1

Health Reform Plans:McCain vs. Obama

William H. Dow

University of California - Berkeley

October 20, 2008

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Many Variants of Republican Ideology:McCain has embraced extremes

MINIMIZE

Govt InterventionTax/Transfers

Libertarians X X

Fiscal conservatives X

Pro-Market X

Conservatives are not monolithic, but different flavors of conservatives tend to have similar policy views favoring smaller government in sectors such as health care.

3

Heterogeneous Views of Government (Blendon, NEJM Jan 24 2008)

Government vs. private insurance providing medical coverage

Repub. Dem.

Govt better 21% 41%

Govt worse 60% 36%

4

McCain and Obama Focus on Different Health Care Problems

• Obama’s goal: universal health insurance. • McCain:

– Reducing uninsurance is desirable, but not paramount.

– Main priority is to reduce health care cost growth. Why?

• Current cost trends are unsustainable. • Addressing cost growth necessary for sustainable

decreases in uninsurance.• Huge inefficiences in health care hurt government

budget, employers, and private individuals.

5

Heterogeneous Views of Uninsured (Blendon, NEJM Jan 24 2008)

Problem that many Americans do not have health insurance

Repub. Dem.

Very serious 55% 94%

6

National Health Expenditures

5%

10%

15%

20%

25%

1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025

National Health Expenditures as a Percentage of GDPNational health expenditures have risen dramatically and are projected to continue rising.

Percentage of GDP

Source: Department of Health and Human Services (Centers for Medicare & Medicaid Services) and Council of Economic Advisers.

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Public BudgetsRelative stability of past spending masks underlying shift towards entitlement

spending and unsustainable growth in Medicare spending

Source: Budget, 2007 [CEA]

8

Social Security and Medicare Costs% GDP

0%

2%

4%

6%

8%

10%

12%

14%

2000 2010 2020 2030 2040 2050 2060 2070 2080

Social Security

Medicare

Source: CEA

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Private Budgets

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Employee Share

Employer Share

Employer-Provided Health Insurance Premiums for Family Plans (1988-2005, adjusted for inflation)

Source: Kaiser Family Foundation/Health Research and Eductaion Trust [CEA] Note: The following years were interpolated: 1989-1992; 1994-1995; 1997-1998.

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How Can We Slow Spending and Reduce Inefficiences?

• No magic bullet.– One-time fixes only of limited help (liability reform).– Health IT, primary care, comparative effectiveness: both

campaigns embrace. Can reduce inefficiencies, but very hard to assess if will reduce spending.

• New technologies are main cost drivers.– Government has been unwilling to ration care, and

insurers have been unable.– Republicans have embraced the potential role of

consumers: with more cost-sharing, they could make better choices, demand lower prices, and induce cost-reducing technologies.

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RAND Health Insurance Experiment

• Large 1970s experiment randomizing people to insurance plans with cost-sharing ranging from none (“free care”) to 95% (high deductible). Results:

• Free care enrollees spent 45% more than high deductible enrollees.– Both “unnecessary” and preventive care was reduced

• Average health levels no worse after 5 years. – But cost-sharing harmed health of those poor and sick at baseline. Long-

term health effects unknown.

• New estimates: if switched insureds from current plans to those with higher cost-sharing, we could reduce spending 5% in short-run. Big unknown is how much long-run costs would drop.

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Tool to remove bias against cost-sharing: reform tax law

• Employer-sponsored insurance (ESI) premiums are exempt from income+payroll taxation – Anomaly from World War II price control policy

• This is a “tax subsidy” for buying expensive insurance, and biases away from cost-sharing.

• McCain: proposes to eliminate this tax distortion. Could raise $200 billion/year, AND improve efficiency AND improve equity.

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Estimated Average Federal Health Tax Expenditure

292

725

1231

1448

2134

2640

2780

102

0

500

1,000

1,500

2,000

2,500

3,000

Less than$10,000

$10,000-19,999 $20,000-$29,999

$30,000-$39,999

$40,000-$49,999

$50,000-$74,999

$75,000-$99,999

$100,000 ormore

Data Source: Lew in Group, 2004; Mean Benefit CEA calculation using CPS, Aug 04 Family Income

Mean Benefit: $1,511 / family

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McCain plan• Similar cost containment ideas as Obama (health IT, primary care, P4P,

etc.) but less budgetary commitment.– [No “Connector” to reduce admin costs… but savings are unclear, and could

easily add a Connector]

• Eliminate current tax exclusion: to encourage consumerism, reduce costs– [Less radical step possible: only partially remove exclusion]

• Replace tax exclusion with flat $2500/person or $5000/family credit for qualified insurance.

– [Too small for many low-income, sick. Could instead be larger for low-income.]

• Guaranteed Access Plan: insurance for high risks. Partly paid through insurer assessments.

• Allow insurance to be sold across state lines…which would reduce rating regulation.

– [Could use risk adjustment to instead reduce premiums for high risks]

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Final Thoughts

• Differing underlying values and beliefs

• Many spurious arguments on all sides– Both out of ignorance and disingenuous– Be sophisticated in evaluating arguments!

• Scope for compromise?– Major federal reform may require 60 Democrats in Senate.– But common ground on many minor reforms.

• But: More important long-run policies are upstream anyway. – E.g., education: Can improve health more, thus lower long-run

costs; can reduce inefficiencies; can reduce inequities.