Saturday, June 28, 2008

Run For the Hills, the Doctors Are Coming, the Doctors Are Coming!!!!

What is the one thing no human being should want to be next week?

A Republican Senator at a Fourth of July Picnic.

In the most amazing turn of events I have seen in 20 years of following health care policy in Washington, DC, the Democrats have the Republicans backed into an awful corner over the issue of the July 1st automatic 10.6% Medicare physician fee cut and corresponding private Medicare cuts to pay for nixing it. Also at stake is another 5% physician fee cut set for January 1, 2009.

On Tuesday, when the House voted 355-59 in favor of the Senate Democratic bill to stop the physician fee cut, suspend the durable medical equipment competitive bidding system, and pay for the doc cut by ending the private fee-for-service version of Medicare Advantage in 2011, no one was more surprised then the Senate Democrats themselves.

On seeing that vote, Senate Democrats scrapped the bipartisan compromise that Baucus and Grassley worked out to avoid the cuts, freeze 2009 physician payments, and bypass the Medicare Advantage changes to pay for it. Everyone was ready to be happy with that--Democrats and Republicans--and go home for the week-long holiday recess.

But then Senate Democrats saw a huge election-year opportunity--stick the Republicans out on a limb and start sawing it off.

Senate Majority Leader Reid and the Senate Democrats decided to shelve the Baucus/Grassley compromise and bring the just passed House bill back for another Senate vote (the first attempt to get the 60 votes necessary for cloture failed garnering only 54 Senators).

Late Thursday night they did just that and missed getting the necessary 60 votes by just one Senator. It is notable that Senator Kennedy was not present and could have been the 60th vote. It was a very undignified scene on the Senate floor as Republicans felt betrayed thinking they had an amicable deal to get past the cuts and go home.

It is also important to remember that Senate Democratic Leader Reid came in for lots of criticism by House Democrats late last year when he chose not to take on the Republicans and a threatened Bush veto and settled on a modest SCHIP compromise. Many in the House thought Senate Democrats should have been tougher. This may be Reid's chance to show the House how tough he can be--especially since the House handed him such a lopsided veto-proof margin on this vote.

So, the Senate recessed on Friday with the docs facing a 10.6% fee cut in just four days.

The Democratic plan is, with the docs looking down the barrel of a 10.6% fee cut on Tuesday, to let the Senate Republicans stew in a provider lobbying onslaught of unprecedented proportions during the week-long recess.

How effective is the doctor lobby? 355-59, that's how effective. About every other health care provider is onside with the docs as well--durable medical equipment because of their bailout in the House bill, and every other provider because they'd like to see the precedent established that it is the HMO industry that has the money to give back to Medicare--not them. AARP is also backing the docs giving members political cover with seniors to vote against the private Medicare plans.

I am continually asked, Would Congress really cut private Medicare with almost 10 million seniors in it? 355-59--any other questions?

Bush also reaffirmed his veto threat for any bill that cuts private Medicare. HHS, trying to get some heat off Republicans and save CMS from a real payment mess, deferred the physician cuts for ten days.

What's going to happen when the Congress returns on July 7th?

There will quickly be another Senate vote on the House bill.

If it passes it goes to Bush who, as long as the vote isn't enormously lopsided, will veto it. In that case the docs will need to have scared enough Republicans to get a veto-proof 67 votes or the docs are out 10.6%.

For two years I have been telling you that the Dems were going to get private Medicare. In November 2006, I thought the big showdown would come during the 2007 budget deliberations. More recently, I figured the Democrats would just bide their time until they had a stronger hand--after the coming elections.

Turns out I was six months off the first time.

Will the doctors suffer the 10.6% cut if the next Senate vote fails to move the bill? Could well be. Sure, the Baucus/Grassley compromise is laying there but I can't see the Democrats backing down now. The train has left the station on the Democratic argument that it is the Republicans who are blocking a physician fee fix and I think they will continue down that track.

If you are a doctor, I would go find your Republican Senator at the nearest Fourth of July picnic and get at it.

If 7 or 8 Republican Senators don't come back to Washington on July 7th with a changed mind, you are out 10.6% on July 1st and another 5% on January 1, 2009.

We will have extraordinary political theater the week of July 7.

Wednesday, June 25, 2008

A Flawed Defense of Medicare Advantage

If private Medicare is to be continued proponents had better make better arguments than Scott Gottlieb made on Tuesday's Wall Street Journal op-ed page.

Gottlieb is a former Bush Administration CMS official and is currently at the American Enterprise Institute.

The context of his arguments is that this week Congress is debating making cuts to the private Medicare Advantage program in order to pay for deferring a 10.6% physician fee cut that is set to begin on July 1.

A number of sources have estimated that Medicare Advantage plans are paid 13% more than traditional Medicare pays for similar seniors--the private fee-for-service (PFFS) product gets 17% more.

Since you can't access the op-ed unless you have an electronic subscription to the WSJ, here are his key points:
  • "The crucial question is where the controls [on our health care system] should be – with patients working through private plans or with government agencies. While private health insurance is imperfect, there's a misguided faith in Medicare's superiority that rests on flawed assumptions."
  • "First, there's a mistaken belief that Medicare is better staffed than private plans, and can therefore make better decisions about patients' clinical circumstances and the access to new therapies they should have. Yet at any time, Medicare has about 20 doctors and 40 total clinicians (including nurses) inside the coverage office, and fewer than a dozen in the office that sets the rates that doctors are reimbursed for the care they provide. Private insurers employ thousands of doctors, nurses and pharmacists, many experts in new technologies."
  • "Recent data from Price Waterhouse Coopers found that private plans spend roughly four times more than Medicare on "consumer services, provider support, and marketing," which includes money spent answering the telephone to adjudicate individual issues. Smaller health plans use one clinician for every 10,000 beneficiaries. Medicare would need 4,500 clinicians to keep pace."
  • "If Democrats have their way these plans could be in for big cuts. If Congress does nothing before July 1, doctors in Medicare will take a 10.6% cut in their pay. To stop that from happening Congress will likely raid Medicare Advantage and use the money saved by cutting that program to cushion the blow to doctors. What terrifies members is facing constituents over the July 4 break who will be upset about rising co-pays and uncertainty about their coverage. The question is how big of a bite the House and Senate will take out of Medicare Advantage. But cut they will, because Medicare Advantage plans enable competition that serves as a model for shaping Medicare into a privately run system."
Gottlieb's points can be summarized as:
  • Private Medicare spends more on its health insurance product than Medicare does and that makes it better.
  • If Congress cuts Medicare Advantage seniors will be mad.
His first point, that HMOs spend much more on "consumer services, provider support, and marketing" is tantamount to General Motors arguing it spends a lot more to build a Chevy than Toyota spends to build a Camry and therefore you should buy the Chevy. So?

The real question is just what do we get for the money spent--What's the return on investment in better cost and quality for the money our government spends on either private Medicare or the traditional plan?

If the HMOs really want to effectively defend Medicare Advantage they need to demonstrate value. Where is the industry data showing that after five years in this recent version of Medicare Advantage, and 20 years all told in the program, the private sector delivers a better cost/quality result?

Gottlieb's second contention, really a warning to members of Congress getting ready to vote, is that they risk upseting seniors in the private programs now getting lots of extra benefits because of the big private plan payments: "What terrifies members is facing constituents over the July 4 break who will be upset about rising co-pays and uncertainty about their coverage."

So he is arguing that Medicare Advantage plans should be paid more so the seniors in them can get better benefits? If seniors getting better benefits is a good idea why must that be confined to just the private plans?

The extra private Medicare payments (13% generally and 17% for PFFS) were intended to be a "prime the pump" strategy to get insurers and seniors interested in these plans in order that a sufficient market scale could be created to give the private strategy a chance to work.

Gottlieb now seems to be arguing in favor of a permanent private health plan entitlement. This isn't any different than the HMO trade association rolling out the NAACP last year in favor of continuing the extra payments indefinitely arguing extra payments for HMOs are a good way to provide better benefits for poor people.

What troubles me even more about Gottlieb's arguments is that he never makes a distinction between the mainstream Medicare Advantage products and the private fee-for-service (PFFS) version.

The PFFS products are too often a simple arbitrage of the Medicare payments system as a few health plans simply take advantage of the most generous payments never intending to build real networks. These "inch deep and thousand mile wide" players are just playing games with Medicare rather than really investing to create a better cost and quality outcome.

It is from these PFFS plans that the Democrats want to get most of the money Gottlieb is protesting. Just how does he rationalize these PFFS plans and the Democrats proposals with his contention that, "private plans spend roughly four times more than Medicare on consumer services, provider support, and marketing?"

I actually thought that Senate Finance Chairman, Max Baucus (D-MT), made the health plan industry a great offer this month that they should have taken. First, he did not propose making any significant cuts to the program. Most of his savings would have come from a requirement that the PFFS players would have to convert their programs to networks over a two year period--which is what the "prime the pump" strategy was supposed to be anyway!

Instead the health plan industry rejected that deal likely throwing the whole debate over to 2009 when the next President and Congress are likely to make even bigger changes--likely impacting more than just the PFFS players. If they had taken the Baucus deal, Congress might well have left the private Medicare program alone for a number of years more. Maybe not--but just what did the mainstream plans have to lose? Clearly, they would have resolved the most controversial part of the program.

One has to wonder just how long the mainstream health plan industry is going to protect the "inch deep and thousand mile wide" PFFS guys and in doing so putting at serious risk the standard Medicare Advantage program.

If the health plan industry is relying on Gottlieb to speak for them on why private Medicare needs to be saved, I'm not optimistic.

By the way, even House Republicans didn't buy Gotlieb's arguments--the House voted 355-59 yesterday to do the Baucus deal.

An updated Baucus/Grassley deal is pending in the Senate and I firmly believe there will be lots of health plan execs that will be wishing later in 2009 they would have taken the first Baucus deal and thrown the "inch deep and thousand mile wide" PFFS players under the bus in order to insulate mainstream Medicare Advantage when they had the chance.

Thursday, June 19, 2008

Coventry Health--Another Reminder That This Isn't an Easy Business

Here are some comments from a first quarter earnings call Coventry management would sure like to take back.

Yesterday, Coventry reported that its Medicare private fee-for-service business will miss its second quarter medical cost ratio projections by more than 300 basis points and that it will miss its prior second quarter estimates for its commercial medial cost ratio by a whopping 200 basis points.

Today, Aetna and Humana reaffirmed their prior earnings guidance leading people to conclude the sheer size of the Coventry earnings problem is largely internal.

What really troubles me about the Coventry announcement is that:
  • Their private fee-for-service (PFFS) problem should have been obvious to to their actuaries since Coventry had apparently not issued ID cards to new PFFS customers and claims weren't coming in as they should have been. The PFFS data had to be too good to be true and that should have been obvious.
  • Their explanation for seeing their commercial trend jump by 200 bps is inadequate. They said they are seeing an increase in large claims and hospital claims generally. That is true of other health plans but not to anywhere near the same degree as Coventry. It is not clear to me that Coventry has really gotten to the bottom of all of this.
CEO Remarks from the transcript of Coventry Health's first quarter conference call on April 25, 2008:
We've said for the last three years that the core operating growth rate in a purely commercial business was not as high as some were suggesting. We took some flak for that. But more recently, the reality of that seems to have become more evident. But that is away different from an underwriting cycle. Underwriting cycles are also not caused by variations in medical cost trends. Variations in medical cost trends generally do not happen quickly and given the progress in analytics within the industry, will be pretty closely anticipated in pricing. That doesn't suggest we will never make a mistake and miss it a little, but that's far from an underwriting cycle.

Underwriting cycles are caused solely by lack of pricing discipline, either consciously, which I actually think is less common, or unconsciously, through lack of financial control. This isn't a new topic either. We've been, for many years, answering the question of whether there's an underwriting cycle. We've cited a consolidation in the industry, growth of for-profit blues, improved analytics and so on and on and on. Those reasons are as valid and real today as they have been for the last five years. It makes no economic sense to chase market share at the expense of pricing discipline.

I'm reasonably confident that that's understood across the industry, but I'm absolutely certain that it's understood at Coventry. So don't look for the operating margins of our commercial operations to fall off the table. They won't. If we have to shrink a little, which we don't think we will do, but we will, we will not sacrifice margin at the expense of market share, and that is the only thing that causes an underwriting cycle.

From the CFO on the same call:

At the risk of sounding like a broken record, I want to reiterate our views on commercial trend in pricing as well. We continue to see no evidence of an overall acceleration of cost trend in 2008 versus 2007. Our outlook remains that trend will be stable in 2008 versus 2007, in the neighborhood of 7.5%. Over a long period of time, we have exhibited an attention to detail and an unwavering discipline in the pricing arena, and to no surprise, this will not be changing. We remain firmly committed to having our commercial price increases at least equal to medical cost trends. The competitive environment is, as always, a very competitive arena. Growth is not easy to come by, but despite isolated local market skirmishes, it is still a rational environment where those that have a low-cost structure, those that are disciplined, those that are close to the details and fundamentals of the business, will succeed over the long haul.

Less than two months later Coventry is reporting 9% commercial trend.

I guess the moral of the story is that you never want to get cocky in this business.

Wednesday, June 18, 2008

Coventry Health Care--What the Heck Is Going On?

When WellPoint, Humana, United, and others had earnings warnings this spring I pointed out their issues were largely unrelated and amounted to more rounding errors as the helpful five year deceleration in health care trend came to an end and the business just wasn't as easy.

But today, Coventry hit us with a 300 - 340 basis point adjustment in their expected Medicare Advantage medical loss ratio for the second quarter. They pointed to a problem with private fee-for-service (PFFS) claims coming in from prior periods. Because PFFS does not rely on provider networks the claim patterns look a lot more like old time fee-for-service--and this block is acting like it.

The hit to PFFS has to be a lot bigger than 300 bps because that is the impact on their whole MedicareAdvantage block--of which their PFFS is only one part.

They also said their commercial MLR popped in the second quarter. They are estimating a second quarter MLR about 200 bps higher than its overall first half MLR.

This puts a lot of doubt into the sector and one has to expect health plan stocks are going to get hammered tomorrow morning on Wall Street.

The other health plans are going to have to reaffirm their prior earnings guidance real soon or they will pay a big price in the stock market--especially those who have made a big play in PFFS Medicare.

Either Coventry has lost control of their financials or the sector is seeing something big--neither being a good development.

Generally, I have not seen anything in the health plan market recently that would lead me to believe something major is going on that would affect everyone in the sector. However, PFFS by its very nature is a business you drive by looking out the rear view mirror. I think it is important for the other big PFFS players to clarify their outlook.

Hate to see what Coventry's numbers would look like if the Dems do cut private fee-for-service. If Coventry can't make money at 117% of what Medicare gets for the same seniors how will they make money?

This is scary.

Prior post: What Good Has Private Medicare Done for Shareholders?

Joe Paduda's great post phone conference take on Thursday morning.

Tuesday, June 17, 2008

Transparency and Accountability: The Door Swings Both Ways--AMA Releases Its "National Health Insurer Report Card"

You have to wonder what they're thinking about over at AHP--the health insurance trade association that called for more transparency and accountability for the provider community a few days ago--now that the American Medical Association's (AMA) detailed report card on insurer claim processing performance is out.

And, it's a fascinating read.

How often do health plans pay at the contracted payment rate?

"On what percentage of records does the payer's allowed amount equal the contracted payment rate?"
The AMA says health plans accuracy rates are:
  • United Healthcare registered a score of 61.55%
  • Cigna scored 66.23%
  • Aetna came in at 70.78%
  • Anthem (Wellpoint) scored 72.14%
  • Humana came in at 84.20%
  • Coventry was the best at 86.74%
Well, Coventry was the best except for Medicare, which the AMA said scored a 98.12%. So much for the for-profit model doing a better job than all those bureaucrats.

Medicare was the slowest on turnaround time for receiving and responding to a claim (14 days) and had the highest denial rate (6.9%), however.

You can see the entire report and the methodologies on the AMA site. The insurer comparison doc is labeled, National Health Insurer Report Card.

Friday, June 13, 2008

Wall Street Relieved Democrats Unable to Cut Private Medicare Advantage Payments This Week--Why?

Congressional Democrats tried to take a big bite out of private Medicare this past week in an attempt to pay for an 18 month fix to the upcoming July 1st 10.6% reduction in Medicare physician payments.

The effort, led by Senate Finance Chair Max Baucus (D-MT) got only 54 of the 60 votes he needed to end debate and move the issue to a floor vote. While getting that floor vote would almost have certainly meant passage of the bill in the full Congress, President Bush would have vetoed any attempt to cut the payments to private Medicare plans and the Dems would not have had the votes in either chamber to override.

Now, Baucus and Senate Finance Ranking member Chuck Grassley (R-IA) will have to find a more modest way of fixing the doc problem––likely for just six months. The docs are not going to suffer a Medicare payment cut this summer.

All of this was expected and is what I have been saying for months would happen.

A temporary fix to the Medicare physician payment problem--the docs will be facing a 15% cut on January 1, 2009--will just shunt the problem off to next January. After January 20th, George Bush will be gone. Barack Obama will have no problem signing a bill with big Medicare Advantage cuts in it. John McCain was one of only a handful of Republican Senators who voted against the Medicare Modernization Act, that created this version of private Medicare, in the first place.

This time, Baucus only tried to nail the private-fee-for-service (PFFS) version by making the relatively reasonable proposal that PFFS plans develop provider networks by 2011 in all but the most rural markets. Since PFFS was only supposed to be a transitional product to real network plans when it was first created in 2003, that's hardly an unreasonable idea. But Bush would have vetoed even that.

Next time around, with a more willing President sitting down the street, the Democrats aren't going to be so generous. The health insurance industry would have been smart to take this deal. But even so incremental a deal as this would have badly hurt the PFFS guys who have been gaming the system with their inch deep and a thousand miles wide strategies for penetrating the private Medicare market.

Sooner or later the mainstream Medicare Advantage insurers are going to cut the PFFS guys loose, who have been gaming this system, in order to save what the program was supposed to be in the first place.

It's not clear to me what Wall Street is so relieved about.

"I Hear the Train a Comin"--What Does That Johnny Cash Refrain and the Employer-Based Health Care System Have in Common?

OK, maybe it's a stretch but bear with me.

I heard a senior exec from a big health plan say the other day that it's hard to believe we will ever see the end of health insurance distributed primarily through the workplace in favor of an individual-based health insurance system. In fact, much of the health insurance industry is lining up behind staying with the system we know best and the one who has been our customer all these years--the employer.

That is understandable. As someone who came up through the ranks looking at the employer as the customer and individual health insurance as a minor product subset I have the same reaction.

But I will tell you that this idea of moving away from third-party employer pay and to a system of individual responsibility--or moving from defined benefit health insurance to defined contribution health insurance--has been coming on us for some time now.

My recollection is that this idea all started with Stuart Butler and Bob Moffit at the conservative Heritage Foundation maybe 15 years ago. Then it spread to more limited proposals for medical savings accounts (MSAs) in the mid-90s and later to the HSA concept and the whole notion of consumer-driven care. George Bush took it the rest of the way with last year's State of the Union proposal to end the employer tax exemption in favor of an individual deduction for health insurance. John McCain has now refined that idea with his tax credit proposal.

Nor do liberals need to be afraid of an individual-based solution. Universal health care systems such as Germany, Switzerland, and Japan provide health insurance to all of their citizens through a structure that has the individual making choices from a list of private health plans.

The bipartisan Wyden-Bennett health reform proposal--a health care reform bill to watch--now adopts the concept as do others.

Now, the Massachusetts health plan, the stalking horse for the incremental expansion of the employer-based system that Barack Obama favors, is showing us incomplete results on the access front for what is turning out to be a very unsustainable cost.

The Massachusetts health law results are going to do even more to get people worried about expanding that plan for the whole nation. If not the Massachusetts formula for health care reform, then what?

My perspective is that this once far-out idea for an individual health care market is no longer so far out.

Is the country ready for such a leap from employer health insurance plans that generally work very well for the people lucky enough to be in them? Not today.

But a whole series of developments seem to be coming together--problems with Massachusetts, the unsustainability of the employer system in a global economy, a number of serious individual-based health care reform proposals, an imperative to structurally deal with health care costs not just dump more people on the existing system, and now a coming presidential debate that will put this idea front and center.

I hear the train a comin and its getting closer all the time.

Thursday, June 12, 2008

Health Wonk Review is Up

This time Jane Hiebert-White does a great job of selecting some of the most thoughtful posts from the world of health blogs over at the Health Affairs Blog.

Topics include federal health reform, health information technology, consumer and patient rights, the business of health care, research-based policymaking, and others.

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:

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

March 8, 2010

Any big health care bill will be full of compromises—political or otherwise. But the Democratic health care bill doesn’t even come close to deserving to be called “health care reform.”

As the Democrats make their final push to pass their health care bill many of them, and most notably the President, are arguing that it should be passed because it is the “right thing to do whatever the polls say.”

Their argument is powerful: We will never get the perfect bill. If this fails who knows how long it will be before we have another big proposal up for a vote. There are millions of uninsured unable to get coverage because of preexisting conditions or the inability to pay the big premiums and this bill would help them.

But as an unavoidable moral imperative, enacting this bill would fall way short:

  • It is unsustainable. Promises are being made that cannot be kept. As the President has said many times, we need fundamental health care system reform or the promises we have already made—the Medicare and Medicaid entitlements, for example—will bankrupt us. What few cost containment elements the Democrats seriously considered are now either gone from their final bill or hopelessly watered down—most notably the “Cadillac” tax on high cost benefits and the Medicare cost containment commission.
  • It is paying off the people already profiting the most from the status quo. Many of the big special interests, that will have to change their ways if we are really going to improve the system, are simply being paid off for their support. The drug deal, the hospital deal, promises not to cut or change the way physicians are paid, all add up to more guaranteeing the status quo rather than doing anything that will bring about the systemic change everyone knows is needed.
  • Nothing in these bills will fundamentally change our current fiscal course. As the CBO, and every other expert has said, if this bill becomes law we will continue on the same cost trajectory we are already on. Yes, the CBO says the Democratic plan will reduce costs during the next ten years by about $100 billion—but that only means they would be $100 billion less than the $35 trillion they would have been anyway! That is merely a rounding error on the track we are already on.
  • There is nothing here that will stop unaffordable health insurance rate increases. Lately supporters have said this bill is the solution to the recent big individual health insurance rate increases we have been reading about in the press. But there is little in this bill that will mitigate or control any such increases because so little would be done to impact underlying health care costs.
We often hear the argument, “Let’s get this entitlement expansion bill passed and it will force us to deal with costs later.” If we don’t now have the political courage to face daunting health care costs in the face of exploding deficits how will we have that courage later?

I will suggest that adding 30 million more people to an unsustainable system expecting it will create an even bigger crisis and thereby force real reform is tantamount to reboarding the Titanic in the hopes it will sink faster. It is also hard to see how doing such a thing is the politically courageous thing to do.

Just where is the moral imperative in ramming a trillion dollar entitlement expansion through knowing full well it will make our long-term deficit nightmare even worse—for those now uninsured and for everyone else?

The Democratic health care bill makes little if any systemic changes to the health care system—certainly not at the level we need.

The Democratic health care bill makes promises we cannot keep.

Proponents of the Democratic health care bill make the claim that it will make health insurance affordable, improve our deficit outlook, and make our health insurance system sustainable. None of those claims are even close to being true and everyone who knows anything about this debate knows that.

Heck of a foundation for doing the “right thing.”


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

More than a million people have read the following post reviewing President Obama's campaign health care plan that closely resembles today's Democratic proposals:

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 partsaccess 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?


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?

All posts on the Obama Health Care Plan

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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