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IT'S NOT WHAT YOU DESTROY, BUT WHAT YOU BUILD.
I've gotten a lot of e-mails on Ruth Marcus's column today, so let's spend some time on it. Here's Marcus:
Overall, Barack Obama's health-care plan is preferable to John McCain's...But McCain's plan is not the ill-intentioned monstrosity of Obama's ominous portrayal. In important ways, it would be an improvement over current law, making a health insurance system that is now tilted in favor of the rich significantly more progressive.This is, in a sense, true. The employer-based system is a historical quirk. It has become an ongoing burden. It should be reformed. But Marcus does something very weird in her column: She elides the question of "how."The central aspect of McCain's approach is to eliminate the existing tax preference for employer-sponsored health care...The existing arrangement is an irrational artifact of World War II wage controls, when companies competing for scarce workers dangled health insurance to lure them. The result is a tax subsidy that has ballooned to $200 billion a year. No one designing a health-care system from scratch would set things up this way. Tying insurance to employment makes little sense in a world where workers hop from job to job. Excluding the value of insurance from taxable income leads to overconsumption of health care, driving up costs. It favors better-off employees who, because they pay higher marginal rates, derive a greater benefit from not being taxed on their health insurance.
An analogy: Imagine that the US government built a lot of affordable housing. A lot of people relied on this housing stock. But, at the same time, it had a lot of problems. The infrastructure was dilapidated, repairs were long behind schedule, costs had ballooned, and surrounding housing markets were seeing their values pushed down. Housing advocates on both sides of the divide were clamoring for some alternative arrangement. And so the government came up with one: They would demolish this housing stock, give the current residents a small tax credit, and send them into the subprime loan market.
Would this be a good solution? Maybe in part. Everyone agrees you need to get rid of the bad housing stock. But the point is to build something better in its place. Not replace it with something worse. Which is, basically, what McCain is doing here. There are three health care markets in this country. There's the government market, which exhibits the lowest cost growth and highest satisfaction. There's the employer market, which experiences higher cost growth and moderate satisfaction. And then there's the individual market, which most agree is an unregulated, cruel, inefficient, dystopic affair. John McCain is blowing up the employer market and moving people to the individual market. And in case you think the subprime analogy unfair, it's not really my analogy. It's John McCain's analogy. McCain wrote earlier this year that "Opening up the health insurance market to more vigorous nationwide competition, as we have done over the last decade in banking, would provide more choices of innovative products less burdened by the worst excesses of state-based regulation."
The point, in other words, is not what you destroy, but what you build. The employer market has terrible problems. The individual market, impressively, is worse. Out of the frying pan and into the fire is not a wise approach to health care reform. But for reasons I don't quite understand, Marcus is unwilling to engage this point, Indeed, she goes to some lengths to hide it:
Eliminating this [employer tax] distortion -- if done the right way, and that's a big if -- could help more Americans obtain insurance, push down costs and reduce the drain of health-care costs on the federal budget. Don't believe me? Read Jason Furman, Obama's top economic adviser, writing just in April: "The most promising way to move forward in all three dimensions -- coverage, cost, and long-run fiscal situation -- is to replace the employer exclusion with a tax credit."Here's what Jason Furman actually wrote (emphasis in the original):
Replacing the Tax Exclusion with a Tax Credit – Together With Other ReformsThe "other reforms" are actually in the title of the section. You can read them at full length in the paper, but they are: 1) Progressive tax credits (to some degree, this fits the McCain proposal, at least in its earlier years). 2) "Mandatory coverage or other institutional mechanisms to increase participation." 3) "New pooling mechanisms." Here, Furman suggests something along the lines of the Federal Employee Health Benefits Program. 4) "Reducing adverse selection in existing pooling mechanisms."The most promising way to move forward in all three dimensions – coverage, cost, and long-run fiscal situation – is to replace the employer exclusion with a tax credit, a step that has been proposed many times before (e.g., Butler 1991 and Pauly and Hoff 2002). Firms would still be allowed to deduct the cost of their contributions to employee premiums, just as they can deduct wages and other expenses today for the purpose of calculating taxable income. But workers would now have to include employer contributions to health insurance in their earnings for the purpose of calculating taxes (precisely which taxes is discussed below). In exchange for, workers who purchased qualifying insurance would get a refundable tax credit. Qualifying insurance would be along the lines proposed by the President in his standard deduction for health insurance, including limits on out-of-pocket payments, coverage of a general range of medical care, and guaranteed renewability by the provider.
What Furman has described here is a new health care system that looks almost identical to Barack Obama's National Health Insurance Exchange. Furman would like to weight the tax incentives such that the National Health Insurance Exchange is advantaged, and grows to envelope the whole system. On this, I agree with him. Obama does not go so far, largely because it's politically treacherous to attack the employer-based market. Instead, Obama builds the replacement system and assumes individuals and businesses will enter of their own volition, as it proves its efficiency against the dysfunctions of the employer-based market. It's not a crazy assumption. But the key is not how fast you destroy the employer-based market, but what you build to replace it. Furman concludes: "By itself such a policy risks disrupting employer-sponsored insurance, making some people worse off, and not achieving significant gains. But structured in the right way, including progressive tax credits, a mandate or other institutional mechanisms, new pooling systems, and other techniques to reduce adverse selection, it could be a relatively low-risk and no cost way to reduce health spending and expand coverage – potentially to all Americans."
Marcus, somewhat unfairly, doesn't add this context, but McCain's plan fits Furman's "by itself" description. It's a policy that disrupts employer-sponsored health insurance, makes many people worse off, and does not achieve significant gains in coverage. It does not have a mandate or automatic enrollment, it does not reform the insurance industry to reduce underwriting or address adverse selection, and it does not create new pooling mechanisms that replace the pooling that's currently done by employers. It carries the cruelty of disruption without the salve of construction. And in that, it is a very bad plan. The fact that a very good plan would also attack the employer-sponsored system is not enough to save it. And if you don't believe me, ask McCain himself. Nothing would do more to end employer-based health care and rationalize the system than single-payer. But McCain does not support single-payer. He derides it. And so the question becomes, is his end point better or worse than the current system? And there can be little doubt: The individual insurance market is far, far worse.
COMMENTS (15)
I worked for Ins. carriers for 18 yrs... I am now an Independent Insurance Agent in Tx. I know you want to evaluate the Insurance Market.. and Insurance companies.. and "let's all find the best plan"... But, let's say we removed the state boundaries on Health Insurance.. and make it a true free market. Individual carriers still have the right to Decline ANYONE.. Group coverage (employer based) in Texas cannot be declined under 50 lives because of the TX small group reform law. And, keep in mind that Insurance carriers DO NOT CONTROL Hospitals or Providers.. The Insurance companies in Houston were held hostage a few years ago by a very popular provider network who wanted more money. And, a monopolizing Hospital organization in Houston put another "start up" hospital out of business before they could open their doors by threating to remove admitting rights to each doc who was involved in the start up. Most people want to yell at the big insurance companies.. I assume they are an easy target. The real culprit is the so-called Not-for-profit jokes of Hospitals who are squeezing the docs and insurance companies and the patients. Keep in mind some Insurance Companies are mutual... and all they want is their 3% each year. We can't use a hatchet.. when we need a scalpul. And, yes.. it may put be out of a job.. But, I'm voting for Obama... and I hope he sees the Hospitals are the monopoly... not the big mean insurance companies.. not all of them anyway.
Also, a side note: Or medical technology as an economic commodity is at the top of our list of resources that people come from around the world to get the best care... we can't lose that competative edge.. We need to think ahead on this..
Posted by: Anna Marie | October 7, 2008 4:49 PM
I'm looking at this as a life or death situation.
I currently work for a small NGO that is barely making ends meet providing health care for it's employees. If the McCain plan passed, it would tax the already fine margin the agency has with solvency, forcing it to drop our health care.
So, sure, I would get a 5k credit....but the thing is, I have a pre-existing liver condition. Sure, I'm fine now, but with my history, and my family history, I probably won't stay that way. With my current insurance, the problem would be manageable.
With McCain's plan, I'll be stuck without insurance, and there's no way I would ever get insurance. I'd be screwed. So, what good is a tax credit if I can't use it?
And this doesn't even begin to mention all the other problems with the plan.
Posted by: Salvo | October 7, 2008 5:01 PM
First, you lost me on the analogy. You're saying, "Imagine a world in which we knocked down low-quality housing used by the poor then gave them unimpressive vouchers in compensation."? Strangely enough, I can, quite easily imagine such a world, so it's hardly like that sort of thing is outside the capacity of our system.
Second: well, a big part of the reason the individual market sucks is that there's not many people in it. If everyone now in the employer market dumped into individual, you'd start seeing things get better - more companies move into the market, more investment in more accurate stat modeling that allows them to undercut competitors, etc. I will yield that for reasons of leverage in bargaining the individual market will probably never deliver as good deals as the group market, which brings us to--
Third: I don't think you should assume that the decline of the employer system will necessarily result in everyone entering the individual system as, well, individuals. De-tax-advantaging employer spending on health care doesn't just level the playing field between employers and individuals, it also levels it between employers and nonprofits. Before the emergence of the employer-based insurance market, insurance was largely a function of churches and fraternal lodges like the Moose or Elks.
This offered risk pooling (each lodge/church would have a small business' worth of members, and regional or national institution-wide pooling could go bigger) and portability (if you lose your job, you're still covered, and even if you move across the country, there'll be a local branch there waiting for you). And between the institutions' charitable mission, sense of cameraderie, and insurance's appeal as a recruiting tool, they tended to optimize for robust and comprehensive coverage, including pre-existing conditions. This remains a fundamentally viable model; it collapsed as tax-advantaged employer-provided insurance became the norm, but should that wave sink back into the surf, there's no reason insurance-by-social-community couldn't become the norm again.
Posted by: Senescent | October 7, 2008 5:19 PM
I am bewlidered by the notion of health care "overconsumption." Is it possible that such a thing even exists? Excluding what I assume must be a relatively small number of certifiable hypochondriacs and people who have crushes on their doctors, what half-way sane person goes to the doctor if they don't feel a genuine need for medical attention? Is health care truly a consumable product in the sense of, say, fast food or cigarettes, i.e., something in which one would willingly overindulge?
If anything, in my observation of others' behavior as well as, unfortunately, my own, the real problem is not going seeking medical help even when it's clearly required. My own father, despite working his whole adult life for an institution that provided an excellent health plan, had to be dragged kicking and screaming to the doctor even though he had numerous health issues that eventually cost him his life (but might not have, at least not as quickly, had he chosen to "overconsume").
So maybe I'm missing something important here. can someone help me out? What exactly is "overconsumption of health care?"
Posted by: scribe9 | October 7, 2008 5:27 PM
My brain is small and must work very hard to follow these conversations, but I've watched the two debates so far, and I've sat up straight and listened when they got to McCain's health care plan, and I don't think Obama or Biden has brought up the part where masses of people end up in the individual market, either.
They talk about McCain taxing your benefits, and his fig-leaf "tax credit" (and tonight Obama will certainly point out that McCain will cover the shortfal by cutting Medicare), but so far they haven't drawn the line to the next dot: the part where employer health coverage fades away, and tens of millions of us are tossed into the jungle.
Is it because the Democrats are scared of the insurance industry? When is someone going to ask if Americans really believe that the government could do a more clumsy and avaricious job of running health care than the insurance companies?
Posted by: pk | October 7, 2008 5:34 PM
Thanks, Ezra, I'm one of the people that sent you an email about this. And scribe, I totally agree with you. I have excellent government employee insurance, and I hate going to the doctor. I should go more b/c its actually affordable to me. Who are the people 'over-consuming'? While my healthcare costs so far are somewhat reasonable, I wouldn't be wasting 20 or 30 bucks on a doctor's visit.
Posted by: Jay | October 7, 2008 6:40 PM
I think the main form of "overconsumption" identified by critics of the health care system is testing for things you have only one in a million chance of having.
But IMO, that's mainly a result of ass-covering prompted by the possibility of malpractice suits if it *is* that incredibly rare thing and the doctor advised you *not* to bother testing for it. The AMA could establish a clearer standard of care on when tests are indicated or not indicated and all those suits (or phantom suits) would be dismissed for failure to allege that the doctor had violated standard of care.
Posted by: chris | October 7, 2008 7:22 PM
Very good post.
Probably the most non-partisan you've been with respect to assessing McCain's plan. While you are correct that Marcus fails to provide the context, you've too frequently ignored the positive aspects of McCain's plan, albeit one with significantly more flaws. This has been the type of post I've been hoping to see you write for a while. Nice job.
Posted by: wisewon | October 7, 2008 8:04 PM
"And in case you think the subprime analogy unfair, it's not really my analogy. It's John McCain's analogy. McCain wrote earlier this year that "Opening up the health insurance market to more vigorous nationwide competition, as we have done over the last decade in banking, would provide more choices of innovative products less burdened by the worst excesses of state-based regulation."
Free checking, better CDs, online banking, weekend hours, grocery store branches, community banks to compete with national banks, better service no he wasn't referring to any of that.
He was really referring to subprime mortgages which Democrats forced banks to offer to unqualified borrowers and then just to be sure the Democrats crashed our economy authorized Fannie and Freddie to buy as much of the junk as they wanted.
Your desperation is pitful Ezra. Far from being unregualted subprime mortgages where regualted on the public just the same as Teddy K regualted HMOs on us. Keep shoveling your BS you still might be able to cover up the truth
Posted by: Nate | October 8, 2008 12:46 AM
I may be dense here, but how is McCain's system preferable if a) it costs me more taxes, or b) I have to pay exorbitant premiums. In the case of business, they a) lose the expense of insurance, but b) also lose a tax deduction and c) lose the ability to retain skilled employees. The govt takes on an additional burden and only insurance companies win?
Posted by: Always Hopeful | October 8, 2008 5:03 PM
to mock your ignorance some more Ezra allow me to share a specific example of where his statement is true.
CA only has a handful of insurers. Further they have one of the most regulated small group markets in the country called CalChoice.
OH has a larger number of active insurers writing business and considerably more competition, their small group reform is far less regulated.
In the past 2-3 years it has become very popular for small groups to self fund under a fully insured high deductible. They pay the small claims directly without insurance. They save 30-50% in premium and only spend 20-30 in claims for a net savings of 10-20% or more. Basically free money and thus the increase in popularity.
In CA CalChoice has it written overtly written into their contract this is not allowed. If they catch you doing it they cancel your policy and the broker compensation agreement. There are only a couple policies in CA you can use to do this and they aren't priced well.
In Ohio a few years ago the smaller carriers started doing this to write business and it worked so well the large carriers were forced to follow suit and offer it as well.
Anthem specifically claims in CA it's an unfair practice and would crash the system while we use them all the time in Ohio to do it.
If it wasn't for CA regulation and lack of innovation by CA insurers CA employers could be saving 10-20%. Exactly what McCain claimed.
This is just another perfect example of your cluelessness on all matters healthcare and your partisan hackery.
I assume you will be issuing a correction?
Posted by: Nate | October 8, 2008 5:05 PM
Nate,
For you:
http://www.slate.com/id/2201641/
Posted by: Always Hopeful | October 8, 2008 5:09 PM
Nate,
I'm not sure I follow the CA story, but I know that my employer chose one of those high deductible plans this year and managed to save lots of money, but it cost me $4,500 extra in expenses, since I'm diabetic. I didn't get an increase in salary. What about the poor individual? Why do we worship business in this country at the expense of individuals?
Posted by: Always Hopeful | October 8, 2008 5:13 PM
Always Hopeful do you only read every other word? They self fund the small claims. That means if they had a $500 deductible and purchase a $5000 from the carrier the employer pays the claims between $500 and $5000. Why is it Liberals can't even grasp basic math and comprehension?
Posted by: Nate | October 9, 2008 12:52 AM
The real problem is not going seeking medical help even when it's clearly required. My own father, despite working his whole adult life for an institution that provided an excellent health plan, had to be dragged kicking and screaming to the doctor even though he had numerous health issues that eventually cost him his life.
Posted by: tower defense | April 25, 2009 3:11 AM