More Americans Fear Losing Their Health Insurance Than Being in a Terrorist Attack

If health insurance were cheap, we could all buy it. If universal health care could get 60 votes in the Senate, we'd all have it. But these two imperatives -- the need to control costs and the need to attract the 60 Senate votes required to overcome a filibuster -- point in opposite directions. This is the central paradox of health reform.

The most intractable policy problem is not, fundamentally, the 47 million uninsured or the fact that insurers have a business model right out of Dickens. It's cost. In 2006, the average family policy cost $13,600. This is why one out of six Americans are uninsured; they can't afford the premiums. An October 2007 Kaiser Family Foundation poll found that more Americans were "very worried" about being priced out of their health insurance than feared losing their job, their house, or being in a terrorist attack. And with good reason: Premiums have gone up 98 percent since 2000. Wages have not.

Corporate America's outlook is similarly grim. Better Health Care Together, a health-reform coalition that includes Intel, Wal-Mart, and General Mills, recently issued a report, Health-Cost Crossroad: Why American Businesses Urgently Need Health Care Reform. The paper warns that "health care cost growth threatens businesses, workers, and the overall health of the American economy," and frets that "if trends continue, health benefit costs will exceed profits in Fortune 500 companies in 2008."

Likewise government. Absent reform, government health spending would be 37 percent of gross domestic product by 2050. (The entire federal government now consumes about 20 percent of GDP.) David Walker, the U.S comptroller general, warns that "we have been diagnosed with fiscal cancer, and we need to start treating it." At the Congressional Budget Office, the normally staid Peter Orszag gives an Al Gore-esque slideshow on the looming threat of health costs that risk bankrupting government finances.

The question, then, is how to limit heath-care costs while still surviving the legislative process. A single-payer system would increase efficiencies, but critics fear that it would control costs excessively, limiting care. Politically, single-payer would mean restructuring about 17 percent of our economy and eliminating multibillion-dollar industries that provide tens of thousands of jobs. It would have to be legislated over the fierce objections of the Republican Party and all conservative Democrats. Conversely, many Republicans, John McCain included, advocate a radical shift of costs onto individuals, controlling spending by pricing care out of reach for tens of millions. Few Democrats or moderate Republicans -- or voters -- favor this course.

Kids First?

Looking at this blockage, many observers instinctively grope toward a political stopgap -- starting with kids, a very attractive and cheap-to-insure part of the population. Coverage for all kids, they theorize, could make it through the Senate. Once accomplished, the rest of the country would view that success and green-light full reform of the health-care system. The logic of this strategy fails on two counts. First, as George W. Bush's obstinance on the State Children's Health Insurance Program (S-CHIP) has shown, many Republicans view health-care expansions the way the National Rifle Association looks at gun control -- there's no such thing as a little bit. Second, both the Republicans and the Democrats who see S-CHIP as the road to socialism are wrong. Medicare, despite its popularity, hasn't advanced the single-payer movement. It just took seniors out of the constituency for reform. And S-CHIP hasn't even led to its own successful expansion, much less that of the whole health system.

Moreover, covering kids is just covering kids; it does nothing to reform the system. Universal coverage of children, grafted onto the existing system, could actually exacerbate problems of inefficiency and cost. Worse, politicians could posture as if they had made major progress on the health-care crisis, while in fact they would be letting it deteriorate.

Single-Payer by Stealth

Another strategy would incrementally move toward single-payer, alert to the electorate's fear of change. That's one lesson many reformers learned from 1994 -- know your audience. Among those reformers was Yale political scientist Jacob Hacker, whose book on the failure of the Clinton proposal, The Road to Nowhere, concludes that President Clinton had built a plan for wonks, not voters. Cost containment was front-loaded (global budgets, managed care) and required total restructuring of the system. Clinton's plan scared people, introducing unfamiliar and untested concepts like "managed competition" and changing current health arrangements. "They couldn't defend it in simple terms," Hacker says, "because it actually meant a complex set of changes for most Americans."

Following his book, Hacker devised a plan to avoid these pitfalls. His final proposal was embraced last year by the Economic Policy Institute and the Campaign for America's Future, the latter of which worked hard to push it to the candidates. The final plans from Clinton, Obama, and Edwards all looked a lot like the Hacker plan, with some crucial and perhaps fatal political compromises thrown in. More on that in a moment.

Hacker's plan works on a few basic principles. First, no one loses what they already have. You like your current insurance? Keep it, unless your employer kicks you off. Second, a new group market is created (the Health Care for America market, henceforth HCA), where insurers can compete for the business of individuals and employers (who can buy their employees in for 6 percent of payroll). Third, the group market contains a strong public insurer modeled on Medicare, creating competition between private insurance companies and the public offering. The hope is that the public insurer, which will not need to turn a profit and will be free of some of the perversities of private insurance, will prove the most cost-effective and attractive option, leading individuals and businesses alike to gravitate toward it. Over time, it would evolve into something approaching a single-payer system.

The Lewin Group, currently the gold standard in health-care consulting, has analyzed the Hacker plan and estimated that it will save about $1.04 trillion over 10 years. Some of these savings will come through basic efficiencies, both administrative and technological. But the savings depend heavily on the quiet cost controls built into the HCA. There, spending per enrollee will only be allowed to increase at a fixed rate of that year's GDP growth plus a half percent. Basically, the government mandates spending growth at a far slower rate than that of the private marketplace.

If it works, this has two effects: First, it saves money by mandating that a portion of the system -- the HCA -- spends less money. This, in effect, is the same way single-payer saves money. It simply caps spending and induces providers to use available funds more cost-effectively. But it also makes the most cost-effective HCA a progressively better deal for businesses to buy into, thus expanding it. Over time, more Americans end up within the cost-controlled structure. According to Lewin's estimates, the HCA would have an initial enrollment of 128.6 million enrollees (mostly individuals and small businesses), while 122 million Americans would remain in private, mostly employer-provided insurance. By 2017, the HCA would have 177.4 million members, while private insurance would be down to 93.5 million. Under these assumptions, the slower spending in the HCA alone would result in $1 trillion in savings.

Can It Work?

But therein lies the danger for the plan. The HCA is created to compete with the traditional private market. With its more attractive terms, the hope is that the HCA will largely overwhelm the private market, becoming a sort of de facto single-payer plan. Indeed, the Lewin analysis factors in this competition, and the brutal effect it will have on the private market, explicitly. "The combined effect of increased market share and a constrained rate of growth in Health Care for America spending would result in pressure on providers to shift costs to the private insurance market," Lewin says, "which will increase private insurance premiums and generate an even larger difference in premiums between HCA and the private insurance market."

But it isn't a single-payer plan. There's still a large private market to contend with, one that won't appreciate being knocked around this way. Private insurers outside the HCA will presumably compete in kind, only in the opposite direction. They'll attempt to cost-shift onto the HCA by insuring healthy, young firms that still offer private insurance at advantageous prices, and pressuring sicker, older companies and individuals into the government options. If they succeed, the risk pool in the HCA will grow expensive, the premiums will grow inordinately pricey, and cost savings won't be realized without cutting care, no matter what the government mandates.

Politically, a robust version of the Hacker plan remains a huge reach. Democrats weren't even able to attract 60 votes to allow Medicare Part D to bargain down drug prices, much less set them centrally. Even with a Democratic president embracing some version of Hacker, and a pickup of several Senate seats, many Democrats remain skeptical of price controls by government diktat.

While there are differences between the health-care plans of Hillary Clinton and Barack Obama -- notably, the much discussed individual mandate -- they are both based on structure similar to Hacker's. However, while both include his new, "Medicare-like" group market, neither uses the group market to set cost controls. Given that this is the prime source of $1 trillion of Hacker's $1.1 trillion in savings, it's hard to see how the Obama or Clinton plans will adequately control costs. They will see some savings from administrative efficiencies and more cost-effective care, but these will be comparatively minor. Nor are Obama or Clinton clear about what employers would have to pay. So they have basically embraced the politically savvy part of Hacker's plan while leaving out the cost controls -- and that's before the insurance industry and Congress get into the act. We could be left with a system very much like the current one, just with more subsidies for coverage and more clearly structured insurance choices, but with relentless cost increases that translate into reduced actual care.

Bipartisan Reform?

Hacker, it should be said, is not the only game in town. While versions of his plan are getting the most attention at the presidential level, in Congress, the action is around the Healthy Americans Act sponsored by Sen. Ron Wyden of Oregon. Along with Sen. Robert Bennett of Utah, Wyden has attracted 12 more colleagues, six Democrats and six Republicans, as co-sponsors. Given that any health-care bill will likely need Republican Senate votes, it's the closest thing to a viable legislative process currently in existence.

Wyden's plan differs from Hacker's in two key ways. First, it lacks a public insurer, meaning that there won't be public-private competition. But it compensates for that absence with much more radical system integration. Hacker's plan creates a new group market with about 44 percent of the population, leaving the existing private market with 41 percent or so and most of the remainder in Medicare. The success or failure of the plan will depend on which market can most effectively undercut the other. Wyden's plan, by contrast, does away with employer health coverage almost entirely. Rather than encouraging employers to transition to a single group market, as Hacker's does, Wyden's forces them to redirect all the money they were spending on employee insurance into paychecks. At the same time, it creates "Health Help Agencies," one in each state, which act much like Hacker's group market -- they're regulated structures where various insurers compete for business. No cherry-picking, no high premiums or denials of coverage for pre-existing conditions. Everyone pays the same price, but everyone has to buy insurance that's at least as comprehensive as the current Blue Cross-Blue Shield Standard Plan. There are subsidies for those with low incomes, and penalties for those who don't buy in. Medicare still exists for the elderly.

The Lewin Group also evaluated Wyden's proposal, and they see the possibility for even more drastic savings: $1.48 trillion over 10 years. In Wyden's case, the savings don't come from explicit spending caps in the group market, but because consumers who now see exactly how much they're spending on health care (before, their costs were obscured because employers paid most of the bill) will become more price-sensitive and choose cheaper options. Namely, HMOs. In other words, rather than asking the government to cap spending, as Hacker's plan does, Wyden's plan pushes individuals to do it. Lewin estimates that under Wyden's plan, HMO enrollment will jump from 30 percent to 70 percent, which will bring large cost savings, as HMO enrollment did in the mid-1990s.

As a contingency, Wyden sets up future cost controls if needed. Currently, it's impossible to impose targeted cost reforms because there's no system to impose reforms on. We have a health sector, composed of thousands of self-contained private insurers routed through myriad employers, not a health system. If the system is entirely under one roof, as it is in Wyden's plan, and as it comes closer to being in Hacker's plan, implementing cost controls becomes much easier. A public insurer could be the benchmark, and there could be better incentives to adopt best practices, with smart forms of cost sharing and incentives to only offer cost-effective treatments.

Overcoming the Blockage

But where the basics of Hacker's structure have a reformist political logic, Wyden's risks running into the same fears that detonated the efforts in 1994. By blowing up the employer-based system, Wyden's risks triggering the natural status quo bias of voters and insurers. In Hacker's plan, the majority of the country sees no change unless they volunteer for it. With Wyden's, the majority needs to buy new insurance. The question is whether Wyden's plan can compensate for that political risk by attracting more support from stakeholders -- employers who no longer want to run health-care businesses on the side and insured individuals worried about losing what they have. Also, to realize cost containment, Wyden's state agencies would need to define, which is to say, regulate, qualified plans -- a sensible policy that led the insurance industry to oppose a similar idea under a different name when Clinton proposed managed competition in 1993.

Moreover, both of these plans are in their idealized forms. Neither has been through the legislative process, or vetted by a White House, or larded up by special interests, or subjected to attack ads. Hacker's plan would face serious trouble attracting Republican votes. Wyden's plan would require a Democratic president's strong support to attract liberals, and it would have to persuade voters to let go of their present coverage.

Either way, it will be a tough road. But look at the numbers. One way or another, reform must come. We really don't have any choice.

Reprinted with permission from Ezra Klein, "The Elusive Politics of Reform," The American Prospect, Volume 19, Number 5: May 07, 2008. The American Prospect, 2000 L Street, Suite 717, Washington, DC 20036. All Rights Reserved.