Guest Essay from Andrew Sheldrick
Barack Obama’s recent address to a Joint Session of Congress was yet another example of oratory outmatching substance. A rousing speech to promote a healthcare reform package that, on closer examination, seems designed principally to allow Obama to declare victory and move on. Obama seems to have achieved his immediate goal of rallying the base, though he was also the beneficiary of some unintended help from the reactionary and self-promoting congressman Joe Wilson, whose boorish outburst and subsequent refusal to apologize have so outraged and preoccupied the progressive blogs and talk show hosts that few have actually dissected Obama’s “plan”.
It’s hard to predict where Obama will go from here; the Senate Finance Committee bill unveiled by Senator Max Baucus rejects any form of public option, a key element of the President’s proposal. Having ceded leadership on healthcare reform to “Mad Max”, a leading Congressional beneficiary of health industry largesse, Obama may find it hard to regain control of the process. It probably makes little difference, because what he is proposing is fundamentally flawed, for reasons too numerous to discuss in detail here. In the highly unlikely event any plan is enacted, Obama will doubtless claim credit and tout it as major reform, but in reality it will merely institutionalize some of the worst aspects of the current flawed system.
At the outset, let me make my own preference clear. I agree with the 73 percent of physicians recently surveyed who support either a single payer system or a strong government option to compete with private healthcare insurance carriers. The argument over that will continue, but what is interesting (depressing is probably a better word) about the current debate, and why it’s an apt topic for this particular blog, is the number of “bad premises” that seem to underpin the arguments on both sides. Let’s take a closer look.
First: “The Employers Should Take Care of it”
The principal plank of the Obama proposal is a mandate on employers to provide health insurance for their employees. It isn’t clear what level of coverage employers would be required to provide, but opponents will justifiably complain about the added financial burden an employer mandate would impose on U.S. industry and the negative effect it would have on job creation. The impact would be felt especially hard by small businesses – which are critical to job creation – because they currently are less likely than large corporations to provide their employees with healthcare benefits.
As the country struggles to emerge from recession, it is hard to conceive of anything more irresponsible than burdening U.S. industry, especially small business, with the added cost of providing health insurance.
Obama apparently recognizes the economic risk posed by the employer mandate, because he also proposes granting a 50% tax credit to offset the added costs. This palliative would provide at best partial relief, and unless the tax credit were refundable, it would provide no relief whatsoever for the most financially vulnerable companies, that emerge from the recession in an unprofitable – and thus non-tax paying - condition.
Obama unveiled his employer mandate during the primary campaign, but he never explained exactly how it would work or what sanction would be imposed on companies that failed (or could not afford) to comply. He has had a further two years to think about it, and based on his recent speeches, has made little if any progress filling in the holes. Press reports recounted debate raging within the White House on the very eve of the Joint Address over what the plan should actually be.
Clearly, this was not a plan based on sound conviction or thoughtful policy analysis; it was a hastily cobbled-together and poorly thought through political response to falling poll numbers and a growing realization, especially among Progressives, that Obama has been asleep at the switch.
The concept of an employer mandate is bad policy, plan and simple, but it also exposes two bad premises that continue to bedevil the healthcare debate.
The first bad premise is that employers should have a role in the healthcare system in the first place. In discussing why the persons not covered by employer plans should be required by law to buy health insurance, Obama drew an analogy with auto insurance – if individuals are required to have auto insurance, he asks, why shouldn’t they also be required to have health insurance? This is a downright silly analogy, but if it had any validity one could equally ask why employers shouldn’t be required to provide their employees with auto insurance.
The fact that some employers have chosen to provide healthcare insurance reflects not a moral or legal obligation on their part to do so, but rather a belief that it can help recruit and retain top talent. To that extent, it is designed to serve an important corporate (as opposed to social) function. The problem is that the practice also tends to restrict mobility of labor, and that effect increases as private health insurance costs rise. Increasingly, people are making employment-related decisions based in large measure on the availability or otherwise of employer-provided health insurance.
Entrepreneurially minded employees may be disinclined to leave a job that comes with health benefits in order to start their own businesses, especially if they or a family member have pre-existing medical conditions that would preclude their purchasing private health insurance directly.
The concept of an employer mandate implicitly assumes that healthcare is a right not a privilege – why else compel companies to provide it. But if the Federal government believes that healthcare is a universal right, it – the Federal government - should find a way to provide and fund it. Shifting that obligation to employers (something that no other country in the word does) is not simply inefficient and costly; is a fundamental abrogation of the Federal government’s responsibility, as well as an unreasonable burden on industry.
That brings me to the second bad premise, which is inherent in Obama’s proposal to give companies a 50% tax credit to offset part of the cost of the premiums employers would have to pay. The whole concept defies common sense. If the Federal government wants to fund at least part of the cost of private health insurance, why not simply pay the insurance companies directly and leave the employer out of it? But the bad premise here is not the mechanism itself, but rather the fundamental assumption that it’s appropriate to use the Internal Revenue Code for purposes other than raising revenue to fund government operations. The tendency of successive Administrations to incentivize or penalize this or that type of behavior through deductions, credits or punitive excise taxes has led to a grotesque expansion of the Code and regulations, corresponding increases in enforcement and compliance costs, and a proliferation in tax evasion.
I recall that when I began practicing law some thirty years ago, the softbound edition of the Internal Revenue Code and Treasury Regulations was comprised of four or five volumes; now, it consumes eight – a total of 16,485 pages.
The government already subsidizes the private health insurance structure; for example, employers can deduct the cost of providing insurance to their employees but the employees are not required to treat the premium cost as additional income. This has the perverse effect that employees who are required to purchase their own insurance are doubly disadvantaged; not only are they generally unable to benefit from the lower group rates available under employer plans, but they are required to pay their premiums out of “after-tax dollars”.
It is unconscionable that they should have to subsidize the more fortunate beneficiaries of employer programs.
A March 2007 study by the Joint Committee on Taxation estimated that the various tax subsidies for private health insurance plans will cost the Federal government an astonishing $1.2 trillion over FY 2009-12. While some of the bills pending before Congress recognize the problem and would repeal some or all of the subsidies, Obama’s proposal for a 50% tax credit would actually compound the problem.
The linkage between employment and health insurance is bad for business and makes for bad healthcare policy. It also is a prime example of why the Tax Code has become so complex as to be incomprehensible to most Americans. Progressives need to understand that Obama’s employer mandates will not provide the “incremental change” they are told they now have to accept. It will further reinforce and institutionalize the very worst feature of the existing system.
Second: “It’s all the fault of the insurance companies”
I am tired of hearing Obama criticize the insurance companies for price gouging, excessive profits, paying excessive executive compensation, declining or rescinding coverage for high-risk individuals and refusing life-saving treatment. Opponents of health care reform, and to some extent even the health insurance companies themselves, seem to accept that there is validity in the premise - hence the Republican focus on “health insurance reform”, rather than “healthcare reform”.
Demonizing the health insurance industry is easy because it’s politically risk-free, but it’s also misplaced. For the most part, insurers are organized as “for profit” corporations. Management has a fiduciary obligation, within the bounds of the law, to maximize profits for the benefit of the stockholders.
That’s how our system works. As with any for profit corporation, a health insurance company should be able to pay its executives market compensation and deploy its capital as it sees fit. Management should be free to exercise prudent business judgment and should not be required by government to assume risks or engage in transactions that are likely to be unprofitable or unduly risky.
The Obama solution is to regulate more strictly how health insurance companies operate, the way in which they conduct business and the types of risk they must insure. Additional regulation will also create monitoring and compliance costs, both at the insurance company and governmental levels, and open the door to further costly litigation.
It is self-evident, moreover, that premiums would rise across-the-board to reflect the disproportionately higher cost of treating high-risk individuals.
The private health insurance companies require not more regulation, but less. Clearly they should be required to maintain adequate capital to pay claims, and a greater focus on truth-in-advertising is required; just as drug companies are required to disclose the adverse side-effects of the products they promote, so should health insurance companies be required to highlight the exclusions and limitations in their policies. They should be required to honor their contractual obligations in good faith, just like everyone else. But aside from that, a lighter regulatory touch is called for, especially at the state level, to enable insurers to sell policies across state lines, thereby promoting competition and ensuring that persons seeking insurance have the greatest possible selection of options to chose from.
Third: “Most People are Happy with their Existing Plans”
Opponents of healthcare reform argue that major change is unnecessary because most people are happy with the existing system. Recent polling data indeed confirm that most people are either “very satisfied” or “somewhat satisfied” with their existing health plan. But satisfaction with the current system is nonetheless a bad premise in the context of the healthcare debate. What, after all, are these people really satisfied with, and why are they so satisfied?
For example, none of the polling data I have seen differentiate between persons with private insurance and those taking advantage of government-run or administered plans - Medicare, Medicaid or the VA system. There is no reason to assume that satisfaction levels are higher among private health insurance users than among the population as a whole. But let’s set that aside. I suspect that those expressing satisfaction are satisfied not with their medical plan per se, but by the quality of care they receive from their primary care physician, pediatrician, local emergency room, etc. In other words, they would be equally satisfied by a public option that left them free to use the same medical providers.Other people may be satisfied because their employers pay all or part of their insurance premiums. Maybe the company HR department all helps out with all those tedious claims forms or gets involved when a claim is denied? Who wouldn’t be satisfied with that? But that isn’t a reason to deny a public option to those less fortunate, any more than it justifies eliminating Medicare, Medicaid or the VA.
Finally, there are millions of people who may be satisfied with their private health insurance coverage because they have yet to read the small print in their policies: things like lifetime caps, deductibles and exclusions. Some people only find out about these problems when a major claim is declined. Until a couple of weeks ago I would have told you I was “somewhat satisfied” with my own policy; that was before I took time to read the “Exclusions” section and discovered, hidden among the list of the standard exclusions for cosmetic surgery, experimental procedures, etc., an exclusion for chemotherapy. Now I’m not so satisfied.
Fourth: “A public option would put the health insurance companies out of business”
It’s easy to criticize this bad premise. Many who claim that government is inherently too inefficient to manage health care – or anything else for that matter - also oppose the concept of a public option on the grounds that it would put private health insurance companies out of business. In reality, the Congressional shills for the health insurance industry may have reason to be concerned. The administrative cost of running Medicare is roughly 4 percent whereas the health insurance companies spend up to 30 percent of premium income on administrative overhead, including the return to their shareholders.
A public option would require health insurance companies to become more efficient, and perhaps tailor their products differently.
But the British experience shows that private healthcare programs, as well as private hospitals and physicians, can peacefully coexist and indeed thrive alongside a government-run national health service.
The creation of a public option may indeed reduce the size of the private health insurance sector, but so what? The object of the exercise should be to reduce healthcare costs and increase access to healthcare, not prop up health insurance companies. That is why the assertion that the public option would put health insurance companies out of business is a bad premise in the context of the current debate. The mere fact that Congressional opponents raise the issue is an astonishing acknowledgment that they put the concerns of the companies above the interests of the people that elect them and who they are supposed to represent.
Fifth: “We Can’t Afford a Public Option”
I might take this criticism more seriously but for the fact that many of those who now express concern about the deficit sat on their hands while the George W. Bush Administration converted a budget surplus of $236 billion into a deficit of $455 billion, in the process adding $5 trillion to our national debt (almost half the current total). There is no question that the deficit is a serious problem, and the fact that prior administrations failed to exercise fiscal discipline is no excuse for more of the same. True also that the Obama record to date does not create reason for optimism. The Obama stimulus plan became a giant exercise in old-style Congressional pork, and the billions shoveled out to GM and Chrysler were essentially poured down the drain. All of this notwithstanding, I simply do not accept that the richest country in the world cannot afford to provide all of its citizens with the same basic quality of healthcare that other OECD nations provide
The high cost of health care is in large part a function of the insurance companies’ high overhead, and the generous government subsidy for employer provided programs. Some back-of-the-envelope math demonstrates this. Under Medicare, which has an administrative cost of a little under 4%, the cost of providing $100 of healthcare is roughly $104.
For a private health insurance company with a 25% medical loss ratio, the premium cost of providing the same $100 of healthcare is roughly $147. If the insurance comes through an employer-funded plan, the government chips in as much as $51 to subsidize the premium if the company pays tax at the maximum 35% rate. If the employer pays tax at the average effective tax rate of roughly 25%, the subsidy is roughly $37, bringing the total cost of providing that $100 of health care to $196. This figure does not include the additional administrative cost of borne by healthcare providers and employers in administering the claims process.
As already noted, eliminating tax subsidies on private insurance would save over $300 billion per year. These funds could be redeployed to subsidize Medicare premiums for the lowest income families.
So here in summary are the key elements of my proposal:
* No employer or individual mandate;
* Eliminate tax subsidies for employer-provided plans;
* Enact meaningful tort law reform;
* Recognize that health insurance companies are for profit corporations, not public utilities, and regulate them accordingly;
* Offer Medicare for all at rates that will recover the added cost; but
* Provide a government subsidy for the lowest income earners.
Could this be enacted? Not any time soon, in large measure because it has enough elements to offend both sides. But I would hope that we could at least have an informed debate about healthcare that critically examines and redefines the fundamental assumptions upon which the system should be based. To date, opponents of healthcare reform have relied on scare tactics about “death panels”, threats of “rationed care” and demagoguery about illegal aliens and abortions. Congressional Republicans who have used these tactics, or who have kept silent and reaped the benefits, have done the country a real disservice, but so too has Barack Obama, through his failure of leadership.
What is remarkable about the Obama plan – if it can even be called that – is how little intellectual effort the President seems to have invested in the healthcare reform issue since he ran against Hillary Clinton in the Democratic primary. It was Clinton who made healthcare reform a campaign issue.
Obama’s counter-proposal, based on the employer mandate, lacked detail now and, by his own admission, still does. Why? The President has had months to develop a detailed and coherent proposal but instead stood on the sidelines while lobbyists took control of the process. I don’t believe he did so in the naïve expectation that Congress would swiftly agree a “bipartisan” solution to the most contentious issue in national politics. I think simply that he was never sufficiently committed to healthcare reform to expend the political capital required to take on and beat the special interests that benefit from the status quo, and “bang heads” within his own party. Now the moment has been lost, and Obama has confirmed the views of those who believe not just that he lacks the courage of his convictions, but rather that he just lacks conviction period.
Once again, the “audacity of hope” of Yes We Can will be trumped by the cynical political calculus of No, I Won’t.
