1 Health Reform Plans: McCain vs. Obama William H. Dow University of California - Berkeley October 20, 2008

2 Many Variants of Republican Ideology: McCain has embraced extremes MINIMIZE Govt InterventionTax/Transfers LibertariansXX Fiscal conservativesX Pro-MarketX Conservatives are not monolithic, but different flavors of conservatives tend to have similar policy views favoring smaller government in sectors such as health care.

3 Heterogeneous Views of Government (Blendon, NEJM Jan ) Government vs. private insurance providing medical coverage Repub.Dem. Govt better21%41% Govt worse60%36%

4 McCain and Obama Focus on Different Health Care Problems Obama’s goal: universal health insurance. McCain: –Reducing uninsurance is desirable, but not paramount. –Main priority is to reduce health care cost growth. Why? Current cost trends are unsustainable. Addressing cost growth necessary for sustainable decreases in uninsurance. Huge inefficiences in health care hurt government budget, employers, and private individuals.

5 Heterogeneous Views of Uninsured (Blendon, NEJM Jan ) Problem that many Americans do not have health insurance Repub.Dem. Very serious55%94%

6 National Health Expenditures

7 Public Budgets Relative stability of past spending masks underlying shift towards entitlement spending and unsustainable growth in Medicare spending Source: Budget, 2007 [CEA]

8 Social Security and Medicare Costs % GDP Social Security Medicare Source: CEA

9 Private Budgets

10 How Can We Slow Spending and Reduce Inefficiences? No magic bullet. –One-time fixes only of limited help (liability reform). –Health IT, primary care, comparative effectiveness: both campaigns embrace. Can reduce inefficiencies, but very hard to assess if will reduce spending. New technologies are main cost drivers. –Government has been unwilling to ration care, and insurers have been unable. –Republicans have embraced the potential role of consumers: with more cost-sharing, they could make better choices, demand lower prices, and induce cost- reducing technologies.

11 RAND Health Insurance Experiment Large 1970s experiment randomizing people to insurance plans with cost-sharing ranging from none (“free care”) to 95% (high deductible). Results: Free care enrollees spent 45% more than high deductible enrollees. –Both “unnecessary” and preventive care was reduced Average health levels no worse after 5 years. –But cost-sharing harmed health of those poor and sick at baseline. Long- term health effects unknown. New estimates: if switched insureds from current plans to those with higher cost-sharing, we could reduce spending 5% in short-run. Big unknown is how much long-run costs would drop.

12 Tool to remove bias against cost- sharing: reform tax law Employer-sponsored insurance (ESI) premiums are exempt from income+payroll taxation –Anomaly from World War II price control policy This is a “tax subsidy” for buying expensive insurance, and biases away from cost-sharing. McCain: proposes to eliminate this tax distortion. Could raise $200 billion/year, AND improve efficiency AND improve equity.

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14 McCain plan Similar cost containment ideas as Obama (health IT, primary care, P4P, etc.) but less budgetary commitment. –[No “Connector” to reduce admin costs… but savings are unclear, and could easily add a Connector] Eliminate current tax exclusion: to encourage consumerism, reduce costs –[Less radical step possible: only partially remove exclusion] Replace tax exclusion with flat $2500/person or $5000/family credit for qualified insurance. –[Too small for many low-income, sick. Could instead be larger for low-income.] Guaranteed Access Plan: insurance for high risks. Partly paid through insurer assessments. Allow insurance to be sold across state lines…which would reduce rating regulation. –[Could use risk adjustment to instead reduce premiums for high risks]

15 Final Thoughts Differing underlying values and beliefs Many spurious arguments on all sides –Both out of ignorance and disingenuous –Be sophisticated in evaluating arguments! Scope for compromise? –Major federal reform may require 60 Democrats in Senate. –But common ground on many minor reforms. But: More important long-run policies are upstream anyway. –E.g., education: Can improve health more, thus lower long-run costs; can reduce inefficiencies; can reduce inequities.