Tuesday, June 10, 2008

Comparing John McCain's Health Care Plan to Barack Obama's Health Care Plan--What's the Big Idea Difference?

This election is different than any other on the issue of health care because both candidates are giving us serious blueprints to reorganize America's health care system and those blueprints are very very different.

As voters, you have a huge and critically important choice on health care.

There are dozens of details upon which they differ and for those I would point you to my comprehensive posts on the McCain Health Care Plan and the Obama Health Care Plan.

But to understand their big idea differences, I would point you to our pension system to better understand where McCain and Obama are going on health care.

Back in the 1960s and 1970s, it was common for workers to have what is called a defined benefit pension plan. The worker got a promise from the employer that when retirement came he'd get a certain monthly benefit--often about 60% of his final average earnings. That might be $2,000 a month--every month for the rest of his life. Therefore a defined benefit.

But starting in the 1980s, employers came to find that they couldn't afford these very expensive defined benefit pension plans. Employers started backing away from these plans often by no longer making new employees eligible for them or simply terminating them and freezing the benefits for those who had been participants.

Instead, employers more often offered a defined contribution plan--usually in the form of a 401(k)
plan. A 401(k) pension plan is generally dependent on employee contributions that are made pre-tax. Often, the employer matches the employee's contribution at some percentage of what the employee contributes--a defined contribution plan.

401(k) plans are popular with employers because they have no big funding requirement--defined benefit plans required them to contribute whatever it costs to keep the expensive benefit promise. Now, the risk of having enough money to retire on was shifted from the employer to the employee.

With workers changing jobs more often than in the 60s and 70s, employees also had a portable plan. Defined benefit pension plans have vesting schedules so a worker that stayed less than 10 years perhaps left with no pension benefit. With a 401(k), the employee leaves with all of his contributions and investment earnings as well as most or all of the employer's contributions. The departing employee can roll his account over to his own IRA or his new employer's plan and continues to accumulate toward retirement.

401(k) plans are popular with workers because they own them, control them, and make investment decisions for them.

The pension plan story is what the big idea difference between McCain and Obama's health plan is really about.

Obama: Do we continue down the same incremental line with health care reform--building on the employer-based system where the employer provides so many of us with generous defined benefit health insurance plans that the employer continues to pay most of the cost of no matter how expensive they are?

McCain: Or, do we change the health insurance focus from relying on the employer to relying on individual responsibility and a structure that enables the individual to build their own health care security, often with an increase in wages to replace the health insurance benefit, and not having to rely upon the generosity of one employer or another to provide a fixed and comprehensive plan?

Just as we have learned from our pension experience, one approach is not necessarily good or bad. Both have some very important advantages and some very important disadvantages.

Liberals often believe that the best way to provide health care is via a large group. Lots of people coming together to spread the risk and cost of insurance has worked well for consumers. The great health benefits most of us get from our employers may be the best thing going in our problematic health care system. The worry is that if we push people out of these plans and into the individual health insurance market to fend for themselves consumers will be subject to the vagaries of the market that include underwriting limitations and health insurance premiums in the thousands of dollars.

But conservatives often worry that the employer-based system is at the heart of why our costs are out of control. A third-party, the employer, pays for care the doctor and the patient demand. There is little in the way of incentives for the buyers to care much about costs. American employers are also saddled with by far the most expensive health care system in the world as they try to shoulder those costs and still be competitive in a global market--the cost of health care that goes into the cost of making an American car is much more than the cost of steel in that car. Conservatives also argue is is unrealistic to think the employer-based system is anymore sustainable than the old pension system was.

Conservatives also worry that Obama's endorsement of the defined benefit approach also applies to government making even more unsustainable entitlement promises than it does now by guaranteeing more access to government plans and promising expensive subsidies so everyone can get into a health insurance plan. That is a legitimate concern particularly in the light of Massachusetts enacting an Obama-like plan last year that is proving to be giving us an incomplete result toward getting everyone covered for an unsustainable cost.

But liberals counter that McCain would "shred" the traditional employer-based system of health care and push consumers into a very expensive and even less regulated health insurance marketplace with a reputation for wanting to cover only healthy people.

Liberals believe we have a moral imperative to get everyone covered sooner rather than later--in Obama's case by spending many billions upfront. Conservatives believe we have a moral imperative to avoid making promises we can't keep if the system isn't made to be affordable first.

In my mind, both sides have legitimate points.

I also believe either system can work--how well is a matter of what the details look like. The most important of these details is how costs would be controlled. When the day is done, controlling costs is what it is about so we can get everyone insured, sustain that, and make America competitive in the global economy.

So it all comes down to the security afforded by employer-provided defined benefit group plans (Obama) versus the potential for cost savings and the advantages of portability that come with a defined contribution approach (McCain).

In many ways, Senator McCain makes the more radical proposal--not what you would expect from the Republican on health care. But with our system as unaffordable and globally uncompetitive as it is that is by no means a criticism on my part.

As a voter, you have a big decision to make in November when it comes to health care.

Obama has a defined benefit health care plan that asks us to give up less--but will it get the job done in making health care more affordable and will the program be sustainable for us? Under Obama's health care plan that continues to rely upon the employer, will America's products and services be more competitive in the world?

McCain asks us to make the biggest health care leap with him and give up the security we have had under employer-based health care--but a security that may not be sustainable anyway.

Boy! Do you have a big decision to make.

You can see my analysis of each of the candidates all important health care plan details here:
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