the three main parts of the Obama health plan:

1. “Quality, Affordable & Portable Health Coverage For All”

Obama follows the Democratic health care template by building on existing private and public programs such as employer health insurance, private individual health insurance, Medicare, and Medicaid. This is unlike the Republican approach that would refashion the private market by providing incentives to encourage a reinvigorated individual health insurance platform focused on personal choice and responsibility (see McCain post).

Obama’s key components here include:

• Establishing a new public program that would look a lot like Medicare for those under age-65 that would be available to those who do not have access to an employer plan or qualify for existing government programs like Medicaid or SCHIP. This would also be open to small employers who do not offer a private plan.
• Creating a “National Health Insurance Exchange.” This would be a government-run marketing organization that would sell insurance plans directly to those who did not have an employer plan or public coverage.
• An employer “pay or play” provision that would require an employer to either provide health insurance or contribute toward the cost of a public plan.
• Mandating that families cover all children through either a private or public health insurance plan.
• Expanding eligibility for government programs, like Medicaid and SCHIP.
• Allow flexibility in embracing state health reform initiatives.

Obama would also mandate guaranteed insurability, a generous minimum comprehensive benefits package such as that required for federal workers, the ability to take their policy from one job to another (portability) when it is purchased through the new Medicare-like public plan or the "National Health Insurance Exchange," and he would require providers to participate in a new plan to collect and report data about standards of care, the use of health information technology, and administration.

Obama would provide premium subsidies to individuals and families who are not eligible for employer-based care or a government program. Just how much these subsidies would be is not indicated. In Massachusetts, thousands of families have been exempted from that state's mandate to buy coverage because subsidies are inadequate for those making too much to qualify or too little to still afford coverage.

How would Senator Obama do on improving coverage for all?

This is the section that separates him most from Senator McCain.

In Europe they have a way of explaining the general philosophy toward universal health care for all. You often here the term, “solidarity.” The concept implies that everyone is in it together—all are covered in the same pool and share the burden equally.

Democrats, like Obama, tend to make an Americanized attempt at health care solidarity by crafting a structure that ensures everyone will be covered, not by a single government-run plan but by guaranteeing access to a mix of government and private plans. Obama understands that the vast majority of Americans are not ready to give up their private health insurance plans and that creates a political imperative to continue making private health insurance a part of any “unique American solution.”

Republicans, like McCain, on the other hand, build their health reform plans on the classic American foundation of “rugged individualism” promoting choice and personal responsibility.

Therefore, Obama puts as his first priority getting everyone in the system by spending lots of money up front to ensure that everyone can afford a benefit rich traditional private plan—or have access to a public plan.

McCain argues that we already spend too much on health care and says his plan will not cost more than that since he will rearrange existing tax benefits to provide the incentives and support necessary for a more efficient system. It is hard to see how McCain can rearrange the existing employer tax benefits those who are insured now get, reapply them on an individual basis to those same people and also have extra money to provide assistance for the millions of uninsured who don't get these employer tax benefits today.

Obama sets as his goal quality, affordable, and portable coverage for all.

Let’s take them one at a time:

• Quality- Obama’s quality initiatives look a lot like McCain’s as well as those things that are going on in the market anyway. All good points—but no advantage here or expectation there will be quick savings.
• Affordability – Affordability is more about shifting the cost of insurance to the government then it is making a more efficient U.S. health care system. Health insurance is more affordable for people because he spends many billions of dollars subsidizing access for everyone.
• Portable Health Coverage For All: While Obama does not have an individual mandate to purchase health insurance; it is likely that he would cover most of those who are uninsured today because of his generous subsidies for low-income Americans. Compared to McCain, he puts far more emphasis on getting people covered upfront.

Obama would be successful in getting most of the uninsured covered and securing coverage for those that now have it. But when it comes to crafting a system that will not continue to outstrip the rest of the economy in what it costs, I see no evidence that he has tackled the drivers in health care costs—in fact he has likely poured some highly inflationary “gas on the fire” by adding tens of billions more to the system with no effective cost containment features to offset the new inflationary pressures.

The Obama health care reform plan is very similar to the new Massachusetts health care reform plan that was first implemented a year ago. The Massachusetts plan is proving to be falling short of covering everyone for an affordable cost. It's second-year costs look to be coming in 50% higher than were projected when the plan became law in 2006 and its insurance is still unaffordable for most families making between $60,000 a year and $110,000 a year. See: First Year Results in Massachusetts' Health Care Reform Undercut Barack Obama's Health Care Reform Strategy

2. Modernizing The U.S. Health Care System To Lower Costs and Improve Quality

Obama would argue that I am wrong about the notion that he has no effective cost containment ideas. In this section of his plan he argues he will contain, if not reduce costs, with a long list of proposals.

He would reinsure employer plans for a portion of their catastrophic costs. This would reduce employer costs but it would do so by simply shifting them onto the government. He runs the risk of shifting these costs away from a market that now has incentives to manage them to a big government program that likely will not have the same incentives to confront and manage them. I don’t see this as cost saving as much as just cost shifting.

Obama goes on to outline a long list of quality initiatives that include disease management programs, coordinated care, transparency about cost and quality of care, improved patient safety, aligning incentives for excellence, comparative effectiveness reviews, and reducing disparities in health care treatments for the same illness.

McCain has virtually the same list—all good ideas and all things the market has been tackling for years with only incremental success. The notion that Obama will suddenly make any or all of these more successful than others have with all the billions spent on such programs in recent years constitutes a leap of faith. Why will Obama be any more successful in this area than any other candidate or than those who have been tackling these things for years—no new ideas here and no cost containment “silver bullet?”

Obama would also reform the medical malpractice system by strengthening “antitrust laws to prevent insurers from overcharging physicians for malpractice insurance.” Clearly a malpractice reform strategy supported by the trial bar! He also makes a vague pledge to “promote new models for addressing physician errors that improve patient safety.”

Obama makes investments in health information technology an important part of his cost containment strategy. This is something every other candidate supports and is generally regarded at the heart of what’s needed to improve both cost and quality. And it is something the market has been spending billions at for many years and has shown only slow but steady progress on.

Obama would make the insurance markets more competitive and efficient by creating the “National Health Insurance Exchange” to promote more efficient competition and he would set a minimum health cost ratio for insurers—not defined in detail. Reducing insurance company overhead is important but constitutes only a small percentage of costs and those overhead costs have been increasing at the rate of general inflation while health care costs have been increasing by two to four times the basic inflation rate in recent years. The biggest cost containment challenge is in the fundamental cost of health care itself.

He would legalize drug reimportation. However, the amount of drugs imported from Canada, for example, has fallen by half in recent years, as this once popular scheme hasn’t produced the savings to even maintain itself at past levels. Somewhat surprisingly, even Republican McCain favors drug reimportation.

He would emphasize the use of generics by making it harder for drug companies to payoff generic makers to stay out of their markets—a good idea that also has bipartisan support.

He proposes lifting the ban on Medicare being able to negotiate drug prices—including those for the senior Part D program. However, recent Democratic proposals to do so do not allow Medicare to take a drug off the Medicare formulary when the manufacturer is not willing to reduce its prices. If Medicare doesn’t have the power to walk away from a drug maker, its power to negotiate is a hollow one. Obama does not tell us if he would give Medicare the leverage it would need to get real results.

When the day is done, Obama gives us a list of generally good cost containment ideas that are more often than not also in Senator McCain’s health proposal and have been part of a market struggling to bring costs under control—nothing really new and nothing that promises to get better results than each of these cost containment ideas are going to be able to get us anyway.

What would it take to really contain costs?

McCain would say a more robust market and more reliance on personal responsibility and consumer choice to make the market work better.

Obama, like McCain, has come up with the same generally good list of things that are underway in the market anyway with only a limited success to point to so far.

To really get at costs you have to gore some very powerful political oxen among all of the key stakeholders.

McCain won’t do it because he simply doesn’t believe that a direct assault on the market players is the right thing to do—put market incentives in place and it will encourage and reward efficient behavior.

Obama won’t do it, not because he doesn't like government intervention, but because he doesn't want to offend key stakeholders who could derail any meaningful health care reform effort.

The Democrats learned a very powerful lesson in 1994 when many of the special interests all united in opposition to the Clinton Health Plan.

Capping or even reducing costs means you have to cap or reduce costs. There are no magic bullets that reduce payments without doctors, hospitals, insurers, and lawyers getting less than they would have gotten. All of the health IT, prevention, wellness, and the like will not reduce costs by any big amount at least in the short term.

McCain avoids the notion that aggressive cost containment is important because he just doesn’t believe in it—a vibrant market will do the job.

Obama avoids the notion that their cost containment list will be inadequate because it is politically expedient to do so—they aren’t going to risk their health care reform proposals by taking on the big stakeholders head-on.

I have been convinced for some time that we will actually do health care reform in two parts—access first and cost containment second.

This Democratic proposal is all about access—getting just about everyone covered. Getting everyone into this unsustainable system will then make things even more unsustainable creating an imperative for a second wave of real cost containment when the feel good list of cost containment proposals now in their plans falls short. My sense is that most Democratic health policy experts already know this but see no other political alternative.

3. Promoting Prevention & Strengthening Public Health

At the core of this Obama health care proposal is the notion that, “Each must do their part…to create the conditions and opportunities that allow and encourage Americans to adopt healthy lifestyles.”

Obama lists employer wellness programs, attacking childhood obesity in the schools, expanding the number of primary care providers, and disease prevention programs as part of his effort.

Again, his emphasis on healthier lifestyles is embraced by all of the other candidates and doesn’t give him an advantage.

Perhaps the most important thing a new president can do in this regard is to use the “bully pulpit” to place far more emphasis on just how unhealthy Americans are becoming. We can pass all of the health care reform proposals we like and spend many more billions of dollars each year but that will do little as we watch our youngest generation on its way to becoming the first in American history to be less healthy than the prior generation.

Will the Obama health reform plan work?

The Obama health reform plan would get most of those who are now uninsured covered.

The Obama plan focus is on access by making it possible for everyone to have coverage in an existing private or public plan and by making a Medicare-like program also available for those who don’t have private coverage.

The Obama plan is not really a universal health care plan. A universal plan, like those in Europe and Canada, start out by including everyone in a plan they are automatically enrolled in and that is paid for by various mandatory taxes. While people in these truly universal systems can sometimes opt out for a private plan, as in Britain, they are in one on day one. As the Massachusetts plan is showing us, Obama's plan structure will still leave a significant number of the uninsured without coverage.

Obama builds on the American tradition of people having to buy their coverage. He claims to make it affordable to buy—but the consumer must make the purchase. Obama makes that an option for adults. In the end what matters is not the mandate but whether coverage is in fact affordable to everyone.

McCain takes a completely different view continuing to build on options and choices and relying upon the market to do the work in creating an affordable system.

Would the Obama health care system work?

It would clearly get most of the unisured covered sooner rather than later.

The real question is how would it be sustained. Are his cost containment strategies going to support a system that is affordable in the long run?

No.

As the Massachusetts plan is showing us, the Obama health care reform plan would likely have an incomplete result for an unsustainable cost.

The Obama cost containment proposals are only incremental cost containment proposals that are layered over $100 billion of upfront spending to cover tens of millions of more people—far too little cost containment for the new massive injection of money, almost overnight, into the health care system.

Obama offers us a long list of good cost containment ideas—most of which he shares with McCain. Most have been underway in the market for many years with limited success. Undoubtedly, a government infusion of resources or requirements aimed at a more efficient system would have a positive impact but it is hard to see how they would be enough fundamentally alter things and bring the system under real control.

More likely, a $100 billion infusion of new health care spending by an Obama health plan would actually increase the rate of health care inflation and ultimately create an imperative for more draconian government intervention in the health care markets Obama would preserve.

Cost containment is the big missing link here.

The big question John McCain has to answer is how will his health care program cover everyone—particularly the older and sicker—and how will he be able to provide enough assistance to those who are now uninsured by simply redistributing the tax breaks now only enjoyed by those currently covered?

The big question for Obama is not in how he will get almost everyone covered—his plan spends enough money up front to likely do that—the question for Obama is how he will create an affordable and sustainable health care system with only minor incremental cost containment ideas?

November 5, 2008: The Morning After: Obama and the Dems Win Big--What It Means For Health Care

Earlier posts:

An Analysis of Senator John McCain's Health Care Reform Plan

First Year Results in Massachusetts' Health Care Reform Undercut Barack Obama's Health Care Reform Strategy

All posts on the Obama Health Care Plan