Philadelphia Reflections

Clinton Health Plan: Promises Broken?

Clinton Health Plan: Promises Broken?

GEORGE ROSS FISHER

AEJ March 1994, Vol. 22, No. 1

There is growing recognition the Clinton health plan bears little resemblance to the Clinton health speeches. I intend to respond to the program chairman’s instruction to discuss the Clinton plan, as leaked in a 250- pages documents to Democratic leaders. But, I must state this: just as the leaked Clinton plan bears no resemblance to the Clinton speeches, it is also likely the Clinton plan is only a tool, not a blueprint, for the Clinton strategy. The written Clinton plan reads like a deal-making machine. It is filled with quid pro quo, with veiled threats for non-cooperation, and with hints of possible rewards for interest groups who fall in line. Many proposals are made, but in politics, it is, of course, not necessary to push all of them with equal vigor, or any vigor at all.

Distorting the National Incentive System

A number of large corporations have been unsuccessful competitors in recent years, chief among them is the auto industry. Unless failing firms reduce surplus capacity, corporate raiders will reduce it for them. The chief response has been to offer early retirement to older workers.

Because health insurance in America has an unfortunate linkage to employment, it has been common to promise to pay the health insurance premiums for early retirees until they reach Medicare age. The promise is, of course, a blank check, and fair accounting of it nearly wiped out the net worth of many large but essentially failing businesses.

The Clinton proposal would lift this burden from the back of the industrial failures to keep them alive a little longer. The rest of the population will pay for this in one way or another, depending on how the other deals are made. Of one thing you can be sure: every man, women, and child are not going to smoke 16 packs of cigarettes daily to pay for it with tobacco taxes. And, if you suppose $234 billions of waste, fraud, and inefficiency can be wrung out of Medicare, you can have it on the word of the world’s chief Medicare hater, me, such an idea is either fanciful or demagoguery, depending on your political party.

Now, the news of the early retiree swindle was leaked to the press by a Democrat spokesman, so we can hope the real Clinton strategy is to broadcast the promise but try to make it look as though Republicans in the Senate were the ones who killed it. If it should unluckily pass, there will be highly undesirable consequences. Chief among them, of course, is the incentive of rewarding failing businesses by taxing successful ones. Successful growing businesses, to underline the point, are not retiring people early, they are trying to hire extra employees.

Intergenerational Equity

The second incredible consequence of the early retiree deal is to cripple the stated goal of the program, which was to ensure the uninsured. You would think the program would lower insurance premiums for people who are typically uninsured; unfortunately, the proposal is to balloon such premium by 500 percent.

To understand the issue, you need to know two things. First, most people without health insurance are young. Second, health insurance for young people is cheap, unless tinkered with. The Clintons tinker, all right, using something called “community rating.” Community rating is charging everybody the same premium, in spite of knowing the true cost for a person age 25 is only 20 percent of the true cost of someone aged 55.

Where in the world did this idea of community rating come from? Let me tell you. First and foremost, it reduces the cost to the government of picking up the early retirees. It is beyond my resources to calculate the relative cost of the two items overall (young uninsured versus middle-aged retirees from mismanaged businesses); but, it looks likely mismanagement costs the country more, even in the short run.

You might as well know some more. Until recently, the dominant form of health insurance was Blue Cross, and Blue Cross always used community rating. I suspect they were responding to union negotiations which tend to offset health insurance fringe benefits against hourly wages in the “pay packet”. It does not matter; Blue Cross dominated the scene with community premiums. Eventually their competitors, notably the HMO’s learned how to enroll younger subscribers selectively and take the resulting profit for themselves. First, the Blues were left with sicker older subscribers and got in so much financial trouble their premiums had to skyrocket, causing them to spinal again into still more loss of business. And second, states like New York, Massachusetts, and Vermont got themselves into trouble by passing a mandatory community rating law, which was nicknamed in the legislative corridors the Blue Cross Rescue Law”.

Under this new law, the New York insurance department set the premium for a 30-year-old at $7800 per year for a family plan. Keep that figure in mind when you learn the Clinton plan proposes a national premium of $4200. I guarantee any state government with a disparity like that is willing to suspend disbelief if their dream is to redistribute costs to other states, particularly to young people in some other state. Young people better look out for their interests.

Yuppies do seem to be waking up. It is a universal truism among Yuppies to expect to be cheated by Social Security when they get to the right age. So, it should be a fairly easy belief, however attractive the Clinton health plan may be for their parents, that it too will all go up in smoke for baby boomers when the time comes. Mr. Clinton minimizes the cost and asks Yuppies to think ahead. It will be most unfortunate for his plan politically if they do.

What young people need is a credible guarantee. It would be even nicer if their guarantee could be put away at compound interest and actually reduce the lifetime cost. Time prevents a digression to the Health IRA proposal, which would do just that. What is central to an economic discussion to Health IR proposal, which would do just that. What is central to an economic discussion is the principle of necessary private ownership of policies. What is true of Social Security is also true of the health scheme the federal government simply cannot invest money. Senator Moynihan of New York once blew the whistle on the way purchasing U.S. government bonds for Social Security Trust Funds merely underwrites the federal deficit. The U.S. government can scarcely be expected to buy bonds of foreign governments. And, if it bought a trillion dollars' worth of common stock, we would quickly have the Communist ideal of government owning the means of production.

Government is inherently incapable of being an investor on behalf of its citizens. Although the government puts a spin on it, we are necessarily facing another “pay as you go” plan in the Clinton health proposal. Even “pay as you go” might be tolerable if it were based on present value accounting, net of inflation. Such accounting is improbable since the Clintons are already forced to pay for present health care in one scheme by postulating future reductions ($200 billion from Medicare) in another.

Let us return from investment digression. Young people are to believe community rating is designed to spread the risk of the unfortunate sick. It is not. Like “pay as you go”, it is intended to make young people subsidize the payoff of major corporations for making management blunders, and politicians who court their support.

The nature of required support is becoming clearer. For the past six months, the medical community has watched a remarkable onslaught of demands from insurance companies for them to participate in the price and utilization control system known as “managed care”. The insurance companies are careful to explain they are only responding to intense pressure from employers. The force of that was brought home to me when I recently addressed the Chamber of Commerce of Philadelphia. In a day-long symposium on health care, the representative of the hospital and I were excluded from the room while the chairman of the meeting lectured the corporate benefits managers for two hours. Who started this rumpus, which is obviously timed to coincide with the Clinton health speeches?

Well, obviously, I do not know. But, Joseph Califano would certainly be on my short list of suspects, because the auto and steel industries have been so outspoken for so long. And, they needed a trusted insider in the Clinton campaign. Potentially, however, there is grim pleasure in imagining how angry steel and auto moguls will be when nasty gridlocked Congress deletes the early retirement deal in a House-Senate conference committee closed session.

Individual Rather than Company Ownership of the Policy

For quaint historical reasons, those conference committees on health will be made up of the leadership of the Senate Finance Committee and the House Ways on Means Committee, the supreme court of national taxation. Now, Sherlock Holmes noticed it was particularly a dog did not bark, and the Clinton proposal has one big omission, too. He does not touch the $48 billion annual tax entitlement of wages paid in the form of health insurance premiums. Even without the revenue loss, this is the heart of the artificial crisis which President Clinton proposes to solve.

As you know, it got started when Henry Kaiser offered fringe benefits as a way around wartime wage controls, and the War Production Board felt income taxation would expose them as disguised wages. Regardless of history, the tax-exempt feature of employer-paid health insurance premiums is the main, or possibly sole, reason employer-basing is the main form of American health coverage. Consequently, along with getting divorced by a working spouse, it is the main reason losing your job means losing your health insurance.

For years, the Census Bureau found roughly 37 million people lacking health insurance every time they conducted a spot check. It took a while before they asked the longitudinal question of how long the individual had been without coverage. It took a while before they asked the longitudinal question of how long the individual had been without coverage. It turns out 28 million of the 37 million can be accounted for as partial persons, constituted out of a pool of 68 million who lack insurance for an average of four months during a two-year period. Leaving aside the quibble that treatment for most medical conditions can be deferred four months, it emerges our problem is not what we thought it was. More or less, permanent lack of coverage is found in 9 million people, most of whom could probably be fit into Medicaid. The rest, having a far more pervasive if a less severe problem, could be cured of their difficulty if the employer turned over the ownership of the health policy to the individual employee, never mind who paid for it.

What is the slogan to be derived from this? Must break the link between health insurance and employment. In my opinion, we do not need to rearrange health care to do it. Just declare as of the signing of this Act, health insurance belongs to and can move with the person it covers. Never mind who writes the premium check.

Cost Shifting

Speaking of national tax policy, the contentious 1993 budget bill, passed by only one vote, purported to contain $250 billion in expenditure cuts; $50 billion, or 20 percent of that, was to come from reducing Medicare, and $42 billion was from reductions in hospital expenditures. Well, guess what. Hospitals will immediately react to those federal revenue losses by raising prices to the other clients in the hospital, mostly paid for by employer group health insurance. In this way, a $50 billion cut in expenditures is instantly transformed into a $ 50 billion tax on business.

Now, the Clinton health plan proposes to pay for several hundred billion in new programs by a new $238 billion cut in Medicare and Medicaid. To the extent this is not just “fantasy” in Senator Moynihan’s phrase, it will effectively be a new round of taxes on business. More likely, the Medicare squeeze-process has already been pushed past the point where the Medicare program can survive if it is seriously extended. Since the collapse of Medicare is more than any political party could survive, the absolutely certain outcome is a larger deficit, or more taxes, or both.

And even if that does not work, am I being extreme in saying it will endanger the health of the nation?

Bringing Welfare recipients into the Workforce

There is one legitimate social argument for risking massive disruptions of a good medical system. Every welfare program has the same difficulty that the person who leaves welfare may then be worse off financially, even though he takes some low-paying job. In our system, Medicaid medical coverage is an important asset for the welfare recipient, particularly pregnancy coverage for young women. A young person's taking marginal jobs may gain a sense of pride, but marginal jobs seldom give out health insurance. It thus appears attractive “to break the chains of welfare” by giving subsidized health insurance to young persons in low-paying jobs.

People who use this argument usually refuse to accept identical logic with regard to repealing the minimum wage laws so their sincerity may be open to challenge. However, the main problem created for health care reform is equalizing the discrepancy which forces the benefits package of the new insurance to match that of Medicaid, unless the choice is to make Medicaid coverage worse. Generous benefits packages delight doctors, of course, but using a politically correct benefit package for Medicaid makes the whole Clinton scheme too expensive for governors and legislatures even consider.

By this circuitous route, we get to the idea of merging Medicaid with the mainstream of health insurance. Once merged, legislatures do not have to pay for fixing the Medicaid mess, a business will. Business leaders may now imagine they have an inexpensive bargain since they already pay taxes which go toward Medicaid costs. A small price to pay for getting rid of the early retiree burden, no doubt.

Business leaders are so utterly wrong about the future size of this welfare cost, it is not acceptable to let them stew in their own juices. The country cannot afford to let them ruin their companies that way.

Rather than digress into political solutions at this convention of economists, it seems better to propose the legitimate social and economic goal of reducing the barrier for welfare-leavers only. Or some extra benefits for welfare leavers could center o pregnancy coverage, the main medical issue which would affect employment choices (as drug abuse and AIDS, aimed at hopeless cases, probably would not).

Risk Pooling, Reinsurance, and Alliances

The problem of uninsurability for medical reasons positively cries out for some form of risk pooling. Medium-sized business probably would be well served by reinsurance, while small business groups and individuals might be better served by assigned risk pools or joint underwriting. Although these approaches are thoroughly understood and tested within the insurance industry, the Clintons heard about them from Alain Enthoven but propose something quite different.

The contrivance is called an alliance; it is really a forced merger of insurance companies, with a political board of directors and an enormous bureaucracy. Since the solutions to the uninsurability issue are so straight-forward and time-tested, one has to suspect the true main purpose of the alliance is to supervise price controls.

There is a saying among manipulators that the way to hide something is to put it in the next-to-last paragraph, which careless people often do not read. At approximately that point in the Clinton, Health Proposal is a description of the transition plan-how the country is to get from here to there. It centers on the risk pooling idea, acknowledging to Alain Enthoven it has been considered. Perhaps a way can be devised to get into the transitional stage and never go any further. The first Tuesday in November 1994 seems like an appropriate time to start a mid-course correction.

Redefining the Concept of a Hospital

The Clinton plan proposes to transform hospitals from revenue centers to cost centers of “alliances,” using the Kaiser model, we presume. Unfortunately, the rest of the country does not have the luxury of choosing where to place hospitals which fit into the Kaiser system of doing business, avoiding other areas less adaptable to that system. Many hospitals are run by churches, many are the solitary facility in a region. Anyway, the long-term trends seem to lead in other directions.

Hospital care is moving from the center of cities to the suburbs, where it is cheaper to be but where the service mode is different. Patients with educated families and bathrooms on the ground floor can go home early, often the day after surgery; social isolates in walk-up flats need a bed in the hospital for a week. Meanwhile, continuing care retirement centers in more centripetal areas are rapidly coming to provide post-operative care “at home” in their infirmaries. These all seem desirable evolutions but it is uncertain where they will lead. Five-hundred-thousand senior citizens now live in a retirement village with infirmaries, but how far that trend will go, and what part of the urban landscape they will occupy in unclear. If you believe in market solutions, you will let this sort itself out. If you believe in central planning, you will have those consumer committees in health care alliances decide it for the country.

Copayment and Supplemental Insurance

Finally, I come to a technical blunder in the Clinton plan which could easily slip past. Almost everyone agrees partial payment by the patient is desirable, and the Rand Corporation showed evidence it could reduce overall health costs about 30 percent. The Clinton plan provides for a 20 percent patient copayment for all services.

However, patient copayment comes in a variety of forms. I want to leave you with the opinion that all copayment is a good thing, except the 20 percent coinsurance variety, which is a bad thing, or at least a delusion.

Visualize an individual’s annual health cost as a rectangle. You can shave off a part for the patient to pay from any of the four sides. At the front, you have what is known as a deductible-and it is a good thing because it reduces the administrative cost of petty claims. At the back, is balance-billing, which serves as a safety valve for luxury demands and helps adjust imbalances between premium collection and inflation or technology advances. Balance billing is a second good way to involve the patient in his costs.

But, shaving 20 percent off the longitudinal side is a dumb idea. It doubles the administrative expense. It is only a great favorite of insurance marketing departments because it reduces the premium exactly 20 percent, whereas it requires an actuary to tell how much the other types of copayment are worth.

However, there is that darned supplemental insurance, the “65-special” or whatnot. It can be purchased for, guess what, 20 percent of the cost of the main policy, and you are, thus, back to total insurance without any patient copayment at all. You also then have two insurance policies instead of one, with any patient copayment at all. You also then have two insurance policies instead of one, with double overhead and double confusion. I can understand how people on a fixed income wish to budget their medical costs. I hate to forbid anything by law which does not hurt someone else. And yet, it is quite clear the purchase of supplemental insurance to cover cash obligations will utterly defeat the cost-consciousness of patient and provider.

So, as this health care debate goes on and on, remember something. Do not outlaw supplement insurance; outlaw 20 percent coinsurance provisions in the main policy. But, do it without damaging front-end deductibles, or back-end balance billing.

Originally published: Wednesday, July 25, 2018; most-recently modified: Wednesday, May 15, 2019