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

John McCain would reform the American health care system by providing big tax incentives for it to transition from being employer-based to one built on a system of individual responsibility. He would do this by eliminating the longtime personal tax exemption on employer-provided health insurance and replacing it with a $2,500 individual, and $5,000 family, tax credit for those who have health insurance.

It's too bad this idea will likely recede from the national health policy debate whether John McCain wins or loses the presidency. Even if he wins, the Democratic majorities in Congress will be so large there is little chance we will be able to move away from the traditional employer health insurance base in the next few years. All you have to do is look at the way Obama and all of the Democratic candidates for the Senate and House have railed against McCain's plans to "tax your health benefits" to see how Democrats have willingly painted themselves into a political corner that makes this idea a non-starter in the new Congress.

As I have said on this blog before, I have been largely disappointed in the McCain health plan. He started out with a bold new approach but never closed the loop on so many key elements in his plan. For example, he leaves those with pre-existing conditions to the fate of state-based risk pools--a place no one would ever vote themselves into. See: John McCain's Health Care Plan and the Uninsurable--There Are Better Fixes Than the Ones He's Proposed

It never made sense to me for McCain to ask voters to take a bold leap with him to reform the health care system but do little to make voters comfortable with the consequences of all that he was proposing. As a political proposal, the McCain health plan was a disaster. Who would ever vote themselves into such a system with less health care security than they have today?

It is no surprise that a big part of Obama's advertising budget has been spent zeroing in on the McCain health care plan's tax changes. I am surprised they didn't zero in on even more of it.

McCain's failure to make such a big leap away from our current system of third-party pay something voters could look forward to also makes it harder for more serious proposals to fundamentally redo our health care system on a platform of individual responsibility--the Wyden-Bennett plan for example.

The employer community themselves have amazingly added fuel to the arguments we need to stay with the employer-based system. The U.S. Chamber, the Business Roundtable, The National Business Group on Health, the American Benefits Council, and the NFIB have all had at least cool things to say about McCain's tax credit idea (New York Times, October 7th). The health insurers have gone along with this opposition--most certainly afraid to call for their benefit manager clients' layoffs!

Why are employers so against taking this big benefit cost off their books? They continue to see benefits as an effective way to compete for workers. They are also worried that they are going to get the bill anyway but won't have any control over what it costs in a new system.

As I have also said many times on this blog, I believe that either the employer-based or individual-based approach to health care reform could work. However, my guess is that if most health policy experts could create a clean sheet health care system in America, putting it on an individual platform would be one of the things most--liberal and conservative--would agree to do.

McCain has made such a mess of selling his health plan--and Obama has done such a good job of taking advantage of it--that I fear we have boxed ourselves into the third-party pay employer-based system, that has proven to be so expensive, for a longtime to come.

The only hope for this idea is that, in the face of daunting federal and state budget deficits, a restructuring of the system on an individual platform may be the only way we can achieve health care reform on a pay-as you-go basis--Wyden-Bennett for example, pays for itself in the third year.

But the well has been poisoned over an individual-based system in the face of big Democratic majorities that have so opposed the idea in this election.

The Democrats, in trashing the idea of a tax change for health benefits, and the Republicans in so fumbling the argument, may have taken the one way we could have done pay-as-you-go health care reform off the table.

Or, both sides can take a second look at it--this time complete with the appropriate arguments and policies that give voters the health care security they require.

Update: Speaking of fumbling the arguments for the conservative approach to health care reform, a few hours after I posted this, a leading McCain spokesman was quoted at CNN regarding the McCain health tax credit:

Younger, healthier workers likely wouldn't abandon their company-sponsored plans, said Douglas Holtz-Eakin, McCain's senior economic policy adviser.

"Why would they leave?" said Holtz-Eakin. "What they are getting from their employer is way better than what they could get with the credit."

So just why would Holtz-Eakin expect anyone to vote for the end to the employer tax exemption on health benefits in favor of the McCain tax credits?

Demystifying U.S. Health Care Spending--Some Surprising Information

Paul Ginsburg, of the Center for Studying Health System Change, has just authored a new report, "High and Rising Health Care Costs: Demystifying U.S. Health Care Spending." The report is part of the Robert Wood Johnson Foundation's Synthesis Project.

This paper reviews existing literature in search of a more clear understanding of U.S. health care costs, the drivers, and the trends.

It is an encyclopedia of the research on U.S health care costs and required reading for any health policy wonk!

I found the following notable:

• Technology is the key driver in health care spending accounting for an estimated 38% to 65% of spending growth.
• "Obesity is a significant factor driving health spending, accounting for an estimated 12% of the growth in recent years." However, any gains from reducing obesity would be concentrated in the short and intermediate period "because some of the savings will be offset by increased longevity and the cost of disease that are most prevalent during old age." The irony is that obese people die sooner thereby avoiding the high medical costs associated with living longer.
• If we insure more people our health care system will cost more not less. "The increase in the percentage of people with health insurance accounted for approximately 10% to 13% of the historical growth in spending." The uninsured has not contributed to the recent growth in health spending in the aggregate and will not be a driver in the future unless we find a way to insure more people.
• Aging will not be a major factor in driving health care spending, and will not become one, despite aging baby boomers.
• Medical malpractice is not a major driver of spending trends. Medmal does contribute to health spending at any moment in time, but is not a large factor nor a significant factor in overall growth of health care spending.
  
• "Productivity gains in the health care sector have probably been lower than in other industries."
• U.S. health care cost increases continue to outstrip those in other industrialized nations by a large margin. Excess health care growth in the OECD nations was 0.6% between 1985 and 2002 compared to 2% in the U.S. for that period.
• When compared to the health systems of other industrialized nations, "prices, efficiency, and insurance administration are the most important differences."
• Drug prices are 70% higher in the U.S., physician compensation is 6.6 times per capita GDP for specialists and 4.2 times for primary care compared to 4 and 3.2 in OECD nations, the U.S spends 54% more for the top five inpatient medical devices, and the U.S. spends six times more for administration than the OECD nations.
  
• "Overall our understanding of high and rising costs is fairly solid. Our most pressing needs are not as much on the research side as on the development side, that is, all of the technical work needed to pursue many of the reforms..."

Aging and medical malpractice costs are not major contributors to the cost of health care in America? If we solve our obesity epidemic we will just increase longevity, more people will make it to old age, and we'll have all sorts of other high costs? Covering everyone will cost us more in the aggregate not less--getting them all in the system won't be a money saver?

Are these the "inconvenient truths" in health care reform?

The data would seem to say they are.

So does this mean we should back off on tackling obesity, forget medical malpractice reform, and scrap plans to reduce the uninsured?

No. I'd respond it's fair to say that is not what the author has in mind.

There is a moral imperative to deal with the uninsured. Being obese may save the system some money in the long-term because the person dies a lot earlier--hardly a desirable policy objective. That obese person still costs us a lot more in the near term and typically suffers from chronic disease in the meantime. Our medical liability system needs reform if only to reduce the rate of medial errors and the human toll those take.

But when it comes to health care costs, the real target needs to be productivity--or said another way cost containment.

One finding from this report really struck me: "If the efficiency of the delivery of services could by increased by 20% over 10 years, this would roughly close the gap between health care spending and GDP over that period." The bottom line is that if we want to contain our health care costs we need to find productivity improvement in things like technology use, treatment patterns, and administrative overhead.

Today, most health care reform plans focus on things like expanding the number of the insured and wellness initiatives. Those are good objectives.

But covering more people will cost more not less. Improvements in lifestyle--particularly obesity--can help.

But we cannot afford to stop there. Literally.

The big-ticket play is in productivity--the more discriminate use of medical technology, consistently practicing outcomes-based medicine, and reductions in system overhead particularly in the insurance system.

The problem with the health care productivity issues is that you have to step on some very powerful toes amongst the stakeholders to make any big gains--it's a lot easier to talk about insuring everyone and promoting wellness.

If we only increase access and don't hit the health care productivity issues head-on we will simply craft a system we will never be able to sustain.

Time to Get Real--On the Economy and Health Care Reform

I just got a call from a reporter at one of the major news organizations to talk about the chances for health care reform.

We both commented on the almost surreal environment we are all in. I'm not sure if my friends and neighbors are in denial or just numbed by the recent cascade of events in the financial world. Up on the Hill and in the presidential campaigns it's business as usual when it comes to extending the Bush tax cuts, spending on alternative energy, or the imperative to do health care reform.

The reality is we are now headed down an unavoidable slope into a recession. The only question is how bad. Today, Dr. Phil told his audience to stop spending money, get their credit card debt paid off, and hold cash--"Cash is king." They are and they will.

General Motors' stock hit a price today not seen since the 1950s because no one is buying cars--and won't be for quite awhile.

A slowed economy means less tax revenue at a time we were already headed for a $500 billion budget deficit in 2009--and that was before we would spend as much as $200 billion to extend all (McCain) or most (Obama) of the Bush tax cuts. (Anybody want to give odds on that?)

The next Congress and the next President are facing unprecedented fiscal challenges presuming the credit crisis starts to work itself out.

Someone recently told me an economic crisis doesn't necessarily mean we won't have important social legislation. After all, Social Security came from the depths of the Great Depression. It did. But it was pay-as-you go--there was no big upfront cost as there is in health care.

This denial--or numbness--in the face of a harsh reality reminds me of the times I have called the airlines in the face of a blizzard looking to get them to rebook my flight without penalty. The usual answer is, "The computer says its on time so far." Of course you know it isn't going to take off in the midst of the terrible storm outside.

Health care reform isn't going to take off in the midst of this huge financial storm either and McCain, Obama, all those offices on the Hill saying it will aren't going to make it so.

The sooner we get real--on health care and everything else--the sooner we can start talking about what is really possible.

Recent post: What I'm Telling the Health Care Business About the Future

The Big Elephant in the Room During the Presidential Debate

Last night Tom Brokaw asked Barack Obama and John McCain to prioritize health care, Medicare/Social Security, and energy. Neither of them backed down from their promises to deal with all of them.

When Jim Lehrer tried to challenge them at the last debate on their ability to do all of the expensive things they want to do he got pretty much the same answer.

About the only two people in America that think we can do all of these things--or maybe any of them--would appear to be the two candidates.

So, why do we let them get away with the notion there isn't any reason why we can't have it all on top of their expensive plans for extending some or all of the Bush tax cuts and all of the bailout costs?

A couple of weeks ago I posted about, The Pretend Presidential Debate on Health Care--The Health Care Press Needs to Force the Presidential Candidates to Get Real on Health Care "Change".

Two debates later the press is still letting the candidates get away with their pretend campaign promises as if none of this were happening.

The real issue at hand is just what would each of the candidates be able to do on health care? What's the real health care strategy that each of them have in the face of the greatest financial crisis since the Great Depression.

In all likelihood the most we will see next year is a Medicare bill necessary to deal with the upcoming 21% Medicare physician fee cut. There is money for that in the extra private Medicare payments thereby satisfying the pay-go rules.

If there is any other money the Congress might try some modest expansion of SCHIP and maybe something to stem the enrollment bleeding in the small employer health insurance market. But even those things look like a long shot in the wake of the crisis.

Business as usual isn't an alternative.

Getting these guys to talk about the real world would be helpful!

Rrecent related posts:
What I'm Telling the Health Care Business About the Future

The Chance for Major Health Care Reform in Either 2009 or 2010 Is Now Zero

What I'm Telling the Health Care Business About the Future

Last week I did a post, The Chance for Major Health Care Reform in Either 2009 or 2010 Is Now Zero.

I made the point that the bailout the Congress is now voting on is on top of a 2009 projected federal budget deficit that the White House has already estimated to be $500 billion. Add to that the $300 billion in deals the feds have done for the likes of Freddie, Fannie, and AIG. Then we have the $200 billion expiration of the Bush tax cuts in 2010 the new Congress and President need to deal with next year.

On top of all of this, the notion we are going to spend billions more on health care reform is unrealistic.

I have been reminded that the $700 federal bailout would be "off budget." That is this would all be accounted for not as an expenditure but as an asset purchase and therefore not added to the deficit. That accounting point is true--although about $25 billion in interest on the bailout will add to the annual deficit.

I am also optimistic that the AIG bailout, and the up to $700 billion purchase of "toxic" mortgages, would ultimately at least come close to paying for themselves. I actually believe taxpayers will make a good profit on AIG. The $85 billion loan in exchange for an 80% stake in a company, whose insurance businesses are likely worth far more than that, should end up to be a good bet. The discount paid for the mortgage debt and recourse that buyout is based upon will at least come close to allowing us to make out there.

But, what I have been telling my clients this past week is that we will face a major economic correction because of the more permanent changes that will come to the credit system.

The U.S. economy has been on one incredible run--all based upon unrealistically easy credit. With or without the bailout, that is now coming to a hard end and there will be an adjustment.

To buy a house you will now need good credit and a solid down payment--house sales will rebound but at a more modest level.

In a more reasonable credit environment--the kind we should always have had instead of the foolish credit environment we did, there will also be fewer car loans and credit card limits and interest rates will all change in response.

We will now have to ratchet down to an economy that can be sustained by more reasonable and prudent credit rules. That means less housing construction, fewer cars sold, and less use of credit cards in restaurants and big box stores. That means lower employment in these businesses and at the manufacturers and distributors that supply them.

That means fewer insured lives and it means less tax revenue at the state and federal levels. That will mean less money for Medicare and Medicaid.

This is all bad news for private Medicare. You heard Barack Obama at Friday's debate--Medicare Advantage is where the money is. Even if McCain is President, look for that private Medicare money to be used as needed to cover any Medicare or Medicaid provider cuts on the table--the January 1, 2010 21% Medicare physician fee cut right on top of the list.

Even after taking the "extra payments" from private Medicare, I doubt that will entirely insulate the other providers--docs, hospitals, pharma, device, or others like durable medical equipment providers. The upcoming "food fight" I have been talking about between all the providers about how to divide the Medicare and Medicaid money is only going to intensify. With it, will come the likelihood of cost shifting from public to private programs in the way providers bill commercial health plans.

I do not see this as a pessimistic view. I see this somewhat hard landing as the best view. It presumes our economy begins to respond to all of this restructuring in a relatively orderly way as it ratchets down to a more sustainable level based on a prudent credit market.

The pessimistic outlook, in my view, is that this will be more than a rational economic adjustment. That's the view to really be afraid about.

As the economy adjusts itself to this new reality, there will be no money for big health care reform plans--although what will likely be a growing number of uninsured will create an imperative for it to happen. An imperative that will be stymied by budget issues driven by the economic adjustment.

If you want to be told the financial crisis is not going to have a fundamental impact on the business of health care, or health care reform, you won't hear that here.

The Chance for Major Health Care Reform in Either 2009 or 2010 Is Now Zero

A couple of weeks ago I did a post, The Pretend Presidential Debate on Health Care--The Health Care Press Needs to Force the Presidential Candidates to Get Real on Health Care "Change".

In it I made the point that facing a $500 billion budget deficit next year, the sunset of the Bush tax cuts in 2010, fixing the alternative minimum tax problem once again, and the cost of the Freddie and Fannie bailout, the presidential candidates needed to get real about health care reform. Instead of giving us their rote health care talking points, I said they needed to start telling us how they were really going to deal with health care reform in the face of all of these challenges.

Just when you think things can't get any worse....

Two weeks later you can add the AIG bailout and as much as a $700 billion bailout of the financial system now being considered by the Congress to the reasons why the health care plans of both candidates are no longer relevant.

On top of that $500 billion deficit in 2009, the Congress is now being told it must take on a total of almost $1 trillion in government long-term costs to try to turn the financial system around.

I would suggest that lots of things have changed since each candidate offered their health care reform plan.

Obama's health plan will cost at least $100 billion a year. That's now a non-starter.

McCain's health plan counts on deregulation of the health insurance industry. Do I even need to explain to you why that is a political non-starter in this environment?

I don't know about you, but watching both Obama and McCain I feel like they are living in a parallel universe from the one the rest of us are in. We are living in the midst of the greatest financial crisis to face this country since the Great Depression--the outcome unknown and able to tip either way--and these guys are out there on the hustings as if this is all just another partisan reason to beat up on the other guy. I'm not seeing a lot of leadership here. Instead of making meaningless political speeches in the Heartland, why aren't they on the Hill this week leading their respective party--and the country--to a solution?

These guys have the greatest opportunity of any presidential candidate ever to demonstrate to voters why they should be President by taking their seats in the U.S. Senate and showing us their leadership skills.

On health care, they need to get just as real.

What are their plans to reform health care that actually make sense and can be implemented in the face of all of the things this crisis has changed?

AIG and Regulation Versus Deregulation

As I posted earlier today, I believe the feds did the right thing in making sure AIG did not fall.

But as the dust settles, that takes us to another big question--the question of more or less regulation generally and, more specifically for readers here, more or less regulation for the health insurance industry.

The first thing to note is that the existing state regulation of the insurance industry generally worked well in AIG's case. AIG's mainstream insurance business is in great shape.

AIG's problems were in its bond wrap business--the financial side. That said, those were financial products offered by a sub of an insurance giant and the regulators blew it in letting them so leverage the company where they essentially guaranteed the housing bubble. My 20-something son passed on buying his first house in 2004 and 2005 because he was smart enough to smell a bubble--but the AIG guys weren't and that is unforgivable.

The nation's perspective on the regulation of business will now very correctly focus on getting our financial regulatory systems back to what they should have been. Even Palin and McCain are calling for the regulators to do their jobs!

This is also a reminder that there needs to be a very even balance between government regulation and private enterprise. A balance that has clearly gone too far in favor of greed.

John McCain has called for a more vibrant and more unregulated health insurance market as a core solution to our health care problems. Whether or not he is elected, I expect those ideas are now incredibly out of step with voters more than wounded in recent days by the unfettered market.

I also call your attention to Joe Paduda's post today, "Implications of the AIG bailout"

The Pretend Presidential Debate on Health Care--The Health Care Press Needs to Force the Presidential Candidates to Get Real on Health Care "Change"

Let's pretend that either Senator Obama or Senator McCain will be able to implement their respective health care reform plans if elected. Should be easy--we've been doing it for months now.

Or, we can get real and expect them to do the same.

For all the arguments both are making that they are change agents, including over the candidates' competing health care reform proposals, is this dirty little secret––neither Senator's health care plan has a chance of being implemented.

Senator McCain is not going to get a likely Democratic Congress to pass a health care reform plan that eliminates the deductibility of employer-based health insurance and pushes millions of consumers into a wide-open and less regulated insurance market.

Maybe the Congress should pass it--but they won't.

If Obama is elected he will not get even a Democratic Congress to pass his health care plan which will cost at least $100 billion a year. The 2009 deficit is now projected to be in the $500 billion range--and that is before the huge cost in 2009 to extend the Bush tax cuts even Obama favors and the cost of the Freddie and Fannie bailout.

Maybe the Congress should pass Obama's health care reform plan in the face of these overwhelming fiscal realities--but they won't.

So this presidential debate over "my health plan versus your health plan" is interesting but it's actually pretty irrelevant.

The real question that needs to be put to these candidates: Just how will you achieve bipartisan health care reform in the face of the reality of needing to deal with a Democratic Congress (McCain) and a crippling budget challenge (Obama)?

Bipartisanship means reaching out to get enough of the other guys onside. Political leadership means finding the place a deal can be made. So, just how would these candidates get the job done?

Let me suggest that it is more important for voters to hear from these candidates about how they will handle the real world of health care reform rather then the pretend one they seem to be debating.

Let me give you a for-instance.

There is one bipartisan health care reform plan that takes from both sides and the CBO says is cost neutral. It has 16 Senate sponsors--8 Republicans and 8 Democrats.

Senator Ron Wyden (D-OR) and Senator Robert Bennett (R-UT) have crafted a health care reform plan that gives both sides the most important things each are looking for:

• For the Republicans, it gives them a plan that moves away from the third-party employer-based payment system to one of individual responsibility and the promise of a more vibrant market.
• For the Democrats, it provides a plan that assures everyone will have access to coverage and provides the financing to get about everyone covered in the short-term.

But here's the big one: The Congressional Budget Office and the Joint Committee on Taxation have said the Wyden-Bennett plan could be operational by 2012 and would be budget neutral by 2014! In health care terms, parting the Red Sea would be an easier accomplishment.

I'd ask McCain and Obama just how they would accomplish health care reform--in the real world not in the pretend one they are in now. I'd go further and ask each of them if he would sign the Wyden-Bennett plan if it came to his desk.

If I had the answers to these questions then I would really know something about just how they would be "change" agents and accomplish health care reform!

Update on the financial crisis and health care reform: What I'm Telling the Health Care Business About the Future

Earlier post:
Watch the Wyden-Bennett "Healthy Americans Act"--It Could Be the Place Health Care Reform Compromise Takes Place in 2009

"Lipstick on a Pig"--The McCain Campaign is Defining the Fight

The quickest route to a political loss is to let the oppostion define the fight.

Anyone who listened to just 10 seconds of the Obama "lipstick on a pig" sound bite knows he wasn't talking about the Alaska governor.

But what this whole dust-up tells us is that the McCain campaign is defining the debate and the Obama side can't get their message out.

Not that long ago the Obama campaign was complaining about remarks McCain's campaign manager made when he said that this election was going to be more about personalities than issues. Apparently, the McCain people believe they have the best ground on that score.

Well so far the McCain people are succeeding with personalities over issues. Palin has been their biggest win on that battleground.

The press used to refer to President Reagan as the "Teflon president." Bad news just didn't seem to negatively impact his approval ratings and it drove the press nuts. I believe the reason was that so many people simply had a sense of how Reagan felt about things and that he thought like they did. As a result, the policy details were not so important. People could overlook the daily bumps in the road knowing they had confidence in the general direction President Reagan was heading.

A recent poll shows that Palin scores a point higher than Obama, and a lot of points higher than McCain and Biden, over the question of "which candidate understands my problems."

Palin has struck a cord. Lots of Republicans and, more importantly, independents view her as seeing the world as they do and they are comfortable with that--and that has so far been a boon to the Republican ticket. When that happens, just like Reagan, the complex over-your-head details on things like health care reform aren't so important. You just know she'd fix it like you would.

There are still almost two months to go to election day.

Attacking Palin personally--which Obama did not do on the "lipstick" issue--will backfire.

Ironically, Obama was the beneficiary of a personality-driven contest with Mrs. Clinton. Now, he's on the other side of that one.

But he will now have to regain his lost momentum by making this an issue campaign.

If Obama thinks his approach to health care reform, and all of the other issues, is what most voters want, then he better make it clear where he stands versus where Palin, and her running mate, I think his name is McCain, stands in the starkest detail.

For his own sake, Obama better rattle the notion that "Palin thinks like I do" or this is going to be an even more surprising campaign season.

Sarah Palin on Health Care--A Free Market Republican

Republican vice-presidential candidate Sarah Palin has very little on her health care policy resume from her short time in office as Alaska's Governor but what she does have fits right in with Senator McCain's strategy to use the market more effectively in bringing down America's health care costs and improving access to the system.

Her health care efforts have focused on two things in Alaska:

• Eliminating the 1970s era strategy of requiring providers to file Certificate of Need (CON) applications before being able to build more health care facilities.
• Providing consumers with more information.

On the Certificate of Need issue she recently wrote in an op-ed:

Health care: Do we have too much government or too little? Should we have regulated markets or open markets?

Those are the perennial questions.

And that's what makes the state's proposal to repeal the current Certificate of Need (CON) program so contentious. Yes, there are solid arguments on both sides. But after much consideration, we believe that the program has not accomplished what it set out ultimately to do more than 30 years ago -- lower costs for the consumer. It is time to end Alaska's program in its present form. Doing so will not only reduce the cost of health care, it will also improve the access to health care, allow more competition and improve quality of care for patients.

Certificate of Need programs were required in all states in the mid-1970s by federal mandate. The goal was to make sure that health care facilities matched community need and provided access and quality care, which in turn would help reduce health-care costs. The federal mandate was repealed in 1987 -- 20 years ago! -- along with its federal funding.

The basic assumption in those days was that excess capacity, in the form of overbuilding, directly results in health-care price inflation. However, after more than 30 years of such programs, the National Conference of State Legislatures has found that there is no solid proof that the state-sponsored CON programs have actually controlled health-care costs. In fact, in 2004 the Federal Trade Commission and the Department of Justice both asserted that these programs actually contribute to rising prices because they inhibit competitive markets.

Many opponents of CON programs have argued that health-care facility development should be left to the economics of each institution, in light of its own market analysis, rather than being subject to political influence...

As I said recently in my State of the State Address to the Legislature, "Under our present Certificate of Need process, costs and needs don't drive health-care choices -- bureaucracy does. Our system is broken and expensive." Eliminating the CON program, with certain exceptions, will allow free-market competition and reduce onerous government regulation.

Governor Palin has also been calling for more price transparency, openness and competition as a solution for rising health care costs in Alaska.

A task force set up by the Governor on health care issues in Alaska recently concluded that consumers needed more information to be able to compare costs.

As a result, Palin introduced the Alaska Health Care Transparency Act to provide consumers with information on quality and cost which would be provided by a new government-run health care information office.

Both of these relatively minor forays into health care policy could hardly be described as heavyweight attempts at health care reform. But both are consistent with the McCain market-based strategy to remake America's health care system.

I expect Governor Palin will have no trouble fitting right in with Senator McCain on the health care issue.

Related posts on the presidential candidates' health care plans:

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

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

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

The Voters Aren't Upset Enough About Health Care--And Why Should They Be?

The health care issue has a history of being named by voters as one of the biggest problems we face--until the problem de jour comes along and pushes it off the list. In 2008, that seems to be happening again with the economic downturn, the mortgage mess, and $4 gas surpassing health care as the big issues.

When asked to name the most important financial problem facing families today by the Gallup organization:

• 29% said energy and gas prices
• 18% said the high cost of living and inflation
• 14% said a lack of money and low wages
• 9% said health care costs

Policy experts can point to the high cost of health care but Joe and Mary Middle-America are still clearly sheltered from the real impact of these costs largely by the employers who still provide so many of us with affordable health care.

True the ranks of the uninsured are growing with the unemployment rate and the number of people getting health insurance from small employers has been on a long decline. But the fact is the vast majority of Americans still get very good health insurance from mid-size and large employers. And, what cost shifting has occurred has been relatively modest.

Last year's Kaiser Family survey of employer-provided health insurance found:

• Health insurance coverage at larger employers is stable - In 1999, 99% of employers with more than 200 employees offered health insurance--that number was also 99% in 2007.
• Cost shifting has been only modest - In 2001, workers at larger firms (over 200 employees) contributed 4.4% of the cost of their coverage as a percent of their income--in 2007 they contributed an average of 6.9% of the cost of their coverage as a percent of their income.
• Consumer-driven plans remain a very small part of the market. More than ten years after MSAs became available, and five years after HSAs were expanded by the MMA, between 3% and 5% of workers are in various forms of these and high-deductible plans.
  

Most workers are still sheltered from the reality of health care costs and equate health care quality with access to whatever they want.

Conservatives, including John McCain, argue that we need to move away from third-party pay to a health care system that stresses individual responsibility so consumers can better understand the problems of high cost and respond with more efficient choices. Makes sense.

But to get that kind of far-reaching change it will take a groundswell of major support from voters.

Ironically, voters aren't going to be interested in supporting that kind of change if they remain sheltered from the problem.

It's a "catch-22"--conservatives believe we need voters to realize they need to be more sensitive to health care costs but to sensitize them voters have to be willing to let policymakers take their rich benefits away.

Voters sure don't have a lot of incentive right now to give up those still rich employer plans.

Recent post on why health care reform will be very difficult in 2009: Health Care Reform, the Federal Deficit, and the Bush Tax Cuts--A Very Counter Productive Combination

State High Risk Pools For the Uninsured--Who Would Want To Be In Them?

What do we do with people who are uninsurable because they have a pre-existing medical condition?

That is a particularly important question as both McCain and Obama propose reforming American health care by building on the private health insurance system.

One of the solutions being discussed--by McCain among others--is to use state-based risk pools. Under McCain's plan heavily dependent on an individual platform, people who don't have employer-based coverage and healthy enough to qualify for individual health insurance could get a private mainstream plan and people who do not qualify for a standard individual plan could buy into a state-run high risk pool for the uninsurable.

In today's market, these state-run pools can be lifesavers for those who can't otherwise get coverage. But of 47 million uninsured, only about 200,000 people are in these pools nationwide. Sometimes the pools are prohibitively expensive, sometimes they are full and taking no new members, sometimes their coverage is hardly worth it.

One of the states that proponents point to as doing a good job with their risk pool is Minnesota.

Minnesota does have one of the better pools for those who are uninsurable. It offers a wide range of plans with a maximum cost of 125% of comparable market plans that medically underwrite. A family of four can get an HSA-style plan for about $9,000 a year (parents age 35-39). A couple age-60 can get a $2,000 deductible, 80/20 plan for about $12,500 a year. Pre-existing conditions are excluded for six months if you do not have prior creditable coverage.

If you are uninsurable in Minnesota--and can afford those premiums--you are likely facing some pretty high medical costs to make it worth your while. These plans tend to be anti-selection magnets in our voluntary system.

In 2006, there were about 30,000 enrollees in the Minnesota high risk pool (out of 465,000 uninsured in the state). Minnesota had a total program cost of $236 million that year. Of that, $124 million--more than half the funding--came from state subsidies collected by an assessment on insurer premiums. The per enrollee subsidy coming from state government was $4,265. That family of four had a state subsidy of over $16,000 that was added to the $9,000 premium they paid.

So, how does a state-based risk pool work?

In Minnesota, if you are uninsurable you qualify only for the limited state plans, at a cost that is up to 25% more than in the mainstream market, and the state government has to come up with a subsidy of more than $4,000 per participant to make it work--and it still costs you a lot.

If the federal government were to pass a health care reform bill that required the states to set these pools up, as McCain proposes, wouldn't that just be another unfunded state mandate?

I can't figure out why John McCain wants to go to voters with the unappealing notion that those with pre-existing conditions are going to be shipped off to a risk pool like Minnesota's when we could accomplish something better by putting them in mainstream health plans using proven market-based reinsurance principles and underwriting rules.

If assessing insurers for the cost of high risk consumers, as they do in MN, is a good idea why not do it through the front door and promise those with pre-existing conditions they can get into regular coverage? See also: John McCain's Health Care Plan and the Uninsurable--There Are Better Fixes Than the Ones He's Proposed.

If nothing else, the market ought to tell the McCain health care planners something--out of 465,000 uninsured in Minnesota, only 30,000 are buying the product.

I don't think the voters are going to buy it either.

The Minnesota Risk Pool--Facts and Figures

If McCain Picks Romney He Will Never Again Be Able to Criticize Obama's Health Plan

Mitt Romney seems to be at the top of the list when it comes to speculation over who John McCain will pick for his vice presidential running mate. I am not sure if that is what John McCain is thinking as much as the Romney people, trying to boost their guy, want us to think.

But if McCain picks Romney, it will make for an interesting health care debate this fall.

The Obama Health Plan is a virtual clone of the Massachusetts health law. Romney signed it and continues to support it--most recently a couple of weeks ago in an enthusiastic Wall Street Journal Op-Ed.

With Romney on the Republican ticket, how would McCain ever be able to criticize Obama's proposal as just another Democratic government-run tax and spend health plan?

Mitt Romney's Health Plan--A Foot in Each Canoe

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

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

The National Coalition On Benefits' Oppostion to the Wyden-Bennett "Healthy Americans Act"--Maybe They Like It After All?

The National Coalition on Benefits is a group of more than 150 of America's biggest corporations as well as the U.S. Chamber of Commerce and the Business Roundtable.

They wrote a letter to Senators Ron Wyden (D-OR) and Bob Bennett (R-UT), cosponsors of the bipartisan "Healthy Americans Act," telling them that their bill was a non-starter because it dared to mess with ERISA. The Wyden-Bennett bill has 16 bipartisan Senate sponsors and 23 House sponsors.

The Coalition objected to Wyden-Bennett because of its emphasis on the individual health insurance platform over the traditional employer-based system of health insurance:

In summary, we believe that a sensible, consensus approach to health reform should build on our voluntary employer-based health care system and not undermine the essential role of employers in our health care system. Central to this is the current ERISA standard which provides a single, uniform federal framework and makes it possible for employers to offer health benefits to millions of employees, which they highly value and depend on.

Upon reading the letter, I was frankly puzzled that many of America's largest companies, the U.S. Chamber, and the Roundtable would be so against what is also the core principle in the presumptive Republican presidential nominee's health plan. John McCain shares the same basic approach to individual responsibility in health care the Wyden-Bennett bill uses--including the elimination of the employee tax exemption on employer-provided health insurance in favor of individual incentives for coverage.

Apparently, things are not all that happy over at the National Coalition on Benefits because a significant number of its corporate members were more than surprised to find out they were against the Wyden-Bennett Health Plan when the letter came out. I am hearing there has been at least one conference call between leadership and some unhappy companies who found their name on that letter.

That the letter could also be interpreted as a denunciation of the core individual responsibility section of the McCain Health Plan and supportive of the Obama approach, that would build on the existing employer-based system, didn't help things. Xerox also chairs the coalition and the Xerox CEO has been a strong supporter first of Senator Clinton and now Senator Obama.

ERISA may well be the most successful thing we have in our not so successful health care financing system. The vast majority of employers have been incredibly responsible in providing almost 200 million people valued health insurance despite all the challenges they face in doing so.

None of the Coalition members want to see ERISA eroded--just as the mission statement of the National Coalition on Benefits asserts. But I also expect that what most of those Coalition members meant by that is that they do not want to see ERISA changed in the context of the current health care financing system.

ERISA was passed by the Congress and signed into law in 1974 by President Gerald Ford. It is 1974 health care thinking. It is at the center of a system that is not working.

These big companies know that and, while they understandably are not about to give up the protections they have under ERISA in the current system, the notion that they could never support building an entirely new system on a different foundation is hardly the same thing. I can't believe two of its members in particular--Chrysler and GM--would disagree with that statement.

To fix the American health care financing system we have will require lots of new thinking. The kind of thinking offered by John McCain and the Wyden-Bennett bill, among many other ideas liberal and conservative, need to be part of the mix.

While the McCain Health Plan and the Wyden-Bennett Health Plan are similar in that they would both build on a system of individual responsibility by moving away from America's traditional reliance on the employer-based system, the two plans are very different in other critical areas. Wyden-Bennett goes well past the McCain Health Plan in assuring virtually universal access to health insurance. In fact, one could see Wyden-Bennett as a hybrid of both the McCain and Obama health plans because it couples the individual responsibility concepts conservatives like (and the National Coalition on Benefits objects to) with the liberal notion that we need to get everyone covered sooner rather than later.

For America's largest corporations to enter the debate at this early stage and demand that the Wyden-Bennett bill--and the McCain Health Plan by not so subtle inference--come off the table because they would build a health care system on a platform different than the one devised in 1974 was outrageous on the face of it.

It is hopeful to hear that this might not be where corporate America stands after all.

Earlier posts:

Watch the Wyden-Bennett "Healthy Americans Act"--It Could Be the Place Health Care Reform Compromise Takes Place in 2009

So I Guess the HMOs, U.S. Chamber of Commerce, Business Round Table, and Over 150 Big Corporations Are Opposed to McCain's Health Plan?

So I Guess the HMOs, U.S. Chamber of Commerce, Business Round Table, and Over 150 Big Corporations Are Opposed to McCain's Health Plan?

That's the only conclusion I can come to after having read the letter the National Coalition on Benefits has written to the authors of the Wyden-Bennett Healthy Americans Act.

Wyden-Bennett is a comprehensive health care reform proposal that would largely replace the existing employer-based system of health insurance with one based on individual responsibility and individuals purchasing coverage. It has 15 bipartisan Senate co-sponsors and has been scored as revenue neutral by the CBO.

Here's what the coalition letter says:

[Any health care system] change must not erode those parts of the health care system that are working. The core provisions of the Healthy Americans Act would cause large scale disruption in the source, financing, and regulation of the employer-sponsored health coverage that now serves most Americans. This disruption for the majority of Americans who have coverage today through their employer will make it more difficult to achieve our common goal of addressing the needs of the 47 million Americans who lack health insurance coverage entirely.

Moreover, widespread and sudden disruption in employer-sponsored health coverage is likely to harm employer-employee relations because most employees have a longstanding expectation that their employer will be their primary source for health coverage.

I would presume the Coalition is in the process of sending a similar letter over to Senator John McCain since his health care reform proposal would end the tax preference for employer-provided health insurance and replace it with a $2,500 individual, and $5,000 family, tax credit. While McCain would also not outlaw employer-provided health insurance, ending its longstanding tax exclusion and shifting those tax benefits to the individual is clearly designed to give the market a big push in the direction of individual responsibility that McCain favors. I guess that would all qualify as a "widespread and sudden disruption in employer-sponsored coverage."

In fact on the subject of eliminating the tax exclusion for employer-provided health benefits, something the Wyden-Bennett bill and the McCain plan have in common, the coalition had this to say:

The [Wyden-Bennett bill] also ends the income exclusion for employees as it applies today. This directly penalizes employer-sponsored coverage and would cause most employers to cease sponsoring health plans.

Senator Obama, on the other hand, supports reforming the health care system by building on the existing employer-based system. I can also see Senator Obama already preparing TV ads pointing out that corporate America doesn't want anyone "disrupting" the employer-based health insurance system--like McCain would do by ending all of the longstanding tax preferences workers now get for their employer health insurance.

It is surprising that so many of the biggest names in corporate America would pick this time to undercut the core part of the presumptive Republican nominee's health care plan--moving away from third-party pay toward a system of individual responsibility.

Guess they're closet Obama supporters.

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

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

"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.

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:
McCain
Obama

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