Key Issues in the Health Care Debate

November 24, 2009

By David Coates

As the debate over health care reform moves to the Senate floor, there is a consensus on what President Obama refers to as at least 80 percent of what is needed: no denial of coverage because of pre-existing medical condition, help to the low paid and the small business sector to buy basic health care for themselves and their employees, and a resulting mandate on both individuals and companies to participate in the health care system (to “pay or to play”).

But two major stumbling blocks remain unresolved: the issue of the public option, and the issue of costs

The Public Option The voluntary offer on cost cutting that the White House won in May was made by insurance companies determined to block the public option; and that opposition could not be talked away, no matter how hard the White House pressed the case Progressively, the issue of the public option divided the leadership of the Democratic Party in Congress – as a vital element in all the bills passed by the House, and a conspicuous absentee from the bill designed by Max Baucus in the Senate. His finance committee twice voted down in September amendments to include such a public provision – conservative Democrats (including Baucus himself) joining with minority Republicans to produce that result. Opponents of a public option regularly presented it as the precursor of a single-payer system, one that would inevitably shrink employer-provided coverage and force health insurance companies out of the market. Advocates of a public option dismissed that as hysteria: a cover to avoid what a public option would do, which is stop insurance companies overcharging for services and denying coverage to the genuinely sick. Into that impasse then flowed a series of different alternatives, not least the idea of a “trigger” – a public option only to be created if the insurance companies failed to deliver extensive coverage that met other criteria – a trigger that liberal Democrats believed was being offered by people determined never to trigger it. Add to that the notion of non-profit-based co-operative insurance exchanges to compete with private insurance providers, or the idea that individual states could chose/not chose to have a public option; but still the danger was obvious. Without either competition or tight regulation, the insurance companies stood to gain massively from any federally-funded expansion of the numbers of those insured; and as the President told the AMA in June, what he “refused to do was simply to create a healthcare system where insurance companies have more customers on Uncle Sam’s dime but still fail to meet their responsibilities”. (The Financial Times, June 16 2009)

Health Costs The Obama position throughout 2009 has been that any reform had to be “deficit neutral” over a ten year period – meaning that any upfront costs had to be fully paid by cost reductions or revenue generation elsewhere. The administration’s first budget proposed $300 billion less to Medicare and Medicaid, through cuts in subsidies to private plans participating in Medicare and by cuts in payments to drug companies and hospitals. Later proposals from the president raised that number to $600 billion. Proposed cuts of this kind mobilized resistance. The administration continued to seek good models from within the existing system – the Mayo Clinic became an early Obama favorite, Green Bay Wisconsin became another – and there was much talk of how dramatically health costs varied by state ($9564 in New York in 2006, but only $5311 in Hawaii – The New York Times, June 9 2009), with all the promise that held of cost-saving through the sharing of best practice.

  • But there was no avoiding the thorny issue of tax rises: could some of the extra cost be offset by taxes on the very rich (the House bill added $1500 to the taxes paid by those earning over $500,000 a year), or by taxes on things that make people ill (soft drinks were a popular liberal target by mid-summer) or by taxes on generous health care packages (the gold-plated Cadillac packages also favored as a tax target by some on the Left). Neither would sit easily with the Obama campaign promise not to raise taxation of people earning less than $250,000 dollars a year!
  • Nor could legislators easily escape the dilemma of making insurance affordable. The CBO’s regular estimates of the cost of each bill as it emerged continued to make the choice clear: coverage or costs. The wider the coverage, the larger the price-tag, on each bill in turn; yet without subsidies, people on low income could never afford the coverage they will be mandated to buy. But scaling the subsidy has the classic welfare trap problem: that as you phase out the subsidy as income rises, the effective income tax rate can reach 100%.
  • Beneath this tax discussion is the thorny issue of rationing. Conservatives like to claim that Obama and the reformers are introducing rationing, but the status quo rations anyway: allowing those with generous coverage to get what those without cannot. But the reforms are bound to change the rationing system: raising issues of whether, by widening access, the reformers will lower either the speed of delivery, or the quality, of medical coverage for the rest. the Centers for Medicare and Medicaid Services (the non-partisan watchdog institutions similar to the CBO) warned on November 14 that the Medicare cuts contained in the House bill “are likely to prove so costly to hospitals and nursing homes that they could stop taking Medicare altogether”. The CBO estimate that Medicare spending per beneficiary would have to grow at half the rate it has over the last 20 years to meet the measure’s saving targets. Politicians are unlikely to live with that – grey power being what it is – but increasing Medicare payments will erode much of the claimed savings.
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