The Economists’ Corner:  Dissecting The Presidential Health Care Reform Plans

February 2008

With the 2008 presidential campaign in full swing, making sense of the various health reform plans that have been floated can be daunting. The following analysis – drawn from interviews with and work by ERIU researchers – attempts to put some perspective on some of the components of the candidates’ plans.  The researchers did not weigh in on specific proposals, rather their comments get at the heart of the themes and concepts within the health care reform debate. 

Polls show that health care costs and access to health insurance are topping voters’ minds this presidential campaign season. No wonder. Health care costs continue to grow faster than wages. The current housing crisis and credit crunch portend slower economic growth and possible recession. Such trends only increase the risk of becoming uninsured. Loss of health insurance—even being underinsured—can lead to higher medical debt and bankruptcy.  

“It’s palatable. People understand they are one pink slip or bad break away from losing their health insurance, putting them at greater financial risk,” says Catherine McLaughlin, a University of Michigan economist and director of the Economic Research Initiative on the Uninsured.  They may be even more vulnerable than they think. For example, 66.2 million Americans were uninsured at some point during 2004. That’s nearly 50 percent higher than the 45.8 million the Census Bureau reported for that year. The discrepancy comes in how the uninsured are counted. 

The number of persons lacking coverage for some period during the year is much larger than the number of uninsured at a particular point-in-time. “Counting the uninsured over time makes you realize that a lot more people, and many higher-income people, are at risk of losing their coverage,” says Pennsylvania State University health economist Pamela Farley Short.  She says that people cycle in and out of coverage, and they become more vulnerable when they are without insurance and in between jobs. 

Responding to this growing worry, both Democratic and Republican presidential candidates have unveiled proposals to expand coverage and lower costs. Drawing on ERIU-funded research, some of the nation’s most respected health and labor economists weigh in on key elements in the candidates’ health reform proposals.

Universal coverage and mandates
Universal coverage is a popular theme on the campaign trial. McLaughlin, as vice-chair of the Citizens' Health Care Working Group, heard the public’s calls for universal coverage first hand in 2005 and 2006. The Working Group was a nonpartisan congressionally mandated body charged with seeking solutions nationwide from everyday Americans.  “While the vast majority of people we talked to thought there should be universal coverage,” she says, “the term does not have a universal definition.”

This is apparent in the reform plans put forth by presidential candidates last fall. Most of the Democratic candidates, including Hillary Clinton, John Edwards, Barack Obama and Bill Richardson, espoused affordable, high-quality coverage for all Americans through a mixture of private and public insurance. Still, each candidate differed, for example, to the degree public programs are expanded, the tax code is changed, coverage mandates are used, and whether or not universal coverage is a soft or hard target. The notable exception among Democrats was long-shot Dennis Kucinich, who proposed a universal, single-payer, not-for profit system.

Proposals from Republicans Rudy Giuliani, Mike Huckabee, John McCain, Ron Paul, Mitt Romney and Fred Thompson, meanwhile, largely view health care as an inefficient system that requires more market-based competition for people to get access to affordable, better quality coverage options.      

Many believe expanding coverage significantly requires more than just carrots, or premium subsidies; it requires a stick too. You've got to have money and a universal mandate if you want universal coverage,” concludes MIT economist Jonathan Gruber, a designer of Massachusetts' model universal coverage plan.

“Most candidates don't want to use the "m" word,” remarks McLaughlin. Even Romney, who as Governor of Massachusetts signed a law that included a mandate, has walked away from this approach on the presidential campaign trial. 

“As Jon Gruber and others have shown, relying on subsidies, whether direct premium subsidies or indirect tax subsidies, will not make a significant dent in the number of uninsured persons and, in fact, can be a very inefficient way to push the majority over the edge into the insured bucket,” notes McLaughlin. “The economic case for subsidies just isn't there if the goal is to reduce significantly the number of uninsured persons.”

“Voluntary efforts can [help you cover] large numbers of uninsured but they aren’t going to get you more than half without the mandate,” says Gruber.

Not calling for universal coverage in their proposals, Republican candidates will rely on voluntary efforts. Among Democrats, only Clinton is calling for an individual mandate. Obama would require all children to have health insurance. Edwards and Richardson stated that individuals would either be required or expected to be covered at some point. All four of these Democrats, meanwhile, looked to employers to either provide or finance coverage for their workers. Other candidates largely stayed away the pay-or-play form of financing.  

Premium subsidies and tax changes
Democrat and Republican candidates offer a wide assortment of ways to help people buy affordable coverage, including premium and tax subsidies to employers or individuals. Economic research has found that such subsidies have varying degrees of efficiency that policymakers would be wise to consider. For example, ERIU-funded research has questioned the efficiency of using the employer-based system to expand coverage, while other ERIU-funded studies have shown premium subsidies don’t succeed in getting certain individuals to take up offers of employer-sponsored insurance, and even can lead to unintended consequences of workers opting for more costly health insurance.

Efforts to delink employment from health insurance by limiting or transferring the employer exclusion to an individual deduction for individuals buying health insurance—an approach President Bush has proposed and one embraced to various degrees by Clinton and McCain—is a positive step to reduce labor market inefficiencies, says Anne Beeson Royalty, a labor and health economist at Indiana University-Purdue University at Indianapolis. “I don’t think these tax deductions are going to be enough for most of those who are uninsured to buy policies, however."

Gruber adds while ending or limiting the $200 billion annual employer subsidy makes sense, it must be accompanied by purchasing pools so individuals have access to group or more affordable coverage, as well as subsidies that allow lower income individuals to afford coverage. 

Whether the subsidy or tax break is at the individual or employer level, research urges caution. Substantial numbers of persons with subsidized coverage fail to take up offers of insurance. “If someone doesn't have insurance, you have to give them a whole lot of money before they will take it,” warns Helen Levy, a University of Michigan health economist. Meanwhile, several candidates propose tax deductions and tax credits—from eliminating employer subsidies and allowing individuals to deduct for insurance purchases, refundable tax credits, expanded deductions on health savings accounts and other deductions. 

“The tax code is the right place” to target subsidies, and those directed to individuals certainly are preferable to subsidies targeted to providers or employers, Levy says. Tax credits are preferable to tax deductions in terms of incentives, adds Royalty, especially for lower income families. Still, it’s unclear what the net effect tax credits or deductions would have on insurance coverage. “Depending on the size of the tax relief relative to health insurance premiums, we could see increased coverage, but if too many employers dropped coverage in response to the program, we could see losses in coverage,” notes Royalty.

Expansion of public programs, insurance reforms
The current standoff over the State Children’s Health Insurance Program (SCHIP), pitting congressional Democrats against the White House and many Republicans, presages the battle over the role of public health programs under national health reform. At one end of the spectrum is Kucinich’s single-payer model, a stark contrast to the plans favored by most Republican candidates, who would not expand public programs. Romney favors converting Medicaid to a block grant program to give states more freedom in decisions about how to expand coverage.

In the middle sit most Democratic plans. Clinton, Edwards, Obama and Richardson all look to build on public programs to varying degrees, including expanding SCHIP and Medicaid, allowing those 55 and older to buy into Medicare, using the Federal Employees Health Benefits Program or Medicare to compete alongside private insurers, even starting a new public program.

Expanding public health programs is seen as an anathema to most Republicans. But economists warn not to flatly rule out certain expansions for efficiency reasons. “SCHIP is a very efficient policy,” asserts MIT’s Gruber. “A much more efficient policy would be to target low-income adults who are uninsured. We're already covering kids who are reasonably high up the income scale, whereas an adult with no income isn't covered at all.”

ERIU-funded research, for example, showed that an SCHIP expansion in Wisconsin successfully extended coverage to women leaving welfare and going to work. Many of the women who were eligible for the state’s BadgerCare program could not have afforded employer-provided or other private coverage. 

Policymakers grow concerned when public coverage crowds out offers of employers-sponsored insurance. “It is not clear, from a societal perspective, that this is a terrible thing,” posits Thomas Buchmueller, a University of Michigan economist. “We are talking about low-wage workers who would pay fairly high monthly contributions for that private coverage, with fairly high cost sharing at the point of service. For them, they are better off financially and will likely have access to richer benefits if they go with public coverage.”

Adds University of California, Berkeley economist Steven Raphael: “The costs of crowd-out may be partially offset by other collateral benefits to recipient households. Those who drop coverage may actually be better off if they end up with lower out-of-pocket costs and a more stable source of health insurance for their children and possibly themselves, if SCHIP benefits are extended to parents. In addition, working parents may no longer be locked into current jobs by the need to maintain health coverage for their children. Job mobility may rise for those with SCHIP-eligible children and the average quality of parental job matches may rise.”

Meanwhile, most Republicans and Democrats offer to make private insurance more obtainable, affordable, and portable. One idea supported by Obama is to have the federal government act as a reinsurer, paying for a certain portion of only the most catastrophic of claims. The effect, maintains Harvard economist Katherine Swartz, “will help keep premiums lower than they are now in these markets, and more people who are currently uninsured will be able to afford to buy coverage.”

Other ideas are less government heavy, including allowing small businesses and the self-employed to buy insurance via any organization, association, or other states, requiring private insurers to provide guaranteed issue and renewable policies, and allowing young adults up to age 25 to keep family coverage.

“If policymakers are serious about addressing this issue, they have to make sure that small business can purchase health insurance with stable and affordable premiums,” notes Kanika Kapur, a RAND health and labor economist. “Plans that allow small businesses to band together to purchase health insurance with lower administrative costs have potential if they can be made workable.”    

The value equation, the future of affordable health insurance
As Harvard economist David Cutler sees it, policymakers and politicians should be focusing more on getting value for our health care dollar, rather than focusing so much on containing costs. It’s going to cost money to insure everyone and continue to increase life expectancy, quality of life and live healthier into older age, he says, so “we should be paying for more valuable care and less wasteful care.”

Candidates agree that payers, whether employers, insurers, or patients, should be getting a better value for their health care dollar. Clinton and McCain, however, make high quality health care a centerpiece of their proposals. Still, even with more value-based purchasing, health care costs would likely continue to climb. “Technology is probably responsible for half of all the increase in health care spending,” says Dana Goldman, director of economics at the RAND Corp.

In health care, it’s hard to find examples of where technology saves money, Goldman says. Vaccines do, some pharmaceuticals can; others suggest a health care system infused with information technology can bring savings. Still, medical technology and advances drive up costs. The goal for many is to prevent cost increases from continuing to outpace growth in wages, making health care coverage unaffordable to even more Americans. “It’s not that health care is bad per se; it’s very good,” says Goldman. It helps us live longer, healthier lives. “The challenge for us is to figure out how to make sure it goes to the patients who most benefit, and that the costs are not passed onto future generations.”

Within this context, policymakers “need to think about how we can offer a reasonable health care plan, without all the bells and whistles,” Goldman adds. “Is there somewhere we can provide a basic set of services? We need to find ways to make sure that (the uninsured) have at least access to some basic set of services.” Many economists suggest that health insurance should return to the nature of insurance, protecting individuals against catastrophic financial risks.

Catastrophic or bare-bones policies should be encouraged in order to make insurance coverage more affordable to more people, asserts Roger Feldman, a University of Minnesota economist. “The bottom line is that high deductible health insurance has made insurance affordable to a much broader group.” Other things can be done to increase the reach of such plans and make them more affordable, such as applying the current tax subsidy equally to all out-of-pocket expenses.

"There are multiple goals being sought by different health care reform proposals,” McLaughlin observes.  Virtually everyone wants to improve the health status of the U.S. population.  There are various ways to accomplish this. Improving access to the right care at the right time and place for all involves many changes in the current system, only one of which is increased health insurance coverage. For some analysts, improving the quality of care provided, reducing medical errors, is top priority.  For others, reducing financial barriers to getting health insurance coverage, which in turn removes many financial barriers to getting needed health care, is the primary goal.  Containing system-wide health care costs in order to make health care more affordable to everyone suggests a different approach than directly subsidizing only those who cannot afford available health insurance now.  Before we can assess what the "best" strategy is, we need to agree on the goal and then look for good research that suggests the most efficient way to reach that goal.

-Written by Christopher J. Gearon

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Funded by The Robert Wood Johnson Foundation, ERIU is a five-year program shedding new light on the causes and consequences of lack of coverage, and the crucial role that health insurance plays in shaping the U.S. labor market.