Health Care's Big Choice

The American health-care system is again at a point of critical change as a result of escalating costs and a gathering movement among employers, insurers, and policy-makers to revamp the structure of health insurance. Like the spread of managed care a decade ago, the new changes will be a bitter pill for many people. Most Americans, however, don't know what is in the works or what fundamentally different choices about the future of health care the two presidential candidates are offering them.

During Bill Clinton's second term, health-care inflation slowed to a crawl as the economy grew rapidly, but under George W. Bush those conditions have been reversed: Health costs and insurance premiums have soared in a slow economy. Median family income fell 3 percent between 2000 and 2003 as a result of the recession, while health-insurance premiums rose 10.9 percent in 2001, 12.9 percent in 2002, 13.9 percent in 2003, and 11.2 percent in 2004, according to surveys by the Kaiser Family Foundation and the Health Research and Education Trust (HRET). Average family premiums hit a staggering $9,950 this year. Unsurprisingly, as insurance has become more costly, the number of people without it has climbed -- up by 5 million to 45 million since Bush assumed office, according to the latest Census Bureau data from an annual survey conventionally used to measure health coverage.

Moreover, the rising cost of health insurance has reportedly made employers that do offer coverage reluctant to add new full-time jobs. (In 2003, employer contributions averaged $6,656 for family coverage and $2,875 for single workers.) High health costs have become a particularly serious drag on employment in economic sectors such as manufacturing that have historically provided good jobs with benefits. According to the Kaiser–HRET survey, health insurance came with 5 million fewer jobs in 2004 than in 2001.

From 1990 to 1992, during the first Bush administration, the same combination of high health-care inflation, sluggish economic growth, and rising numbers of people without coverage created tremendous pressure for reform and reorganization. Clinton's reform efforts failed, but employers and insurers reorganized the system through the introduction of managed care. Though that shift didn't help the uninsured, it provided some temporary relief from rising costs. But after provoking a backlash from both patients and providers, many health-maintenance organizations and other managed-care plans in the late 1990s relaxed the controls they had earlier imposed. Growing combinations of hospitals and other providers also impeded price competition. Many analysts now believe that the managed-care revolution yielded one-time-only savings, primarily by ratcheting down levels of hospital use.

As a result, employers and insurers are facing the current surge in costs without much hope that they can contain it with measures aimed at doctors and hospitals. Instead, they are focusing on consumers and moving toward scaled-back forms of coverage with higher deductibles and co-payments. Such measures not only shift costs from employers to individual consumers but are also aimed at forcing patients to economize on the services they use. Compared with people in other advanced countries, Americans do not actually see doctors more often, obtain more prescriptions, or spend more time in hospitals. Health-care costs run much higher in the United States not because of higher volume but because of greater technological “intensity” and higher prices (prescription-drug prices have become a familiar example of the latter phenomenon).

Nonetheless, exposing consumers directly to more of the price will cause them to cut back on certain kinds of services, including some that are medically necessary. Many people have already seen their deductibles rise from $100 to $300 or $600 (often with separate deductibles for hospital care) and their co-payments for doctor visits jump from $10 to $20 or $40. At the extreme, this approach calls for annual deductibles on the order of $2,000 or more, perhaps combined with a health savings account (HSA) to which an employer may (or may not) make a contribution, perhaps up to half the amount of the deductible.

The advocates of this approach call it “consumer-directed health care,” a term that puts the best face on a change otherwise likely to be unpopular and that embraces several types of insurance. Some insurers, for example, are allowing individual employees to customize their plans by choosing from a menu of deductibles, co-payments, and other features. Some have introduced “tiered networks,” which call for classifying doctors and hospitals in several groups, with consumers paying relatively more to use providers in higher tiers. These approaches, like the high-deductible plans, are “consumer-directed” in the sense that consumers make choices under the economic constraints that insurers and employers have devised.

The measures proposed by President Bush would extend and accelerate this shift; indeed, the model that he and other Republicans have been promoting is a high-deductible plan with an HSA. The legislation passed last year for Medicare prescription drugs included an unrelated provision authorizing portable, tax-exempt HSAs, and this year Bush is proposing to make the premiums for high-deductible insurance 100-percent tax deductible. These provisions would give the high-deductible/HSA option greater tax advantages than exist for any other kind of insurance.

In addition, Bush would provide tax credits to low-income individuals for the purchase of health coverage: $3,000 for a family of four with an income below $25,000, falling to $1,714 at an income of $40,000. These tax credits are estimated to cost $85 billion over 10 years, but given how much insurance actually costs, the impact would be modest: According to a study by the Kaiser Family Foundation, the credits would reduce the 45 million uninsured by 1.8 million—a gain that would likely be wiped out soon with continued growth in insurance premiums.

The high-deductible/HSA option will be chiefly attractive to healthy people in higher tax brackets who may not need medical care in a given year and can roll over their untaxed savings. But it will hold little appeal for those with chronic illnesses or families with children, who are likely to be stuck with larger out-of-pocket expenses than under a conventional insurance plan. Nor will the high-deductible/HSA option appeal to people with low to moderate incomes, who will not realize significant tax savings but expose themselves to risks of bigger medical bills.

In any given year, roughly two-thirds of subscribers to a typical insurance plan are healthy and make relatively little use of their coverage, while the remaining third experience significant acute or chronic illness, with 1 percent suffering from catastrophic conditions that account for a major share of total expenditures. Insurance works, of course, because the healthy subsidize the sick. The HSAs, in contrast, allow the healthy to keep funds out of the general pool and to save them individually. To the extent that healthy, low-risk people opt for high-deductible plans with HSAs, the cost of other forms of insurance will necessarily have to climb. Over time, many people who would not otherwise want a high-deductible plan may well find they have no other choice.

Kerry's “Ambitious Incrementalism”

While the Bush approach puts more of the onus of cost on the individual, John Kerry's proposals aim to reduce and spread the costs of health insurance. Some provisions would make private plans more affordable, while other elements would expand public programs for low-income people. Kerry's plan, unlike Clinton's in 1993, calls for little institutional change and does not include any mandates. It uses new financing to stabilize and extend existing forms of coverage and to create incentives for greater efficiency. In this sense, his program is incrementalist -- “ambitious incrementalism” is the term that some have used to describe it. According to estimates by Kenneth Thorpe of Emory University, Kerry's proposals would cost $653 billion over 10 years and result in coverage of 27 million of the nation's 45 million uninsured, raising the proportion of Americans with health insurance to about 95 percent. Unlike Bush, Kerry indicates how he would pay for his plan: The required revenue would come from rolling back the Bush tax cuts for the top 2 percent in income.

To cut private insurance premiums, Kerry proposes that the government provide “stop-loss” protection to private plans, picking up 75 percent of the cost of catastrophic care. The threshold for this protection would be set so as to relieve private plans of 10 percent of their costs. In 2006, that level would be $30,000 in annual expenses for an individual, rising to $50,000 in 2013. Employers that wanted to get the stop-loss protection would need to have a certified disease-management program (aimed at controlling expenses and preventing recurrences for specific high-cost conditions such as heart disease). They would also have to offer health coverage to all their employees on a nondiscriminatory basis -- that is, if they pay 75 percent of premiums for some employees, they would have to extend the same offer to all.

The stop-loss protection would have benefits to the public beyond the immediate savings of 10 percent. Reducing the risk of high-cost cases would make it less risky, and therefore cheaper, to insure small firms. All employers would have less incentive to discriminate against job seekers who are older or disabled or who have family members suffering from costly medical conditions. In the past, Blue Cross plans used to offer a single “community rate” to all firms, large and small. Competition did away with that practice. Under Kerry's proposal, the government would, in effect, restore “community rating” for catastrophic medical care.

In another measure aimed to increase the pooling of risk, Kerry would use the framework of the Federal Employees Health Benefit Program to create a national pool open to all employers to buy insurance. The federal program today offers government employees, including members of Congress, an array of private health-insurance plans (indeed, it has long been cited as a model of “managed competition”). Under Kerry's proposal, private employers could also purchase health coverage through a parallel, albeit separate, pool.

Kerry would also extend substantial tax credits to enable the unemployed and small businesses to buy insurance. Currently, those who lose jobs with health benefits have a right to buy COBRA coverage for up to 18 months, but they usually must pay for it entirely on their own. Kerry would give the unemployed a refundable tax credit for health insurance equal to 75 percent of their COBRA premium. His plan also includes tax credits to cover up to 50 percent of premiums for employees of small businesses, scaled according to their wages.

Kerry's primary means for reducing the number of uninsured, however, is a major expansion of public coverage. Since 1965, Medicaid has been the primary channel for financing health care for people with low incomes. The federal government sets minimum standards and provides much of the money, but the states run their own programs at varying levels of inclusiveness and generosity. In 1997, Congress added a second federal-state program to expand coverage of children, but both Medicaid and the State Children's Health Insurance Program have suffered from cutbacks in recent years.

Under Kerry's plan, the federal government would pick up all the costs for insuring the 20 million children from families with incomes below the poverty line ($18,811 for a family of four in 2003). The states would then extend eligibility to children in families with incomes up to three times the poverty level; children in school would be automatically enrolled if their parents did not report other health coverage. As a result of these measures, coverage of children would come close to universal.

With federal money, the states would also expand Medicaid coverage of parents with incomes up to twice the poverty level and other adults up to the poverty line. Kerry's proposal also includes federal bonus payments to states as they meet enrollment targets.

The combination of provisions in Kerry's plans helps to address the risk that expanded eligibility for Medicaid would lead employers to drop coverage of low-wage workers. Small businesses would receive substantial tax credits to cover low-wage employees. If firms wanted to get the stop-loss protection under Kerry's plan, they would have to offer the same coverage to all their workers. Some firms could decide to forgo stop-loss protection rather than cover all their employees; in that case, they would be “paying for” Medicaid through the stop-loss subsidies they give up.

There is, however, an unresolved problem with the use of the federal employee program as a framework for a national insurance pool. Because participation in the pool would be voluntary, the employers most likely to use it would be those with older, higher-cost workers. In pricing coverage for the pool, health insurers would necessarily adjust their rates upward to reflect that risk. The national pool, however, would cost less to administer than plans purchased by small firms through insurance brokers. The program could also attract healthier employee groups if the small-business credits in Kerry's plan were at least partially contingent on use of the national pool. Many such details will need careful analysis if Kerry is elected and the program gets turned into legislation.

The chances for enacting Kerry's proposals depend, of course, on control of Congress. Progress will certainly be difficult if voters elect Kerry while returning a Republican congressional majority. But one difference from the Clinton plan is that Kerry's proposals are more easily divisible; they could be enacted piece by piece over an extended period. Most of the package could be included in budget bills needing only a simple majority in the Senate instead of 60 votes. While Republicans characterize the Kerry plan as a government takeover of health care, some on the left will be dismissive precisely because it isn't. But unlike more radical proposals such as single-payer national health insurance (“Medicare for all”), Kerry's approach is politically plausible.

Ten years ago, opponents of reform were able to portray the Clinton health plan as a threat to Americans' existing coverage; Kerry's proposals, however, would unambiguously help Americans keep coverage that is otherwise slipping away from them. The provisions for stop-loss protection have an appeal that extends across the board, including to business. Although Kerry's support for government-negotiated prices for prescription drugs will certainly meet opposition from the pharmaceutical industry, the rest of his program does not threaten the insurance industry, physicians, or small business -- traditional opponents of reform. An executive of one insurance company told me recently that Kerry's plan, especially the stop-loss proposal, is “fantastic” for his firm, but not to expect the company to say so publicly. The ties between business and the Bush administration are too strong for Kerry's health proposals to make much difference in business support during the campaign. But if elected, Kerry may be able to build a broad coalition in support of his plan.

Some journalists have said during this presidential campaign that neither candidate has any important domestic proposals. Kerry's health plan is his single biggest domestic-policy initiative, accounting for most of the new spending he is proposing. Indeed, he has told The New York Times that the health proposals would take precedence over balancing the federal budget. He has held numerous events to publicize his position on health care and, through publications on his Web site, offered far more details about his health reforms than any previous candidate (including Clinton in 1992). Kerry's proposals have nonetheless received little attention in the media. With time running out before the election, it remains to be seen whether the public will hear any sustained discussion about the two candidates' views on health care, even though the voters' stakes in the outcome are enormous.

Paul Starr is co-editor of The American Prospect.

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