October 2008 Edition
By Joseph Paduda, Principal, Health Strategy Associates LLC
There’s a pretty stark choice between the Obama and McCain health reform plans: Obama calls for a significant expansion of the role of employers while McCain wants to eliminate employers entirely from the health insurance process.
Faced with that choice, a significant majority of large-company corporate benefit executives voiced their preference for the Obama plan. Clearly the big issue for employers is tax treatment, and that’s an issue where McCain’s plan directly conflicts with large employers’ preferences.
As long as employers are funding health care benefits, they want to make sure they are getting their money’s worth.
Expanding the role of employers versus eliminating it is just one of the many differences between the candidates’ health reform proposals, but for employers it well may be the most significant.
Execs all but universally reject McCain’s elimination of employer-based health insurance, with 7 out of 8 saying their employees would prefer to get their health coverage through work as opposed to a government-sponsored program (4%) or the individual insurance market (9%).
Almost 75% of the execs polled, responding to a recent survey conducted by Washington law firm Miller & Chevalier Chartered and the American Benefits Council, said McCain’s proposed elimination of the employee tax exemption for employer-based health coverage would have a “strong negative effect” on their workforce, and 83% said it is “very important” to maintain the current employee tax exclusion for employer-provided health benefits.
Almost all respondents—96%—“rejected [McCain’s] assertion” that altering the favorable tax treatment for employer-sponsored health benefits would not affect employer sponsorship of health plans (only 4% said the tax deduction was of little or no importance in employers’ decisions to offer coverage).
In contrast, less than half (46%) said the Obama plan’s “pay or play” requirement, under which all employers with more than 20 workers would have to contribute to health coverage or pay a tax, would have a negative effect. (Currently Massachusetts is the only state with a pay or play policy.)
Cost-Reduction
Employers also noted that they would like to hear a lot more from the candidates about how their plans would affect cost and quality; the respondents’ desire to see more specifics is laudable, as neither plan includes much that promises real cost reduction.
To a large extent, this is understandable; it is an election year, and any cost reduction is going to gore someone’s ox, after which said ox will scream about the unfairness of it all, start funding the other candidate’s PAC, and motivate its constituents to work against the offending candidate.
Therefore don’t expect to hear any details about cost reduction until well after the election. But here’s what details we have so far:
Obama’s Plan
There are 2 cost-oriented components of Obama’s plan, one calling for drug price negotiation, and the other a stop loss insurance program whereby the government agrees to "reimburse employer health plans for a portion of the catastrophic costs they incur above a threshold if they guarantee such savings are used to reduce the cost of workers' premiums."
For truly catastrophic claims, there are certainly a lot of precedents for this type of coverage—for years, self-insured smaller employers have purchased stop loss coverage for high-cost individual claims. The question is how much of the claim cost will the Feds assume, and how much it will cost to do so. Someone has to come up with the dollars, and if the Feds do, this “someone” is the taxpayer (it looks like the Chinese are done funding our deficits for a while). Although this plan will reduce the cost of insurance in general, this does nothing to address health care costs per se.
McCain’s Plan
McCain voices confidence that open competition in a free market that has much less regulation than it has currently is the tool to get insurers to create new products and reduce costs.
There are 2 very simple reasons the free market will not solve the health care crisis. First, private industry is in business to make money. Insuring high- cost people is not how insurers make money. Auto insurers refuse to cover drivers with bad records, home insurers won't insure houses on flood plains, liability insurers won't provide coverage for companies run by convicted felons, and marine insurers won't write ships operating in a war zone. Ask homeowners on the Gulf Coast about their ability to buy wind and flood insurance. If the various states don't force insurers to provide the coverage, it is incredibly difficult to find any insurer willing to take the risk.
The second reason that the free unregulated market will not solve the health care problem is that most health care dollars are spent on or by relatively few people. One-tenth of people in the United States incur two thirds of all costs. One-twentieth drive half of all costs, and a mere 1% of the population drives over 20%.
Figure 1
In a free market, insurance companies would absolutely refuse to cover anyone on the left side of the graph (see Figure 1), and they'd work very hard to tweak their underwriting so they only insured folks in the far right column (where 50% of the population incurs less than 4% of costs). That's not an indictment of insurance companies; it is a statement of fact.
Even in today's regulated markets, fully one third of individuals seeking coverage in the individual market—the only market that would exist in McCain's plan—were "denied coverage or charged more because of a pre-existing condition ... nearly half found it difficult or impossible to find affordable coverage."
McCain proposes an expansion of state-run high risk pools to help deal with these folks, but his plan only provides funding for 3 million potentially high-risk people, less than 1% of the population. That leaves, at the very least, 14% of the population without coverage, yet needing care.
Who's going to pay for their health care? Few individuals can afford to write a check for a couple days in the hospital. The result? A huge rise in the number of charity cases seeking care at emergency rooms, a rise that would quickly bankrupt many providers and continue to be passed along to employers and other taxpayers.
The Bottom Line
Tax treatment is not the only issue, but it may be such an important issue for benefits professionals in large corporations that the other differences between the Obama and McCain platforms do not matter.
But, as noted national health policy expert Bob Laszewski, there’s a “dirty little secret—neither Senator's health care plan has a chance of being implemented. A President McCain is not going to get a (likely) majority-Democrat Congress to pass a health care reform plan that eliminates the deductibility of employer-based health insurance and pushes millions of consumers into a wide-open and less regulated insurance market.”
I’ll add that the additional cost of the McCain plan’s health insurance tax credit plan, estimated by the Senate Joint Committee on Taxation at $206 billion in FY 2009 and $3.6 trillion over 10 years, make it a non-starter even if the GOP is somehow able to turn disaster into victory and retake Congress (remember this is the year that Tampa Bay may win the World Series a year after finishing last in their division).
Given the budget crisis and the recent bailout, a President Obama is not going to convince his fellow Democrats to pass his plan either. Although the Obama plan, which will cost at least $100 billion a year, looks cheap compared to McCain’s (although it does cover an estimated 18 million more people than McCain’s) it is going to look far too pricey for even a Democratically-controlled Congress.
There are other plans (the Wyden-Bennett Healthy Americans Act is one) before Congress that cost less than either candidates’ plans and still address some of the major health coverage issues facing the nation; these will likely get more attention after the election.
Remember the golden rule: She who has the gold rules. In health care, employers have the gold, and they want a big say in their workers’ health benefits. Whether they pay the premiums directly, pay a tax to government, or increase worker wages so they can buy their own insurance, employers will be funding benefits. And as long as they are, they want to make sure they are getting their money’s worth.
Based in Madison, CT, Joseph Paduda is a national health care expert who works with insurers, managed care organizations, and employers to reduce the costs of health care. Before starting Health Strategy Associates LLC, he held high-level positions with major insurance companies, including United HealthCare and Travelers. Paduda can be reached at 203-314-2632, jpaduda[at]healthstrategyassoc.com, or via his blog, www.ManagedCareMatters.com.