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McCain, Obama, and the National Health

The current condition of our health care system must certainly be described as serious, if not critical. Until recently, opinion polls had found it at or near the top of domestic concerns. Although it has been displaced by the economic meltdown, there is still good reason to be very worried about health care. Costs continue to rise at an unsustainable rate. Nearly 46 million people are uninsured and many more are unable to afford the growing gaps in their coverage; and the quality of care received by most Americans is far from optimal. Both Senators John McCain and Barack Obama have plans to cure these ills. To evaluate them, we need first to understand some facts about the current system.

There are two parts to the health care system. The first concerns the sources of funding and how care is insured. The second part concerns the actual delivery of care by physicians, hospitals, and other medical facilities, and how these providers are paid. I refer to all of this as the “delivery system.”

Some 160 million people are insured privately on a tax-exempt basis through their employer or the employer of a family member. Most private insurance is sold by for-profit investor-owned companies through contracts with employers. These companies take 15 to 25 percent of the premiums for their own profits and business expenses before paying for medical care. The physicians, hospitals, and other providers, in turn, have large additional expenses in billing and collecting from multiple insurers. About 40 million people are covered by Medicare, and a nearly equal number by Medicaid. Other government programs cover ten million people or so, and a dwindling number of people buy their own insurance. Although government programs cover less than a third of the population, government bears more than half the cost of health care, if tax exemptions for employment-based insurance are counted.

The delivery system not only provides medical services, but has a major part in determining what services will be provided. Physicians are the most important element in the delivery system, because they make most of the decisions on the use of resources and facilities—prescribed medicine and the use of X-rays and CAT scans, for example—and they provide much of the actual care. Physicians are paid largely on a fee-for-service basis, which gives them incentives to provide more services and to use procedures for which they receive high reimbursements, such as surgical operations and high-technology diagnostic tests. Incentives to maximize income also influence the decisions of hospitals and most other medical care facilities, as well as the powerful companies that manufacture drugs and devices ranging from syringes to MRI scanners.

More than anywhere else in the world, medical service in the US is considered by the people who control it to be a commodity in trade, and health care is seen as an industry. Given the opportunities for profit, and the constant introduction of new and more expensive procedures, tests, drugs, and medical devices, it is easy to understand why the US delivery system generates such huge costs. In view of the incentives to increase costs, and the influence of providers over the decisions to use medical resources, it is also easy to understand why the US delivery system is the most expensive in the world and is getting more expensive all the time. Medical experts agree that we overuse available resources—whether prescribed drugs or surgical and diagnostic procedures—even when their effectiveness and advantages over less expensive forms of treatment are unproven.

How would the candidates deal with these problems in insuring and delivering health care, and what are the prospects that they would succeed in achieving universal care at an affordable cost?

McCain would depend mainly on a consumer-driven market approach to contain costs. He proposes to encourage the substitution of individually owned private insurance for the current employment-based system. He would do that by eliminating the tax exemption for employee benefits, and by giving every single person a $2,500 subsidy and every family a $5,000 subsidy in the form of a refundable tax credit to buy their own insurance. If employees chose instead to keep their employment-based coverage, they would have to pay taxes on it. The funds for the government subsidies would come from the taxes collected on the health benefits of all the employees who elected to remain in the employment-based system.

There are big problems with this proposal. First, the average cost of personal insurance in today’s market is about $5,000 and of family insurance about $12,500. McCain’s refundable tax credit would not come close to covering the purchase of such insurance even today, let alone keep pace with the rise of premium costs in the future. Many who chose this option would be forced to buy relatively low-cost, high-deductible policies. McCain proposes that individuals put aside money for deductibles in a tax-exempt health savings account, but that assumes they have sufficient income to do so and that their taxes are high enough to make it worthwhile. Furthermore, it is impossible to know whether enough people would remain in the employment-based system to cover the tax-credit refunds.

By promoting personal ownership of insurance policies and discouraging insurance through employers, McCain hopes to encourage consumer pressure on insurers to keep their premiums low and their benefits attractive. He also wants to free insurers from state regulations and create national markets for insurance. He promises to help those individuals denied coverage because of high-risk medical conditions by setting up a “guaranteed access plan,” whereby the federal government would work with the states to create suitable insurance alternatives; but he offers no details.

McCain proposes to reduce Medicare expenditures by having the government bundle together payments for care, instead of paying physicians and hospitals in the usual piecemeal, itemized way. He also thinks that Medicare payments should be based on medical outcomes—more for good results, less for poor results. Unfortunately, no one has yet devised a practical method for implementing these ideas.

Finally, McCain proposes measures that he claims would control costs and improve quality in the medical care delivery system, including faster introduction of generic drugs, more emphasis on preventive medicine, better management of chronic diseases, greater use of information technology, and medical malpractice reform. Those are desirable goals, but their impact on overall medical expenditures is either unknown or at most modest. In addition, better preventive care and management of chronic diseases seem inconsistent with the high-deductible insurance his plan would encourage. If your deductible is high, you will likely have to pay for the medical examinations and tests that can be crucial in identifying conditions that threaten your health and in detecting major illness at an early stage. Most important, these proposals do not address the root causes of the increasingly rising cost of the delivery system—the incentives to charge more.

In summary, McCain is clearly more interested in containing costs than expanding coverage, and he doesn’t even mention universal coverage. He relies on consumer choice and market competition to contain costs and improve quality. Many experts on health policy see his plan as not only unrealistic but unfair. It is unrealistic because patients depend on physicians in ways quite different from the relations between consumers and sellers in an ordinary market. Lacking expert knowledge, they are not in a position to make prudent purchasing decisions. It is unfair, because it encourages people with low incomes either to go without insurance or to purchase low-cost, high-deductible insurance that puts them under pressure to forgo the examinations and treatment they may need. Those with higher incomes can afford more comprehensive insurance coverage and would not risk their health. Many economists also find that the McCain proposals provide skimpy and inadequate information about the costs to individuals and government.

Obama would not change the employment-based insurance system and would allow those who prefer their current arrangements to keep what they have, tax-exempt as before. Those who are uninsured or want to leave their present plan would receive a government subsidy to choose from a pool of regulated private insurance plans or join a new public insurance plan similar to Medicare. Small employers who cannot bargain with insurers could also enroll their employees in this national pool. Large employers who do not make a “meaningful” contribution—not yet defined—to their employees’ health insurance would be required to contribute an unspecified amount to the public plan.

Obama would require coverage for all children, but otherwise all insurance would be voluntary—you would have to apply for the government subsidy—and therefore universal coverage would not be assured. Private insurers would not be allowed to deny coverage or to adjust the price of insurance policies because of an applicant’s preexisting medical conditions. A new system of government reinsurance would reimburse employers for a portion of the costs they incur for employees with major medical problems, thus enabling small employers to get lower premiums from insurers.

The cost of these new federal benefits would be covered by letting the Bush administration tax cuts expire for families making over $250,000 a year and by savings in the medical delivery system that would be achieved by many of the same measures proposed by McCain. Medicare would save money by negotiating drug prices with the pharmaceutical manufacturers, a practice now forbidden by law. In addition, Obama proposes a new federal institute to evaluate the comparative effectiveness of drugs, devices, and treatments; this would provide reliable data that physicians could use to achieve results in the most economical way.

We need such an institute, but unfortunately Obama says nothing about changing the incentives that encourage physicians to increase costs. His advisers also say he wants to promote primary care and the integration of primary care practitioners—internists, family physicians, and pediatricians—into medical teams; but they provide few details about how this would be done.

Obama says that by the end of four years he would achieve universal coverage and would save the average family $2,500 on health costs; but this vision is based on many unsupported assumptions, for example, that enough uninsured people would choose to join a plan, that the cost of insurance premiums would not rise too steeply, and that his various proposals for saving money on medical care would succeed. Like McCain, Obama is short on cost details and talks mainly about broad strategies.

However, the differences between the candidates are very clear. I prefer the Obama proposals because I think they are more compatible with what I believe should be the basic goals of a health care system—universal coverage and equal access to good-quality care. McCain takes a narrower view of health care, seeing it essentially as a market for commodities in which people should be able to buy what they want and can afford, and in which government should have only a marginal role.

I think that the McCain plan would speed the disintegration of the health care system, not reverse it. On the other hand, I cannot muster much enthusiasm for the Obama plan. True, it would expand coverage in the short run, but it offers no realistic solution for rising costs. Without major changes in the delivery system, as well as in the private insurance industry, we won’t control costs, and universal coverage is unlikely to be achievable or sustainable. We have to hope that as this situation becomes more and more clearly understood, a truly effective rescue plan for health care will emerge.

—October 7, 2008

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