I was intrigued when Obama first came up in the 2008 election. A relative was positively in love with him (well, he had been a Dennis Kusinic fan), and extolled the virtues of Obama's healthcare plan. At his insistence, I looked into in detail and published the following analysis before the election. I can now update it with more recent examples of State healthcare plans that follow many of the attributes of the plans running through Congress. See the end of point (1) below.
Obama's plan is a public-private approach: government mandates, private insurance. He wants to ensure that anyone get coverage at reasonable rates. The core of the Obama proposal, from his website, is: "Insurers would have to issue every applicant a policy, and charge fair and stable premiums that will not depend upon health status." He has three primary provisions:
- Guaranteed Issuance (GI), meaning anyone can get covered even with a pre-existing condition
- Community Rates (CR), meaning the insurers need to charge the same (for similar coverage) as they charge to the community at large, young or old, healthy or ill. In effect, these means the young and healthy subsidize the old and ill.
- Comprehensive Benefits (CB), so the base policy would cover a wide range of care.
On paper, the Obama Plan sounds pretty good. But it has been tested in the real world and failed. It has a fundamental flaw. Let's walk through five key issues with his plan.
1) Obama's Plan has Been Tried, and Failed.
The Obama Plan was tried in Kentucky in 1994, after the political failure of HillaryCare. Kentucky implemented the first two tenets of the Obama Plan: (1) Guaranteed Issuance of policies (GI), and (2) Community Rates (CR). I don't believe they added the third tenet, but it would have made matters worse, but packing in more mandates and reducing the ability for the healthy to buy a simpler (cheaper) plan.
The Kentucky experience was a disaster. Within two years, 60 insurers had exited, leaving one private insurer plus a state-run plan, which is now defunct. Kentucky had to undo the plan. Only a small number of insurers returned (seven). A bunch of articles were written on it, including here, here and here. Succinct summary from the last cite: "The system was working for 95 percent of the people. We basically destroyed a system that works to satisfy the other 5 percent."
It is illustrative to understand what went wrong:
- Healthy people opted out of insurance. Why? They could always buy back in at reasonable rates if they had to. This is the fundamental flaw in GI at CR.
- Insurance companies could not make any money. The insurance system is not just money in, money out like Social Security; it relies on a surplus coming in, which is invested and creates additional investment income to pay claims, and is used to purchase reinsurance, spreading the risk. The Obama approach by design removes the surplus, and the people who opt out drive the insurance company into deficit.
- Choice was reduced, costs went up, and the number of uninsured increased.
When the third requirement is added - government mandates for comprehensive benefits (CB) - the system spirals out of control. People do not opt out immediately, but as the rates they get charged for coverage they do not want nor need increase, they will increasingly opt out. Note that a large portion of the uninsured - maybe 30%, or 15-20M people nationwide - can afford health insurance but think it too expensive.
This happened not just in Kentucky, but also in New Jersey, Washington, New Hampshire, and Vermont.
UPDATE 10/3/09: In addition to those five States, we have more recent examples discussed in this report. Relevant excerpts:
"Hawaii, Oregon, Massachusetts, Tennessee and Maine have all created some version of government takeover or administration of health care, and all are a mess. ... But perhaps the worst — and closest — example of why a federal takeover of health care won't work comes from Maine. ... Maine's universal coverage plan is most similar to the plans circulating on Capitol Hill. ...
"Six years after it was passed, it has insured only 3% — roughly 3,400 — of the 128,000 promised.
"By 2007, the system was so broke that it closed to new enrollees. It still has not reopened and has also cut and capped benefits. The "streamlined" bureaucracy has cost the state's taxpayers $17 million in administrative costs to cover 9,600 people, leading one to wonder if there are more bureaucrats in the system than enrollees.
"Systemwide insurance costs have increased 74% since Dirigo was passed, and the governor and legislature have tried — unsuccessfully — to raise taxes to fund the system. ...
"These states could have fixed the broken pieces of the system by implementing market-based, patient-centered reforms that bring people into the private insurance market, thus lowering costs and increasing access.
Instead, they layered enormous bureaucracies over patients and physicians, and separated them both from each other and from quality care."
2) Obama May Have a Hidden Agenda
During the primaries, the biggest back and forth between Hillary and Obama was over whether Obama favored a single payer system. Hillary said he endorsed single-payer, and Obama said he 'never' did. But he did, and it was caught on YouTube. Obama's website says he would favor single-payer, if we were starting from scratch.
This is not just a minor squabble. His health team must be aware of the failure in Kentucky, and in other states where the Obama approach has been tried. Yet he proposes it. You probably couldn't design a better way to eviscerate the private insurance system short of outright control. McCain likes to say that Obama is willing to lose the war to win the election. Maybe he is willing to destroy private healthcare to win the a single-payer system.
You can Google political events where healthcare is discussed, like the Take Back America conference from last March, where the consensus view is to first decimate private insurers and then institute a single-payer system. I am not exaggerating - you can see the quotes and arguments from supposedly credible figures.
Whether this is Obama's intent I cannot say, but his YouTube video and the comments to Hillary's arguments in the Demo debates make it clear he is highly aware that politically a single-payer system should not be proposed as a part of a Presidential campaign, as the public would reject it. Hence the only way to get to HillaryCare is incrementally.
3) The European Model is Suspect.
Why not go to the European model of a single-payer system?
I have watched an evolution in thinking here, and it strikes me as replicating a phenomenon I saw when I was in college. Back then, a bunch of folks wanted a socialist revolution in the US. They first pointed to the Soviet Union, but the Gulag killed that. Then China became the next Socialist hope, but the Cultural Revolution and ritual cannibalism gave them pause. Next, Vietnam! But the re-education camps and boat people put them off. Cambodia? Killing fields So the fickle finger of the socialist future pointed to - Cuba! That was the best they came up with. And that died when Castro loosened things and another flood of boat people voted with their feet.
We are only part way through that evolution. Britain's National Health has lost it luster as people with means would rather fly to India for care than wait for National Health. A recent anecdote: after patients were stranded in emergency rooms for days (days!!), the Brits mandated emergency rooms had to help within four hours of checking in, so the hospitals began leaving people in ambulances to avoid the clock ticking. Of course those ambulances simply waited in the parking lots, and needy people needing an ambulance couldn't get first-responder care. Ok, what about Canada? Canada rationed care so much that a case went to the Canadian Supreme Court (in 2005) and reinstated private healthcare. Apparently the plaintiff had to wait over a year for hip replacement surgery.
So now France is the new Cuba. Liberals point to the French system as working. Not sure - the French deficit for the system is now so large the EU is issuing warnings for France to get its budget in order.
The only ways for these systems to contain costs are (a) rationing of care and (b) controls on prices. Rationing is done not just by delaying treatment, but also by denying it. The European systems take a long time to introduce new treatments, especially involving expensive drugs. They refuse to purchase new drugs until the drug companies lower prices. This perversely results in complete lack of treatment. For example, the British National health only allowed Lipitor in five years ago. To make the moral problem clear, in a single-payer system, to reduce costs, they do not pay for treatments, and they let people die.
As a consequence, new drugs are usually first introduced in the US. If the US were to join the parade of single-payer systems, one of the unintended consequences would be a slowdown in new drugs. Initially, we might get a benefit, as the drugs already in process would come out and be cheaper; but the incentives for continuing to go through the long and complex approval process, and the risks even after launch of egregious lawsuits, would make the ROI of pharma much poorer.
UPDATE 10/18: The WSJ lays out the stifling of drug innovation under new rules being proposed for Medi-Care that are also at the center of Obama's plan - to use mass purchasing power to drive down drug costs. This would align the US with Euro systems that wait and wait for new drugs to be priced low, and often never introduce exotic treatments for small numbers of afflicted due to high treatment cost. The Obama plan is closely akin to the UK National Health NICE process to centrally-manage drugs, i.e., to protect against budgetary overruns. According to the article, since 2000 NICE has prevented use of "in my count, in 226 different indications" where "there is 'high-level evidence' or 'uniform consensus' of clinical benefit." Cancer survival rates in the UK are "substantially lower" than in the US, and "the gap continues to widen." The perverse consequence is people in need die due to cost containment.
As to price controls, these would reduce Doctor salaries. If this were combined with a grand reduction of lawsuits and damages, the drop in salaries might be about equal to the drop in malpractice costs. But the risk is the career of a Doctor would suffer, and although we would get a short term benefit from the Doctors already in the system, we would suffer a longer-term atrophy of the best and brightest no longer going into medicine.
4) The Current System is NOT a Market-Based System.
Advocates of government healthcare argue the market system has failed. But the current system is nothing like a market system. What has failed is the Republican Party, to make the case for a more dramatic reform towards market principles. Indeed, Repubs tend to chase Democrat-Lite policies, hoping to assuage the push for government healthcare, only to find they simply whet the appetite for more. Bush thought his drug entitlement would fashion a new Compassionate Conservative majority; instead he created the first budget-busting entitlement in 40 years.
Romney thought RomneyCare would propel him to the White House. Instead, it is so wildly over budget in its first two years it may prove to be another example of why we should avoid a universal coverage system that relies on government not the market. RomneyCare does not encourage more private insurance - only 18,000 of 350,000 new people to the system bought private insurance. It is already starting to ration care. It is trying to get the Feds to cover half the over run - taxing the innocent! It is increasing fines to force people into the system. It has dropped mandates for universal coverage. People are already gaming the system - so much for lower admin costs. (Admin savings tend to be illusory, since lower admin leads to higher fraud).
A market-based system would have a market, and allow millions of decision-makers to make choices, and those choices would drive innovation and efficiency in healthcare.
Instead, we have evolved a FrankenSystem, a third-payer system, where Americans have little control over healthcare spending, and little incentive to shop:
- Only 6% of people directly buy health insurance. 64% get it from their employer, and a surprisingly large 30% get it from the government
- The choices given to employees are quite limited - usually just a few plans with a small range of benefit choices
- Most healthcare is paid for, with a small co-pay, so consumers have little control over the prices of what they get
- Government mandates have driven up costs and removed choice .. a simple regression analysis shows that the states with the most mandates have the highest insurance costs, typically 50% or more higher than neighboring states with similar wages and costs
In a low-regulation state like Wyoming, there are 61 plans for a 30 year old male, ranging from $50/month with a $5k deductible to $217/mo with no deductible. In a high-regulation place like NYC, there are only 12 plans, ranging from $137/mo for ONLY hospital coverage to $888/mo. You can check these sorts of things online, at eHealthInsurance.com for example.
And of course government-mandated systems lack the innovation and efficiency of a market system. In contrast, in those health markets where governments have stayed out, we see cost reduction and service innovation. Consider Lasik. Costs have dropped (30% over the past decade), clinics have flourished, technology has innovated every three years or so. Consider cosmetic surgery - a decline in costs over the past 15 years despite a 6x increase in demand.
5) The Problem is NOT that Daunting to Solve.
I commonly see bandied about that 47M or 59M people lack health insurance. This number is seriously misleading. I gather from a little research that only around 8-12M are really uninsured. Perhaps 30% of the uninsured could easily afford it but choose not to. Most of the rest are either illegal aliens, or eligible for government help but fail to take it, or are uninsured for only a brief period of time (eg., between jobs). if we want to help those 8-12M, we can design programs to do so and afford to have the government subsidize, without creating an even larger FrankenSystem of the sort Obama proposes.
In a market system, people vote with their pocketbooks. The 30% of the uninsured (15-20M) are finding that health insurance is too expensive - likely due to government mandates being layered in. Remove the mandates, free up basic health plans (eg, high deductible and no co-pay), and costs will drop.
Competition can be very helpful. We freeze our health insurance providers in a mish mash of state by state regulation. This seems to be a time when it would be better to break down barriers to competition across states.
What most people worry about is the onset of a chronic or catastrophic problem that is way beyond their means to handle. Reagan bravely proposed a Catastrophic Health Plan in his second term, and it passed, but was repealed in a year for the worst reasons: the Demos thought it would pre-empt their dream for universal healthcare, and the Repubs were worried about a new entitlement. Neither seemed to care about solving the problem of these 8-12M uninsured. Such a catastrophic plan should be reconsidered, and perhaps offered as a government reinsurance program behind the private health insurers.
It is time to get serious about an alternate plan. Besides the McCain Plan, the bipartisan Wyden Plan has a lot to offer: it provides a method to transition quickly from employer healthcare to portable healthcare, and avoids some of the hard to explain parts of the McCain plan. It would be better for us to solve the 8-12M problem with government subsidy and throw the broader system open for market forces, then take an irreversible step of destroying the private insurance business and being left with no choice but a single-payer system. Once we go that way, there is no return.
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