Hillary's Own Plan

Hillary Clinton's "American Health Choices Plan," released September 17, opens a new chapter in the struggle for health care reform, though you would never know it from the predictable reactions on both sides of the political spectrum.

From the Republicans came the usual cries of "socialized medicine," even though the proposal builds on the existing system and calls for three features that have long been part of some conservative proposals: a mandate for individuals to carry insurance coverage, choice among competing health plans, and the use of tax credits to help make coverage affordable.

From the left came the usual charges that anything less than a single-payer plan is a boondoggle for the insurance industry, even though Senator Clinton proposes a new Medicare-like public plan to be offered as an option to employers and individuals and new national rules for insurers that would dramatically change how they operate.

The novelty of Senator Clinton's plan is not in its broad objectives. Like the 1993 Clinton Health Security Plan, this is a proposal for universal health coverage. Also like the 1993 plan, it offers choice among alternative health plans rather than prescribing a single plan run by the government. But the means of achieving these ends -- and certain underlying premises about how best to go about reform -- are different.

The general spirit of the proposal might be summed up this way: Set simple new rules for health insurance that people will acknowledge to be fair and reasonable, and then let both individuals and employers have lots of choices about how to obtain coverage -- including the choice to keep what they have.

In an interview about her health plan last week, Senator Clinton pointedly told Patrick Healy and Robin Toner of the New York Times, "I'm the decision-maker now. I have a plan that is 100 percent my plan."

And so she does. As I write in "The Hillarycare Mythology," the 1993 plan embodied Bill Clinton's priorities and judgments; her role was secondary. The plan that Hillary Clinton has now put forward reflects different aims and assumptions from that of her husband 14 years ago.

Clinton I Versus Clinton II

In 1993, President Clinton came to office with an overriding concern for economic policy that shaped his aims in health care reform. The president had committed himself to long-term reductions in the federal deficit, and he wanted to control the costs of health care for American workers and businesses. Health care reform, as he saw it, had the dual objectives of making coverage universal and setting limits on the growth of health costs. The 1993 plan, therefore, called for a managed-competition framework intended to spur price-conscious choices by consumers, as well as a back-up regulatory limit on the rate of growth of insurance premiums to restrain overall health expenditures. Instead of injecting more federal money into health care, the 1993 plan actually sought to spend less after a transition to a new system.

In contrast, Senator Clinton's plan calls for $110 billion annually of new federal health spending -- money that she proposes to raise mainly by discontinuing "portions of the Bush tax cuts" for those making over $200,000 a year. And while she proposes a variety of specific cost containment measures, her plan does not include any cap on insurance premium increases or other measure to keep overall spending under a target level. Some provisions may stimulate price competition among health plans, but she does not emphasize that aspect of her proposal or appear to put much weight on it.

Another key difference between Bill Clinton's proposal and Hillary's has to do with federalism. As a former governor, Bill Clinton wanted to vest primary operational authority for health care in the states. Under the 1993 plan, consumers would have chosen health plans through "regional health alliances," which the states would have established and controlled. Clinton was so skeptical of the existing federal health bureaucracy that he preferred to create new federal agencies that would be more friendly to a competitive approach to health care reform.

Now, rather than create new institutions, Senator Clinton proposes to take old ones and put them to new purposes. So instead of establishing regional health alliances, Senator Clinton proposes to use the existing Federal Employees Health Benefit Plan (FEHBP) to create a new Health Choices Menu for businesses and individuals. And she calls for that menu to include a public insurance plan modeled on Medicare (and possibly run by it). States that want to opt out of FEHBP would "have the option of banding together to offer the same type of choices in a region."

This approach has clear political attractions. The senator's plan promises to offer new choices without creating any new bureaucracy and to "give all Americans the same options their Member of Congress has." The advantages here aren't just rhetorical. If Congress had passed the 1993 Clinton plan, it would have taken years to implement because all 50 states would then have needed to enact corresponding legislation to set up the alliances. While allowing states to opt out, Senator Clinton's plan removes the possibility that some states will delay and obstruct reform. And by making use of an existing federal agency that is widely admired, she avoids both the need to design an institution from scratch and the risk that opponents will be able to turn it into an object of fear, as they did the 1993 regional alliances.

Reforming the Insurance Market

The use of the new Health Choices Menu would also be optional for employers and individuals, not required as the use of an alliance's menu would have been. This voluntary aspect of Senator Clinton's program would undermine its success if the rest of the insurance market were left unregulated. Insurers outside of FEHBP would offer coverage to relatively healthy employee groups and individuals, leaving the most costly population to go into the federal pool. This is what's called "adverse selection," and it would likely make the Health Choices Menu unattractive to all but those who couldn't get good rates elsewhere -- in short, a government program of last resort.

That's why Senator Clinton's proposals to regulate the private insurance market are so crucial to the success of her approach. Whether they offer their plans through FEHBP or directly to firms and individuals, all insurers would have to follow new federal rules, including "guaranteed issue" (that is, they would have to offer coverage to anyone who applies), "automatic renewal" (they couldn't drop someone because they get sick), and "strong rating protections" (they wouldn't be able to charge "large differences" in rates based on age, gender, or occupation).

These provisions against insurance market "discrimination" would cut rates for people at higher risk of incurring heavy medical expenses. And as the insurance industry will be sure to point out, those provisions would also raise rates for younger and healthier people who buy insurance -- except that other provisions of Senator Clinton's plan, such as the huge buying clout of the enlarged FEHBP, may reduce rates even for those groups. The current individual and small-group health insurance markets are staggeringly inefficient; the new federal insurance pool could radically cut the administrative overhead and make rates cheaper for nearly everyone.

The Medicare-like plan to be offered on the Health Choices Menu might also help keep premiums down. This is another key difference with the 1993 Clinton plan, which had no provision for the federal government to offer an insurance option in the alliances. At that time, the concern about a public insurance plan was that it would become a magnet for high-cost individuals, and there is some risk of that happening in Senator Clinton's plan. For example, private insurers could use marketing strategies and benefit design to make their plans relatively attractive to healthier subscribers, whereas the government plan would be barred from adopting the same tactics. Just as there might be adverse selection into the federal pool, so there might be adverse selection within that pool into the Medicare-like plan. If that happened, it would make that plan relatively more expensive than other options on the Health Choices Menu. But if the government plan were to start off by attracting a very large enrollment, it might also enjoy economies of scale and be able to exercise considerable market power in negotiating lower rates from hospitals and doctors.

Exactly how the government plan would turn out is impossible to say. Senator Clinton says that it would operate on a "level playing field" with private insurance plans, which presumably means it wouldn't receive any special government subsidy. But whether it would be able to take advantage of its size in negotiating lower rates -- or whether it might simply use Medicare's rates -- isn't clear.

Senator Clinton has also suggested that we ought to see how the Medicare-like plan fares in competition with private plans. Conservatives who believe government is inherently incompetent should have nothing to worry about; if they're right, the private insurers will beat the pants off the public plan. And progressives who believe that a Medicare-like plan would be cheaper because it won't have to pay out profits and high salaries should also be willing to let the results speak for themselves.

But, of course, things are never that simple. If Hillary Clinton is elected and Congress approves her health proposal, including the Medicare-like public plan, the success of that plan will depend on the rules under which it operates and particularly on whether it is allowed to flex its market power in relation to providers.

The Financing Uncertainties

In what is perhaps its most significant historical departure, Senator Clinton's plan turns to an individual tax credit approach to financing and reduces the traditional Democratic reliance on employer-paid taxes or required premiums. The 1993 Clinton plan generated most of the revenue for expanded coverage through an employer mandate -- that is, by requiring employers to pay a share of the average premium in an alliance. What employers generally heard was that they would have to pay 80 percent of the premium. What few employers knew was that this was the maximum amount. Depending on a firm's size and average wages, its obligations were limited to a sliding-scale percentage of payroll -- from 3.5 percent of wages for small low-wage firms up to 7.9 percent for high-wage firms. Public subsidies were to make up the remainder of the amount. But the White House never succeeded in communicating the limits on employer obligations, and in any event many employers simply didn't trust the administration.

Senator Clinton's plan does not impose a mandate to pay for coverage on any except the largest firms, 99 percent of which already offer health insurance to their workers. This limited mandate no longer has the function of generating revenue for expanded coverage; it would just keep the biggest firms from dropping coverage.

Although Senator Clinton also proposes to give tax credits to small businesses to encourage them offer health insurance, the major new source of money to make coverage affordable comes through two measures: an expansion of Medicaid and the State Children's Health Insurance Program (SCHIP) to all low-income people and a system of tax credits for individual households. These credits, according to the proposal, would be "designed to prevent premiums from exceeding a percentage of family income, while maintaining consumer price consciousness in choosing health plans."

Senator Clinton hasn't yet spelled out what percentage of family income that would be -- or even whether it would be the same percentage for a family making, say, $25,000 and a family making $100,000. The reference to maintaining consumer price consciousness suggests that the tax credits would be based on the premiums for a benchmark plan and that if a family chose a more expensive option, it would have to pay the difference. But how comprehensive would the benchmark plan be? These and other critical details haven't yet been spelled out.

The costs of the tax credits are also uncertain because it's not clear how employers and state governments would respond to the incentives the new tax credits create. This is the result of another difference with the 1993 Clinton plan, which would have superseded the existing employment-based system as well as Medicaid. In contrast, Senator Clinton's plan leaves in place employment-based insurance and Medicaid as well as SCHIP, which didn't exist in 1993. Her aim is clearly to allay the anxieties about change that the earlier proposal stirred up.

But overlaying new financing arrangements on top of earlier ones may create some worrisome problems. For example, some states may be tempted to cut back Medicaid and SCHIP and let more low-income people get their health care subsidized through federal tax credits. The legislation may, therefore, have to require states at least to maintain their level of Medicaid and SCHIP spending, though such a provision probably could not prevent a long-run shift of financial responsibility from the states to the federal government.

Similarly, many mid-size firms that are neither subject to the mandate nor eligible for tax credits may cut back their health benefits, leaving their employees to take advantage of the new tax credits. A modified mandate for mid-size firms -- for example, requiring them to pay for a share of their employees' coverage (but not necessarily coverage for dependents) -- might reduce the extent of this shift. How to reconcile the new tax credits with the old ways of financing health care is going to be a major challenge.

In a health system as complex as the one America has, there is a great yearning for a simple solution. But the problems are complicated, and any constructive policy will need a lot of fine tuning. Senator Clinton's proposal, as well as the plans presented by John Edwards and Barack Obama, provide an excellent basis for the discussion the country ought to have. Whether the Republicans want to join that debate, or just toss off the predictable ideological slogans, remains to be seen.

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