The Obama Health Plan

Barack Obama rarely gives a speech these days without mentioning “universal coverage.” Yet, in contrast to Hillary Clinton, Obama has no mandates (other than for children).   Instead, he would rely on incentives.  Yet the incentives in the Obama plan are perverse.  Based on reasonable assumptions, the number of uninsured would rise, not fall, under the Obama plan-even as taxes rise, regulations proliferate and the bureaucracy expands.

Senator Barack Obama has released only sketchy details about his plan for health reform.  The Commonwealth Fund has produced a very detailed plan, however, and encourages its readers to view the two plans as very similar.  For this reason, we assume the Commonwealth plan details apply where Obama has been unclear or unspecific.

Taxing Labor.  The Obama plan would subject all employers to a “pay-or-play” mandate – imposing a tax on those who do not provide health insurance for their employees.  Following Commonwealth, we assume this would be a payroll tax of 7% of earnings up to $1.25 per hour on employers who fail to pay at least 75% of the premium for a minimum package of benefits.

Were this provision enacted today, it would immediately affect the 40% of small employers who do not offer coverage, the 30 million people in families who have workforce participation, but no health insurance, and millions of Medicaid enrollees who have a workforce connection  – to say nothing of all the employers who currently pay less than 75% and/or have plans that are insufficiently generous.

As the economics literature affirms, a payroll tax is almost completely born by workers themselves.  During the Democratic party primary, Senator Obama criticized Senator Clinton’s proposal to mandate coverage by asserting she would try to force people to buy something they cannot afford and then tax them when they don’t buy it – leaving them worse off than they were.  Exactly the same criticism applies to Obama’s pay-or-play mandate.

Destroying Jobs.  As the economics literature has firmly established, a tax on labor (or mandated labor benefits) makes employment more expensive and encourages employers to hire fewer workers, adopt labor-saving technology, employ part-time workers, and outsource labor to independent contractors and other entities.

Encouraging Employers to Drop Health Insurance Coverage.  Along with the pay-or-play mandate is an offer to the otherwise uninsured to buy insurance through a National Health Insurance Exchange with an income-related subsidy.  Following Commonwealth, we assume that the premium would be limited to 5% of income for low-income families and 10% of income for everyone else.  It will not take people long to discover that many (perhaps a majority) will be better off if their employers drop their current health plan, pay higher wages instead of premiums, pay Obama’s pay-or-play tax along with income and payroll taxes, and let workers use their additional after-tax income to buy their own insurance in the Exchange.

Consider employees enrolled in an average family package costing, say, $12,000 (about the average for employer-based coverage), with the employer paying 75% of the premium and employees facing a 33% marginal tax rate.  If employees can obtain a plan as generous from the Exchange, they are better off if they earn less than about $63,000.  The incentives for employers to drop coverage are higher for lower-income employees and those with above-average health care costs.

Encouraging the Healthy to be Uninsured.  Why pay expensive premiums for health insurance if you do not have any health problems?  Under the Obama plan, there would be no reason to do so.  Insurance sold in the Exchange would be guaranteed issue and community rated.  This means people would be able to wait until after they get sick to insure and they would be able to do so without any financial penalty.

Encouraging Others to Overinsure.  For those who do insure (especially those with health problems) and who reach the maximum premium limit, there is a different perverse incentive: They can buy more generous coverage at no personal expense.  Although Obama would impose a minimum benefits package, there apparently would be no maximum.  Theoretically, the sky would be the limit – with the marginal coverage all paid for by taxpayers.

Creating Perverse Incentives for Health Plans.  In the Exchange, health plans would be free to set their own premiums, but they would be required to charge the same premium to all comers.  This means the plans would make a profit on healthy enrollees and suffer a loss on less healthy enrollees.  Consequently, the plans would have strong financial incentives to attract the healthy and avoid the sick.  After enrollment, their incentives would be to over-provide to the healthy (to retain their membership and attract more of them) and under-provide to the sick (to discourage their continued membership and repel others just like them).  In the federal employee system, health plan advertisements during open enrollment period picture young, healthy families – never people with costly illnesses.  And some plans are now discriminating against sicker enrollees to keep costs down for healthier ones.  (See The New York Times article.)

Adverse Selection and Death Spirals.  A number of voluntary heath insurance exchanges have been established in the past.  Yet they invariably fail.  The reason:  healthier groups can usually find cheaper premiums outside the exchange.  Yet when the healthier groups leave, the average cost for those who remain goes up – encouraging another round of departures.  As the pool becomes sicker and costs rise, the arrangement collapses.  Insurance exchanges only work where membership is compulsory (e.g. federal employees cannot take their employers contributions to outside plans).  But Obama has specifically ruled out compulsory participation.

Encouraging Special Interests.  Although there are very few mandated health insurance benefits at the federal level, state regulations require insurers to cover all manner of procedures, ranging from acupuncture to in vitro fertilization, and providers, ranging from natureopaths to marriage counselors.  These mandates reflect the lobbying power of special interests, and the resulting higher price of insurance causes as many as one-in-every-four uninsured people to be priced out of the market.  By having the federal government impose a mandated benefit package, Obama would elevate this special interest feeding frenzy to the national level.

Substituting Government Insurance for Private Insurance.  Obama would expand enrollment in Medicaid and S-Chip.  (The Commonwealth Fund projects 12 million new enrollees.)  Yet Obama’s own health advisor (David Cutler) estimates that every extra $1 spent on Medicaid leads to a 50¢ to 75¢ reduction in private health insurance.  For S-Chip, the Congressional Budget Office projects a crowd-out rate of 25% to 50% and private estimates peg it at 60%.  In substituting public insurance for private insurance, the taxpayer burden increases substantially and health care doesn’t get better in return.  It gets worse.  An American Cancer Society study found that being in Medicaid is only slightly better than being uninsured as far as delays in diagnosis and treatment are concerned.

[Note: In the Commonwealth plan, Medicaid reimbursement rates would be increased to Medicare levels, but would still be below private plan fees.]

Encouraging a Two Tier Health System.  Obama would allow people to join a public plan (presumably modeled after Medicare) as part of the Exchange.  If it really looks like Medicare, it will not be very attractive.  Most Medicare enrollees pay three premiums to three plans (basic Medicare, Medigap, and prescription drug insurance) and still have less coverage (e.g. the “donut hole”) than the rest of the population typically has.

In the Commonwealth plan, Medicare for the young is reconfigured to look like normal insurance, but it will still pay Medicare rates.  Many doctors today will not accept new Medicare patients and in some specialties Medicare patients face much longer waits for treatment than younger patients.  If a large number of people are added to plans that pay well below private fees, there will be inexorable pressure to respond to a two-tier payment system with two-tier quality of care.

Taxing Children.  Although Obama would allow adults to remain uninsured, he proposes to force parents to insure their children – undoubtedly through a pay-or-play mandate.  The problems here are:   (1) mandates usually don’t work if people have to pay any portion of the premium out of their own pockets, (2) the end result (health care for children) can usually be obtained less expensively through means other than mandated insurance, and (3) Obama’s criticism of Hillary applies here as well:  He would try to force people to buy something they cannot afford, then tax them when they don’t buy it – leaving them worse off than before.

Taxing Capital.  Obama intends to pay for his plan by repealing the “Bush tax cuts for the rich.”  But there have been no tax cuts for the rich.  Lower rates on capital gains and dividends have induced wealthy investors to realize more income than ever – leading to record high tax revenues.  Reversing these rate cuts is unlikely to produce any extra revenue.  In the process, higher tax rates on capital will lead to a lower capital stock and a smaller national income in the future. 

Note: It’s always bad to tax capital to pay for current consumption.  To tax capital to pay for wasteful health care spending that promises miniscule health benefits at the margin is especially bad. 

Relying on Phantom Savings.  Senator Obama plans to pay for the remaining costs by eliminating waste and inefficiency.  His ideas include:  electronic medical records systems, better disease management, pay-for-performance, and evidence-based medicine.  Yet there is very little hard evidence that a demand-side approach to these reforms (with buyers of care essentially telling their doctors how to practice medicine) will save money.

Becoming a Moving Target.  Senator Obama’s critics have accused him of flip flip-flopping on such issues as campaign finance, wire-tapping, gun control, faith-based initiatives and the terms of withdrawal from Iraq.  The Obama health plan is also in danger of becoming a work in progress.  One week he eyes the Wyden-Bennett bill in the Senate favorably.  The next week he praises Massachusetts’ new health care plan.  (Note:  both have the very kind of mandates he found so objectionable in Hillary Clinton’s health plan.)

More recently he has endorsed federal subsidies for half of the premiums paid by small employers.  Yet the amount of money he would dedicate to this effort ($6 billion a year) is too meager to overcome the dissolution of the employer based system in the manner described above.

Evolving Even More.  During the primary season, Sen. Clinton put the annual cost of her health plan at $110 billion, compared to Obama’s $60 billion.  The difference: both candidates pledged to increase taxes on capital (rescind the Bush tax cut for “the rich”). But Clinton claimed additional phantom savings from such measures as electronic medical records (EMRs), managed care, more efficient insurance, etc.

Phantom savings are savings that (1) no one seriously thinks are going to materialize; (2) sound good because they do not threaten the status quo in any serious way (thereby guaranteeing they will not materialize); and (3) are easily forgotten after the fact when they fail to materialize.  Score one for Obama for not yielding to the temptation to make things up.  But that was then.

Now Obama is taking a page from the Clinton playbook and shamelessly doubling the stakes.  Savings will amorphously appear in every part of the system, according to his advisors.  Hard to say who will get what or how they will get it (these things being very complicated), but count on $200 billion savings for ordinary people or $2,500 for “a typical family” every year.

For the record, the Congressional Budget Office [here] estimates that EMRs will save very little money.  The federal government found that its own experiment with managing the chronically ill saved not a dime [here].  Other studies, including one by RAND researchers, predict that managed care or coordinated care or insurers-telling-doctors-how-to-practice-medicine-under-any-other-name may not save money, and in some cases actually increases spending.

Comments (15)

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  1. Serge Gailly says:

    Every Republican, no, not just the Republicans, the Democrats, too… every US Citizen should be worried about Obama's health care plans.

     Tell Obama to read a new book, called The Molecular Revolution. A Future of Immense Opportunity.(Raider Publishing International, New York). The book elucidates the problems in health care in Europe and in the United States in a very balanced way. At first, it appears that the author's comparison of U. S. health care (where, healthy young people, as well as some indigent sectors of the population, are neglecting to buy insurance, sometimes to pay for other things) with that in France (where the government pays 75% of the costs) denigrates the American system and praises the European welfare state. But shortly thereafter he emphasizes that Continental governments are the tax and spend champions of the world. They raise revenue to pay for health costs through taxation.

    The author, Gilbert Mertens, stresses that in Europe taxes are rising and, indeed, are becoming prohibitively expensive for the young, the productive and the healthy. Moreover, government restrictions have curtailed medical research and development in Germany which was once a worldwide leader. No money for research means no new medicines. That is Europe. That is the kind of health care Obama wants for the U.S. The author proposes a series of intelligent solutions, sure. Obama should read them! The book is full of advice. Obama should get serious, expert advisers and not just think of increasing taxes to pay for health care.

  2. Devon Herrick says:

    Media coverage of the Obama Health Proposal has been fixated on the fact that Obama’s proposal would guarantee access to coverage – even for the sickest individuals. What’s lost in he shuffle are the losers under his system – mainly taxpayers and jobs for moderate-income workers. James Capretta, a fellow at the Ethics and Public Policy Center, points to recent research by Katherine Baicker (Harvard) and Helen Levy (University of Michigan) that finds employer-mandated “pay-or-play” regulations would destroy nearly one-quarter of a million low-wage jobs. The reason? Employers don’t pay for health benefits – workers do. In other words, if employers are required to provide health coverage, they will reduce the cash wages paid to workers. To the extent they cannot lower wages they will eliminate jobs or fire workers. This is precisely why small firms that employ predominantly low-skilled workers generally do not offer health coverage – because their workers don’t want coverage badly enough to forgo cash wages to pay for it.

    Mr. Capretta also points to recent analysis by Lewin that concludes giving workers access to a Medicare-like coverage option could prompt firms to drop their company plans in favor of enrolling their workers in public coverage.

  3. William C (Bill) Waters MD says:

    Once a system endeavors to oppose natural forces–like gravity or the laws of human nature–it falls of its own weight. Dr. Greenspan in his new book says that when the Berlin Wall came down, the properity of West Germany stood in stark contrast to what he calls the economic rot and devastation of the centrally planned East.

  4. William C (Bill) Waters MD says:

    Here is the Afterword from my upcoming book, TWO DAYS That Ruined Your Health Care:

    AFTERWORD

    Get in Sync

    Childlike, I watched with fascination as the soft-drink bottles rolled off the assembly line. The big machine washed them, assembled them, moved them along the conveyor belt, filled them, capped them, and put them into cases. I counted 12 different operations that the system performed.

    Then I realized something: almost all of those operations relied on gravity. The bottles had to stand upright. The fluid had to flow downhill and remain in place in the bottles. The caps had to slide down the column and rest on the lips of the bottles before the machine crimped them in place. And so on.

    The fellows who invented this system knew they could not repeal the law of gravity. And they knew they needed to harness, not oppose, that force. Their machine was in sync.

    I wish those inventors could appear before Congress and at a session of the Presidential candidates. They need to tell them that the systems you invent must not try to contradict the laws of nature; they must work with them.
    But the rules politicians try most to oppose are not the law of gravity but the laws of human nature, laws which cannot be repealed even by a unanimous vote. And if you try to run a big operation counter to them, nothing works.

    Like Communism. It was a nice idea, everybody working for everybody else, but it went against the grain. Check with the Soviet Republics. Look at both sides of the Berlin wall as it came down — prosperity in the privatized West, “economic devastation” (again, that’s Greenspan’s word) in the centrally controlled East.

    Just take control of health care away from the individual, and you have the National Health Service of the U. K., where one million people are currently in line waiting for hospital admission. Or forbid private medicine, as in Canada, where 40 weeks is the average to get indicated orthopedic treatment and where 35% more women die of breast cancer than in the U. S. Is nationalized health care running smoothly in Germany? Ask the 15,000 of 20,000 university physicians who went on strike in March of 2006.

    However, we’re getting there. The most pressing example in the U. S. is the removal of control of the health care dollar from the people who earned it and owned it. Almost half (46%) of the $2.2 trillion health bill is now paid by government (how do you like the quality of this half—including Medicare, Medicaid, and Veterans’ benefits—compared with the private half?). Another third (33%) is controlled by insurance companies who in turn are responsive only to the employers. Only 13% of the American health dollar is paid direct by individuals. So what is the individual citizen to do? Will he economize with money he can’t control? Does he wash his rental car?

    Only if he is allowed to own his private fund — as in Health Savings Accounts — will the laws of human nature begin to operate again. Only then will he ask the prices, compute the risks and benefits. Multiple studies show a one-third drop in expenditures wherever HSA plans are in effect.

    The Congress, and the President, and the people need to agree on systems which resonate with — and amplify — nature’s immutable laws, not conflict with them.

    They need to get in sync.

  5. Dr. Bob Kramer says:

    When will people learn that there is no free lunch?

  6. Chris Ewin says:

    Well-said…

  7. John Dendahl says:

    Several months ago, I received by e-mail a message from a friend attempting a thoughtful statement of his support for Barack Obama. In my blog entry here, I have more to say about my friend’s statement.

    The larger purpose of the blog, however, is to call attention to a terrific series of editorials Investor’s Business Daily has published. The first of those is here, and there’s a link below to a page from which the series can be accessed.

    IBD Series The Audacity of Socialism

  8. Chris Ewin says:

    Obama and McCain have no clue how to fix my business.

    Pics are worth a thousand words. Below is the problem.

    Hint: it starts on the left…(fever and cough)

    (Garrison Bliss created this)

    Crazy, but true…

    I’m transitioning Docs to my fee for care model. One 3 weeks ago made $300 profit last month. Yes, her front desk MA makes more than her.

    A new for-profit Doc in Fort Worth isn’t even trying to start a practice.

    What a waste of all those years in practice…

  9. [...] Among many “changes” advocated by President-Elect Obama is a plan for mandated employer-based health insurance. I can’t find a clear description on exactly how the plan is going to work (the plan is outlined on Obama’s site here, and there is a NEJOM summary here), but there are many opinions out there on what the effects of the plan will be. See posts at Hot Air Blog, The Health Care Insurance Reform Blog, The Cato Institute, and John Goodman’s Health Policy Blog [...]

  10. [...] Among many “changes” advocated by President-Elect Obama is a plan for mandated employer-based health insurance. I can’t find a clear description on exactly how the plan is going to work (the plan is outlined on Obama’s site here, and there is a NEJOM summary here), but there are many opinions out there on what the effects of the plan will be. See posts at Hot Air Blog, The Health Care Insurance Reform Blog, The Cato Institute, and John Goodman’s Health Policy Blog [...]

  11. [...] For example, candidate Obama threatened a pay-or-play mandate on employers that would compel them to provide health insurance or pay a hefty payroll tax.  This would combine Obama's new taxes on capital with a new tax on labor — precisely what we don't need in the middle of a deep recession. Also, candidate Obama envisioned an outside-the-workplace health insurance exchange that would threaten to unravel the employer-based health care system.  He also promised a permanent expansion of Medicaid, which will induce people to drop their private coverage in favor of insurance provided at taxpayer expense. [link] [...]

  12. [...] increase quality. In fact, in the exchange there will be intense competitive pressure to underprovide to the sick and overprovide to the healthy. Although the plan will probably cut the number of uninsured in half, this will be offset by [...]

  13. reXteryalizer says:

    Oboma has NOT brought CHANGE, In fact ~~ THE ONLY real THING needing CHANGE !

    Was Barack Hussein Obama II.

    Barack Hussein Obama II ( Who hates American Values )

    Who who is A ” SELF PROCLAIMED Enemy ” ~ of responsible, Morally Conscious HARD WORKING Americans.

    oBOMAS supporters KNOW~ that Barack Hussein Obama II, WILL FORCE YOU to paY THEM, out of your PockeT ….

    This UN~CHANGABLE fraud, has done His VERY BEST to Inspire VIOLENCE.

    THESE ARE OBAMAS OWN WORDS.. saying “Bring it on” To his supporters.

    Oboma ~ Demands Saying “Get ready for hand-to-hand combat with your fellow Americans”

    – Obama has ALSO DECLARED to his Supporters

    “I want all Americans to get in each others faces!–

    Obama demands !

    “You bring a knife to a fight pal, we’ll bring a gun” – Obama Cant wait to get everybody involved in some kind OF CONFRONTATION of some sort….

    THESE ARE OBAMAS OWN WORDS..

    Obama has ALSO DECLARED “Republicans are our enemies”-

    ** Obama on ACORN Mobs: “I don’t want to quell anger. I think people are right to be angry! I’m angry!”

    ANGER VIOLENCE and more taxes….. THIS IS OBAMAS Change for america

    /“Hit Back Twice As Hard”. He commands !

    THESE ARE OBAMAS Very OWN WORDS..

    *Obama on the private sector: ~~ “We talk to these folks…~ / so I know whose ass to KICK.“
    OBOMA wants to KICK your ass /

    Shouting THAT Republican victory would mean ~ “hand to hand combat”

    HE IS EXPECTING people to kill & BE VIOLENT / for their immoral CAUSES

    THIS IS WHAT HE LIVES FOR
    THESE ARE OBAMAS OWN WORDS..
    * Obama Tells democrats: “ I’m itching for a fight.” !

    PLEASE go to reXes NEW WebsiTe ~ ! Oboma *( Just like Adolf Hitler~~ In that oBOMA~~~ Demands ! — [ THE FINAL SOLUTION – ~ For Un~Wanted Children

    Barak Obama A MURDERER .~Torturing UNWANTED babys on DEATH ROE

    OBAMA supports TAKING a little NEW BORN innocent child.. / BORN. ALIVE ~

    sTabing it iN the head & SUCKs ITS BRAINS OUT.

    He also demands, that a Child SURVIVING a FAILED ABORTION, Has no RIGHT to Life or medical care.

  14. reXteryalizer says:

    Oboma has NOT brought CHANGE, In fact ~~ THE ONLY real THING needing CHANGE !

    Was Barack Hussein Obama II.

    Barack Hussein Obama II ( Who hates American Values )

    Who is A ” SELF PROCLAIMED Enemy ” ~ of responsible, Morally Conscious HARD WORKING Americans.

    oBOMAS supporters KNOW~ that Barack Hussein Obama II, WILL FORCE YOU to paY THEM, out of your PockeT ….

    This UN~CHANGABLE fraud, has done His VERY BEST to Inspire VIOLENCE.

    THESE ARE OBAMAS OWN WORDS.. saying “Bring it on” To his supporters.

    Oboma ~ Demands Saying “Get ready for hand-to-hand combat with your fellow Americans”

    – Obama has ALSO DECLARED to his Supporters“I want all Americans to get in each others faces!–

    Obama demands !

    “You bring a knife to a fight pal, we’ll bring a gun” –

    Obama Cant wait to get everybody involved in some kind OF CONFRONTATION of some sort….

    THESE ARE OBAMAS OWN WORDS..

    Obama has ALSO DECLARED “Republicans are our enemies”-

    **

    Obama on ACORN Mobs: “I don’t want to quell anger. I think people are right to be angry! I’m
    angry!”

    ANGER VIOLENCE and more taxes….. THIS IS OBAMAS Change for america

    /“Hit Back Twice As Hard”. He commands !

    THESE ARE OBAMAS Very OWN WORDS..

    *Obama on the private sector: ~~ “We talk to these folks…~ / so I know whose a*$ to KICK.“
    OBOMA wants to KICK your a*$ /

    Shouting THAT Republican victory would mean ~ “hand to hand combat”

    HE IS EXPECTING people to kill & BE VIOLENT / for their immoral CAUSE
    THIS IS WHAT HE LIVES FOR

    THESE ARE OBAMAS OWN WORDS..
    * Obama Tells democrats: “ I’m itching for a fight.” !

    PLEASE go to reXes NEW WebsiTe ~ ! Oboma *( Just like Adolf Hitler~~ In that oBOMA~~~ Demands

    ! — [ THE FINAL SOLUTION – For Un~Wanted Children.

    Barak Obama A MURDERER .~Torturing UNWANTED babys on DEATH ROE

    OBAMA supports TAKING a little NEW BORN innocent child.. / BORN. ALIVE ~sTabing it iN the head & SUCKs ITS BRAINS OUT.

    He also demands, that a Child SURVIVING a FAILED ABORTION, Has no RIGHT to Life or medical care.

    After having Just been tortured Nearly to death, in agony.

  15. reXteryalizer says:

    ….PLEASE…. go to reXes NEW WebsiTe ~ ! Oboma *( Just like Adolf Hitler~~\oBOMA~~~ Demands ! — [ THE FINAL SOLUTION – for Un~Wanted Children

    Barak Obama is A MURDERER .~Torturing UNWANTED babys on DEATH ROE

    CLICK HERE http://obomlnation.webstarts.com/index.html

    OBAMA TAKES a little NEW BORN innocent child. BORN. ALIVE sTabS it iN the head SUCKs ITS BRAINS OUT.

    This is just to wrong and horrible. Please stand for Loving Children and the USA