Commentary | Health

Finishing strong

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President Obama’s September 9 address to Congress was masterful in defining the challenge the country faces and the urgent need for health care reform. In an era where many politicians mention government’s role in the lives of Americans only when decrying taxes, Obama should be applauded for his bid to redefine government as a potential ally, not an enemy, of low- and middle-income Americans.

In short, Obama provided the perfect springboard for entering the final stages of the debate over health care reform. From here on, however, the debate will move from defining the broad challenge to specifying the precise details of reform. And these details matter a lot.

As we enter the homestretch, proposals remaining on the table are bracketed in their scope by the bill passed over the summer by committees in the House of Representatives on one side, and the framework released in early September by Senator Max Baucus, chair of the powerful Senate Finance committee, on the other. 

Both proposals rule out the worst abuses of the private insurance industry. Both would establish new health insurance “exchanges” to allow individuals and small firms to pool together to negotiate with insurers for better rates, while banning the current industry practices of refusing coverage or price discrimination based on health status or pre-existing conditions.  Both proposals would provide subsidies for those who find the cost of health insurance burdensome even with the enhanced bargaining power provided to them by the exchange.

However, on almost every issue of interest to progressive reformers, the Baucus framework is inferior to the House bill.  The first goal of progressive reformers at this stage is simple: push for the adoption of a bill that looks as much like the House bill and as little like the Baucus framework as possible. The second goal is to make the new national insurance exchanges (including the public insurance option specified in the House bill) as expansive as possible.

The main differences between the House and Baucus framework that should be addressed by progressive reformers are as follows:

–The most obvious difference, and the one that will be most consequential, especially in the short-run, is the generosity of subsidies provided to those who would purchase health insurance through the new insurance exchange. The House bill provides for caps on both premium and out-of-pocket costs for households whose income reaches up to 400% of the federal poverty line (FPL). The Baucus bill does not, providing no protection against out-of-pocket cost-sharing for families whose income is greater than 300% of the poverty threshold. This difference in subsidy generosity is reflected in the overall price tag of the proposals: slightly more than $1 trillion over the next decade for the House bill versus $900 bill for the Baucus plan. On this front, President Obama’s identification of $900 billion as the proper cost of health reform over the next decade was a distressing (if rare) misstep in his speech. There’s no reason to give away the superior subsidies of the House bill.

–The difference between the House and the Baucus proposals most noted by progressive reformers is the lack of a public insurance option in the latter. This is a clear weakness of the Baucus plan; the virtues of a strong public option have been well documented. Non-profit health “co-ops” are no substitute for a robust public option.  States today have the ability to set up co-ops, yet they are quite rare and have shown no sign of providing a true competitive check on either the bad behavior of private insurers or on the runaway cost of private insurance.

–Key parts of financing in the Baucus and House proposals differ greatly as well. The Baucus framework relies on taxing high-cost health insurance plans. Previous work has shown that high-cost plans are not always high-quality “Cadillac” plans enjoyed only by the most privileged workers, as they are commonly characterized. While the initial tax specified in the Baucus framework will affect very few taxpayers, it seems clearly designed to impact more and more over time. The House bill, conversely, relies on a surcharge on very high incomes to finance its reforms. This is a much more progressive option. Given this difference, it was another distressing misstep for President Obama to mention the Baucus financing proposal while not endorsing that in the House bill. Further, the President’s own budget had a health care financing proposal that relied on limiting tax deductions for affluent taxpayers that went unmentioned in his speech on Wednesday. Either the House financing mechanisms or those contained in the President’s own budget proposals would be preferable to those of the Baucus framework.

–The Baucus framework asks much less of employers in sharing responsibility for financing; the money raised from employer contributions is structured particularly poorly from the perspective of low-wage workers. The House bill, on the other hand, has a simple “pay or play” mandate on employers: firms must provide good health insurance to their workers or pay a fee to defray the costs of enrolling them in the new national insurance exchange, with only the smallest firms to completely escape this requirement. The Baucus bill, conversely, requires firms pay only for enrolling workers whose family income is below 300% of the FPL in the exchange. This odd mechanism essentially puts the incidence of the employer mandate solely on workers from lower income households. This is a strong argument against the Baucus framework.

–A more subtle difference, but one that will be very important in the longer run, is the composition of the new health insurance exchanges. The Baucus proposal would set up these exchanges at the state level and would segment off individuals from small firms, creating separate pools for each. Both of those moves would be mistakes. The exchanges should be national (through geographic differences in premiums could be allowed) and enrollment in them should be as expansive as possible. Economics teaches that larger insurance pools work better than smaller pools, period.

Aside from the stark differences between the House and Baucus proposals, progressive reformers should also seek to address a problematic provision common to both proposals regarding the national insurance exchange: it unwisely limits enrollment during the first two years  to individuals and those who work for very small firms. In the House bill, the commissioner of the exchange has the option to expand enrollment in the third year. Here again, we come to a dispiriting portion of the President’s speech last night. In making the case to centrists about the public plan, he all but bragged about how few people are projected to enroll in it. This small projected enrollment in the public plan is almost purely a function of how few workers would be allowed to enroll in the wider exchange. Remembering again that  that larger insurance pools work better than small ones, the new national exchange should be open to all comers, including large firms that think they can get a better deal in it, as well as those workers who have received insurance offers from their employer but would still like the greater choice potentially afforded by the exchange.

Without expansive enrollment, neither the exchange nor a public insurance option contained in it will have a chance to make a real difference. Further, small enrollment exposes both the exchange and the public plan to the possibility that they will simply become dumping grounds for the sickest and most-expensive-to-insure workers.

There is still reason f
or great hope regarding the outcome of health reform. If the House bill (or something very much like it) prevails, and, if the insurance exchanges are opened up quickly following establishment and contain a strong public option, then health insurance in the U.S. will be fundamentally changed for the better and the ambitious promises made by President Obama as a presidential candidate will be fulfilled.  


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