Obama Health Inevitable?
by John Goodman
Issue 133 - June 10, 2009

All the special interests are ready to cave. Doctors, drug companies, big business — you name it. They're all negotiating the terms of their surrender. Republicans are in total disarray. But hope is not yet lost. This was exactly the situation 15 years ago when Hillary care was defeated by grass roots resistance. The same thing could happen to Obama.

Here's what Obama health reform will mean. The federal government will increase its spending on health care by as much as $1.5 trillion over the next ten years. Employers will face a play-or-pay mandate (to provide insurance or pay a tax). Even so, employer-provided health insurance will unravel. Today's individual market will vanish and perhaps the small group market as well. Medicaid will expand and there may be a Medicare-like plan for the middle class. In time, most people will get government subsidized health insurance through a government regulated "exchange."

What difference will Obama health reform make? Amazingly, but as previously explained at this site, the plan will not even put a dent in the three big problems of cost, quality and access. There are no realistic cost control measures being seriously considered and the additional $150 billion of annual spending will almost certainly exacerbate medical inflation. Despite all the hoopla, there is really nothing in the plan that will significantly increase quality. In fact, in the exchange there will be intense competitive pressure to underprovide to the sick and overprovide to the healthy. Although the plan will probably cut the number of uninsured in half, this will be offset by greater enrollment in Medicaid, which is only marginally better than being uninsured. Even though more people will have insurance, overall access to care may actually decrease.

Insurance will be no more portable than it is today. (Insurance obtained in the exchange will be for only one year at a time.) The medical marketplace will be no more competitive than it is today. There will be more, not less, bureaucratic interference in the practice of medicine.

Why are they doing it? Why would Washington politicians be willing to spend so much money and cause so much upheaval without any realistic prospect of solving the triple problems of cost, quality and access? The answer to that question is purely psychological. I may write about it someday.

So what should conservatives and moderates and even rational liberals do? They can't do much about the main features of this plan — the votes are already there to pass it. They may be able to affect some aspects of the plan, however. In that regard, THE SINGLE MOST IMPORTANT GOAL should be to STOP THE CREATION OF A MIDDLE-CLASS HEALTH CARE ENTITLEMENT.

This issue is different from, but related to, the issue of the public (Medicare-like) plan. The reason you have heard so much about the latter from think tanks, editorial writers, etc., is that it threatens very powerful interests. The reason you haven't heard much about the former is that it does not threaten anyone's short run interests. It does, however, threaten the long term financial health of the country in a big, big way.

To see how an entitlement can be created, consider two different ways of subsidizing health insurance. One method is premium support. As advocated during the election by Sen. John McCain, for example, each family would receive, say, $5,000 to apply to their health insurance costs. If the premium exceeds that amount (which it almost certainly would) the extra premium would be paid by the family from its own resources.

By contrast, setting out-of-pocket limits on how much the family must pay in premiums and having government pay any extra is a very different type of subsidy. For example, in the Commonwealth Fund version of the Obama plan, people in the exchange would have their premiums limited to 6% or 7% (but certainly no more than 10%) of their income. Take a family earning $50,000 a year. With a 10% cap, the family would pay no more than $5,000 in health insurance premiums. So if a family plan costs, say, $12,000 (about the average in the group market), the extra $7,000 would be paid by the government.

Five bad things immediately emerge from this design:

• First, the family has no interest whatever in cost control. To the contrary, the richer and more generous the plan, the more attractive it will be.
• Second, as with the current system, the real cost of insurance will be hidden. Only the out-of-pocket premium ($5,000) will be transparent. The family's tax cost (to pay for the subsidy it and other families will receive) will be completely invisible.
• Third, since the limit on out-of-pocket insurance premiums applies only in the exchange — and not to employer-provided insurance — there will be irresistible pressure to shift from nonsubsidized employer plans to heavily subsidized plans offered in the exchange. This means, incidentally, a shift from the only part of the market where there is any serious effort at cost control and quality improvement to the part of the market where there is virtually none.
• Fourth, wherever the out-of-pocket limit is set, health care costs will be rising faster than income. That means that with each passing year, more and more people will qualify for the subsidy.
• Fifth, since health care costs are rising faster than income, the cost to the federal government (i.e. taxpayers) will invariably rise through time for every family covered by the subsidy.

How is a new health care entitlement about to be created? A sixth bad thing — in fact the worst of all — would be for the government's share of the premium to become an entitlement for middle-income families. For example, if the promise to limit health insurance premiums to 10% of income becomes codified as a federal commitment, we will have created a middle-class entitlement every bit as worrisome as Medicare. And since health care costs are growing at twice the rate of growth of income, this would establish an unfunded liability that would grow through time. Medicare for the elderly and the disabled already has an unfunded liability of $90 trillion. A middle-class entitlement could double the size of that debt.

The goal, then, should be to make sure there is no such commitment. Federal subsidies for health insurance should not be open-ended entitlements; they should be subject to budgetary rules that are independent of health care costs; and they should be reviewed periodically by Congress.

So why am I raising the alarm now? Because the creation of a middle-class entitlement is happening at this very moment, below the radar screen, while fiscally sensible people seem blissfully unaware

John Goodman is President and CEO/Kellye Wright Fellow at the National Center for Policy Analysis