If I were designing a system from
scratch, I would probably go ahead with a single-payer system.
-Senator Barack Obama
Senator Barack Obama (D-IL), the Democratic presidential
nominee, has unveiled an ambitious health care plan that is
comprehensive in scope, sparse in detail, and limited in its cost
estimates. The Senator insists that his proposal would save the
typical American family $2,500 in medical costs. These savings
are implausible, and the costs are unknown.
The Senator's proposals are organized around three stated
objectives: offering affordable, comprehensive, and portable
coverage; containing spiraling health care costs and improving
quality of care; and promoting and strengthening prevention
and public health. These key goals would appeal to most
Americans, but the coercive means required to accomplish these
goals will be far less attractive.
Very little in the Obama health plan is new or original. A
number of its policy initiatives are recycled from the ill-fated
Clinton health plan of 1994 and the Kerry health plan of 2004 and
bear a stark resemblance to a more detailed proposal by the
Commonwealth Fund, a prominent liberal think tank. In general,
the Obama plan would give the federal government even more
control of health care dollars and decisions-a radical departure
from the decentralized decision-making system that characterizes
employer-based insurance and state-based insurance regulation.
Instead of using the federal government to change the health
care system from the top down, policymakers should transfer direct
control of health care dollars back to individuals and
families-the people with a personal interest in obtaining the
best care at lower cost. Such a system of personal ownership
would allow Americans to exercise real personal choice of
health plans and benefits in choosing those plans that best meet
their needs. This would also make health plans and providers
compete directly for their dollars by providing value to consumers
and patients. Personal ownership of health care would help to
control costs and guarantee better quality, eliminating the need to
depend on the government or third-party payers.
The Obama Health Care Plan
Similar to the Clinton health plan of 1994, the Kerry health
plan of 2004, and the Commonwealth Fund's "The Building Blocks of
Health Reform," the Obama plan proposes a
comprehensive, standardized federal health benefits structure;
a massive expansion of federal regulatory authority over
health insurance; and an enlargement of federal regulatory power
over health care delivery, including defining and determining
what constitutes "quality" health care.
Moreover, the plan would prop up the existing employer-based
health insurance system and existing government health programs,
such as Medicaid and the State Children's Health Insurance
Program (SCHIP), in an effort to expand health insurance
Centralizing Control. The most significant change in the
Obama plan is a proposal to consolidate even more control of
health care dollars and decisions in Washington, D.C. This is a
radical departure from the existing system, which sets the United
States apart from other developed countries.
The Obama plan includes several initiatives that would give the
federal government extensive control of the financing,
delivery, and management of health care. These government
initiatives would likely precipitate a rapid evolution toward a
federal monopoly over the health care sector. These
- New federal provision and control of health care.
Obama's new government-run national health plan would compete
directly with private health plans in a National Health
Insurance Exchange. Federal officials would not only run the
new government plan but also use the exchange as a "watchdog" over
private health plans "competing" in the exchange. The federal
government would decide the level of health benefits that Americans
would receive through the exchange. These benefit rules would apply
to the new national health plan and all participating private
- Additional federal involvement in employer-based
coverage. The Obama plan would mandate that employers
either provide a federally approved level of health benefits to
their workers or pay a tax to help finance the government's new
national health plan. The plan does not specify the level of the
employer contribution, the value of the required health benefits
package, or the size of the payroll tax. The federal government
would also assume the high-end costs of employer-based coverage and
provide a new taxpayer subsidy to small businesses to
encourage them to offer coverage. In any case, the Obama
prescription would end employer-based health insurance as Americans
- Expansion of existing government health programs,
restrictions on state experimentation, and mandated coverage
for children. The plan calls for unspecified expansions of
Medicaid and SCHIP. In a significant shift from current practice,
the plan would severely limited states' ability to develop health
care proposals on their own. Additionally, it would require
parents to ensure that their children have health care
- Federal Regulation of health care delivery. The federal
government would regulate the delivery of medical care through
specific initiatives, such as those that would govern medical
reimbursement and determine the "comparative effectiveness" of
medical treatments and procedures. It would also increase the
federal Regulation of medical liability reform, prescription drugs,
and health insurance.
Cost Implications. How much the Obama health plan would
cost American taxpayers is unclear. Independent economists have
attempted to offer some cost estimates, but the lack of
concrete details makes the exact costs uncertain.
More Federal Control of Health
I will establish a new national
health plan, similar to the plan available to federal
employees and Members of Congress, that gives every American the
opportunity to buy affordable health coverage.
Senator Obama says he would create another government health
care plan in addition to Medicare, Medicaid, and SCHIP. It
would be available to individuals who cannot access employer-based
coverage or do not qualify for existing public programs, such
as Medicaid and SCHIP. The new government plan would also be
available to the self-employed and small businesses.
The plan would have benefits similar to those in the Federal
Employees Health Benefits Program (FEHBP), which serves Members of
Congress, federal workers, and federal retirees. Benefits must
also include prevention, maternity care, mental health care,
disease management, self-management training, and care
According to Senator Obama's description of the new plan, no one
could be denied access based on health status. Premiums would be
"fair," with only "minimal" cost sharing for deductibles and
preventive care. The federal government would provide income-based
subsidies to needy individuals and families to enable them to buy
health coverage. These subsidies could be used to purchase the new
government plan or private insurance. Only federally approved
private health plans would be eligible to participate alongside the
government plan in the new National Health Insurance Exchange.
Doctors and hospitals that contract with the national health
plan would be required to collect and report data to ensure that
they comply with the federal standards for health quality,
information technology, and administration as envisioned by an
Obama Administration. Yet even while imposing new reporting
requirements for all of these items, Senator Obama promises to
"simplify paperwork" for doctors and hospitals, which is expected
to reduce costs throughout the system.
Exactly how the plan would meet these seemingly
incompatible goals of requiring additional reporting and reducing
paperwork is not clear from the proposal. Perhaps it assumes that
physician and hospital compliance with the proposed
information technology standards would yield these
The new government plan, offered through a National Health
Insurance Exchange, is the cornerstone of the Obama plan. In
some respects, it resembles the Congressional Health Plan proposed
by Senator John Kerry (D-MA) during the 2004 presidential
Senator Obama's pointed reference to the popular and
successful Federal Employees Health Benefits Program is obviously
intended to make the new government-run national health plan
politically attractive to ordinary Americans. However, Obama's
new government plan would function very differently.
The FEHBP. There is much confusion about the FEHBP, its
unique character, its structure, and how it actually works.
Misinterpretations are common and sometimes deliberate. For one
thing, the FEHBP simply does not have "a benefit package" or any
type of standardized health benefits package. Furthermore, no
single FEHBP plan covers all Members of Congress, federal workers,
and federal retirees.
Within the FEHBP, competing health insurers offer a variety of
premiums, cost-sharing options, and benefit packages across various
types of health plans, ranging from fee-for-service options and
preferred provider organizations (PPOs) to health maintenance
organizations (HMOs) and health savings accounts. This year, 283
plans are available through the FEHBP at the national and local
levels. The benefit packages change from year to year- sometimes
dramatically-depending on prevailing market conditions, consumer
demand, and insurers' willingness to compete and offer
different packages through the FEHBP.
This wide range of personal choices and the intense competition
among the various health plans are precisely what make the FEBHP
both popular and successful. It is the closest thing that
Americans-at least those Americans who work for the federal
government-have to a functioning, consumer-driven national health
Obama's New Government Plan Compared to the FEHBP. The
principles and practice of the consumer-driven FEBHP contrast
sharply with Obama's new national health plan.
First, in the regulatory spirit of the Clinton health
plan of 1993, the Kerry plan of 2004, and the Commonwealth Fund
proposals, the Obama plan would impose a standardized benefits
structure on both the new government plan and every private
health plan that participates in the proposed National Health
Insurance Exchange. There is no comprehensive, standard benefit
package in the FEHBP.
Second, the Obama proposal would have a
government-run health plan in the National Health Insurance
Exchange. No federal agency offers a government health plan through
the FEHBP. Only private health insurance plans compete in that
program, and even more important, they compete on a level
Third, Obama's proposal clearly envisions-but does not
spell out-some type of price regulation. Although the language of
his proposal is vague, enrollees are to be charged "fair" premiums
and "minimal co-pays." Presumably, Congress or an authorized agent,
such as the proposed National Health Insurance Exchange, would
define these terms. This would put the federal government in the
business of deciding what constitutes a fair price and a proper
co-payment for benefits and services, leading to some type of
centralized rate setting or standardization of payments for
providers. In the FEHBP, prices are market-based. No price
Regulation is imposed on plans or services.
The challenge in creating a new government-run health plan is to
balance promised benefits with costs. The subsidy envisioned in the
Obama plan would probably need to be substantial, which would
impose significant costs on taxpayers. Concurrently, the
plan would need to adopt tough regulatory mechanisms to control
costs. For example, government officials could employ
British-style "comparative effectiveness" standards to restrict use
of medical services and procedures, or they could enforce strict
pay-for-performance measures to discourage doctors from
providing what government officials deem "wasteful" treatments. In
either case, the plan would need mechanisms that ration care and
medical services to contain potentially explosive health care
The National Health Insurance
I will also create a National Health
Insurance Exchange for individuals wishing to purchase private
insurance. The exchange will act as a watchdog to help reform
private insurance markets. It will create transparent standards and
guidelines to increase fairness, affordability and
accessibility throughout the industry. Through the exchange, all
Americans will have the opportunity to enroll in an approved plan.
The exchange will ensure that private plan premiums, co-pays and
deductibles are fair and stable.
The exchange would oversee the new government health plan
and participating plans offered through the exchange. The private
plan options would be required to meet the same standards as the
new government plan. Specifically, plans would be required to
accept all eligible applicants, to justify premium and premium
changes, and to adhere to federal quality and efficiency standards.
The exchange would also evaluate participating plans on a variety
of measures, including cost.
Government As Umpire and Player. The proposed
National Health Insurance Exchange would clearly be a powerful
regulatory agency, not simply a clearinghouse for a national health
insurance market. Under the Obama plan, the federal government
would both set the highly prescriptive rules and compete in the
market. To borrow a sports analogy, the
government would be both the umpire and one of the teams playing on
The government would also enjoy special advantages that would
tilt the playing field in the government's direction in that
employers and taxpayers would subsidize the new government
plan and cover any related risks-a unique advantage unavailable to
the private health plans in the exchange. Furthermore, political
incentives, not just economic and medical incentives, would drive
the exchange and its powerful board of directors. It is difficult
to imagine how the government officials could take and maintain a
This process would probably steadily erode participation by
private plans because the government would set the rules and offer
a subsidized plan. This could easily pave the way to a government
monopoly over health care. At a minimum, the private plans
could be reduced to operating simply as administrative agents of
the federal plan. In either case, without any realistic market
options, would-be consumers, patients, individuals, and families
seeking value for their health care dollars would be the biggest
The Obama plan takes a giant step toward centralizing
America's health insurance markets by creating the exchange
not simply as a market organizer, but as a new watchdog agency to
regulate private plan options offered through the exchange.
Whether directly or indirectly, the federal government would
control the availability, design, and delivery of health care.
Although its jurisdiction is apparently confined to private health
plans offering coverage through the proposed exchange, the reach of
this powerful regulatory authority would circumscribe state health
reform options and undoubtedly affect the entire private market for
Distorting the Exchange Concept. The concept of a health
insurance exchange is not a new idea, but it can mean
different things to different analysts. Regrettably,
inaccurate policy analysis often misses or overlooks these crucial
An exchange can be defined by its structure and function.
Heritage Foundation analysts have proposed it as a state
institution, designed to permit personal choice and ownership of
insurance policies. The state-based exchange allows
individuals and families to take advantage of the features of
personal choice that characterize the individual market while
securing the generous federal tax advantages of group coverage.
State legislative proposals to create health insurance
exchanges are often designed to enable individuals and
small-business owners to buy health insurance tax-free, to
facilitate defined contributions from employers, and to promote the
personal ownership and portability of private health insurance
policies under existing federal tax rules. In such instances, a
statewide health insurance exchange, sometimes called a
"Connector," serves as a clearinghouse for transactions
between various sources of contributions and for choosing from a
variety of health insurance options.
Senator Obama's proposal to create a National Health Insurance
Exchange as a powerful regulatory agency has little in common
with this state-based approach to consumer-driven health
More Federal Involvement in
I will require employers who do not
offer meaningful health coverage or make a significant
contribution towards their employees' coverage to contribute a
portion of their payroll toward the costs of the national plan.
This broad language is supplemented by slightly more detailed
questions and answers about the plan in which the Senator indicates
that "small employers" (i.e., small business, but the term is
not defined) would be exempt from the proposed mandate.
Analysis. The Senator's proposal resurrects the employer
mandate-buy coverage or pay a tax- which is more commonly known as
the pay-or-play model. However, unlike the Clinton health plan, the
Obama plan is short on detail. Accurately calibrating how the
plan would affect workers, businesses, and the employer-based
health insurance markets would require much clearer definitions of
"meaningful coverage," "meaningful contribution," and "small
business" as well as the amount of the proposed tax penalty.
However, such critical details are missing from the plan.
As a policy matter, however, a few things are certain. First,
the pay-or-play model would add another layer of administrative
compliance to those borne by already overburdened employers.
Determining whether an employer meets the meaningful coverage
and benefit threshold would require imposing a new reporting and
certification process on affected businesses.
Another certainty is that while the Senator's employer mandate
would be seen as another tax on business, it is in reality a new
tax on labor. The broad economic consequences of employer
mandates are not in dispute among economists, regardless
of their political or philosophical orientation. Health insurance
is part of workers' compensation, just as wages are, and any
increase in health benefits routinely means a reduction in
wages or other compensation.
As Professor Mark Pauly, a prominent economist at the University
of Pennsylvania, has observed:
The economic analysis of employment-based benefits is as clear
in economic theory and empirical work as it is muddled in
public debate: theory and econometric studies both say that workers
pay for the majority of health insurance costs, through lower money
wages as well as through explicit premiums.
Likewise, any new payroll tax on employers would ultimately be
borne by workers, either in reduced compensation or in job loss.
While forcing employers to do "the right thing" is politically
attractive rhetoric for politicians, such efforts would
effectively lower wages and eliminate jobs. As Joseph Antos,
Gail Wilensky, and Hanns Kuttner point out in their analysis of the
Obama plan, "The pay-or-play mandate, which is meant to help
workers who do not have insurance gain coverage, could instead
undermine their chances of economic success."
While the absence of any firm details makes empirical analysis
of the Obama plan difficult, recent econometric analysis
illustrates the potential impact of an employer mandate. The Lewin
Group, a national, nonpartisan econometrics health care firm,
assumes a 6 percent payroll tax and estimates that $226 billion in
new taxes over 10 years would be imposed on employers with 25 or
more workers who do not offer health insurance.
Combined with the new government health plan available through a
National Health Insurance Exchange under the Obama plan, this new
tax on business (and workers) would create economic incentives that
would likely cause a massive shift from private coverage to public
coverage. As John Goodman, economist and president of the National
Center for Policy Analysis, states, "It will not take many people
(perhaps a majority) long to discover that they will be better off
if their employers drop their current health plan." In its recent analysis of the Obama
plan, the Lewin Group concludes that an estimated 22.5 million
workers and dependents would lose their employer coverage.
Thus, the mandate on employers proposed by Senator Obama would
effectively end employment-based coverage as Americans know it.
James Capretta, a fellow at the Ethics and Public Policy Center and
former official with the Office of Management and Budget, warns
that, "despite Obama's rhetoric and protestations, his plan would
destroy employer-based insurance, not preserve it, by pricing it
out of business and subsidizing government-run alternatives."
Taxpayer subsidies for Small
While Senator Obama would impose new taxes on businesses (and
workers), he would also provide new taxpayer subsidies to
certain small businesses to entice them to offer coverage. He
would create a refundable tax credit worth up to 50 percent
for small-business employers who secure a "quality" health plan for
their employees and cover a "meaningful" share of premiums for
their employees. However, the language does not define what
constitutes a small business, a quality health plan, and a
meaningful share of premiums.
Senator Obama, like so many before him, stubbornly insists
on trying to make small businesses fit into the traditional mold of
employer-based group coverage that characterizes large and mid-size
firms. As many analysts have argued, a number of factors could
explain why traditional employer-based health insurance may not be
the best model for small business. Trying to force such a policy on
these firms may not be either in their own best interests or in the
best interests of their workers. These firms often operate on low
profit margins, are burdened by high worker turnover, have small
pools for spreading health risk, and face daunting administrative
obstacles. Offering these businesses a subsidy
to encourage them to buy coverage for their workers would buttress
an older corporate insurance model that is increasingly
inappropriate for small-business owners and their employees.
The Lewin Group estimates that the Obama small-business tax
credit would cost $77.9 billion over 10 years and assumes that the
credit would apply only to businesses with fewer than 10
workers. This would result in about 3.6
million workers and dependents benefiting from this new
small-business tax credit.
Reinforcing employment-based health insurance for firms
with a large turnover in their workforce, in which a change or
loss of employment often translates into a loss of coverage for the
worker, runs counter to the goal of expanding portability in
health insurance-a key stated goal of the Obama health plan.
Real portability means that the insurance policy follows the
worker, not the employer, meaning that workers can keep their
health coverage regardless of their job or job status. This is best
achieved through personal ownership of health insurance and would
also improve continuity of coverage and care for the worker.
Taxpayer Reinsurance for Employers
Under my plan, employers will be
reimbursed for a portion of the catastrophic costs they incur above
a threshold if they promise to use those savings to reduce the
costs of workers' premiums.
The Obama plan would have the taxpayers reimburse employers for
the high-end health costs in their health plan. This proposal
broadly resembles the 2004 proposal by Senator Kerry.
The Lewin Group, basing its calculations on the government's
assuming 75 percent of the cost in excess of $140,000 for each plan
member, estimates that the Obama reinsurance proposal would
cost $419.2 billion over the first 10 years.
Beyond saddling taxpayers with employers' high health care
costs, the reinsurance proposal would weaken incentives to control
or manage health care costs. Helen Darling,
president of the National Business Coalition on Health, has noted
that once a patient reaches the threshold at which the taxpayer
funding kicks in, "there's no reason for anyone to pay attention to
costs." In other words, the premium rebate
would drive up health care costs.
Merrill Matthews, executive director of the Council for
Affordable Health Insurance, a health insurance trade association,
[Such a proposal] would undermine the innovative health
insurance products currently being designed both by new health
plans, third-party administrators and traditional insurers.
The government likes uniformity, not diversity and competition,
because it makes Regulation simpler.
Government reinsurance would not only stifle existing efforts by
insurers, employers, and individuals to seek out value, but
also likely replace those efforts with more regulation.
Expanding Existing Government
I will expand Medicaid and the
federal State Children's Health Insurance Program (SCHIP)
eligibility and ensure that they continue to serve their critical
safety net function. Finally, I will encourage states to continue
to innovate and experiment with different methods of coverage
expansion, as long as they meet the minimum federal standards
established for the national plan.
Expanding Medicaid and SCHIP. These proposed
expansions are nothing new. Given the dynamics of the status quo,
including the steady decline of employer-based health insurance,
public program expansions have been routine features of current
Medicaid, the federal-state health program for the poor and
indigent, is already a $350 billion program, and previous Medicaid
expansions have unquestionably helped to "crowd out" private health
insurance coverage for certain populations.
Nonetheless, during 2007-2008 alone, 36 states expanded Medicaid
eligibility. Contrary to the original
intent of SCHIP to provide health coverage for poor children in
working families ineligible for Medicaid, states have also steadily
expanded SCHIP eligibility, reaching well into the middle class,
with periodic bailouts from Congress.
Compared to private coverage, these programs are conspicuously
lacking in quality care, particularly in giving patients
access to physicians for appropriate care at the appropriate time.
Researchers at the Center for Health System Change found that
21 percent of physicians were not accepting any new Medicaid
patients between 2004 and 2005. Research also shows
that Medicaid and SCHIP patients were more likely than the
uninsured and private health plan enrollees to go to emergency
rooms for non-emergency needs.
Compounding the Entitlement Crisis. Meanwhile,
America faces an entitlement crisis. Spending on Medicare,
Medicaid, and Social Security is projected to rise rapidly, pushing
up primary federal spending (excluding interest payments on
the national debt) from 18.2 percent of gross domestic product in
2007 to 28.3 percent of GDP in 2050. According to the Congressional
Budget Office (CBO), financing entitlement spending will require
massive tax increases, including doubling individual and
marginal tax rates in every bracket and doubling corporate tax
Expanding Medicaid and SCHIP would only deepen the entitlement
crisis. Both programs are fiscally challenged and promise more
than they deliver, undermining access and quality for those on
these programs today. For example, it was projected that Medicaid
and SCHIP, combined federal and state spending, would cost $717
billion by 2017.
For states, the Medicaid and SCHIP crisis is apparent. Medicaid
is already the largest item in state budgets, accounting for 22
percent of total state fiscal expenditures in 2006. Senator Obama's unspecified
expansions of these public programs would accelerate this process
and significantly affect the remaining health care economy.
A Step Toward a Federal Takeover? Perhaps of greater
concern, these expansions could serve as first steps in a more
ambitious federal takeover of American health care. Although
these expansions appear incremental and thus less radical, they
could be highly consequential. Simply expanding eligibility for
children up to 400 percent of the federal poverty level ($84,800
for a family of four) would qualify more than 70 percent of
American children for a government health care program.
Inhibiting State Flexibility. The Obama proposal
would severely restrict state variation and experimentation by
requiring state innovations to meet the specific minimum standards
of the proposed new government health plan.
This highly prescriptive approach would be a major step
backward. One of the most promising developments during the past
three years has been the willingness of state governors and
legislators to experiment with different methods to expand their
citizens' health care coverage. Not surprisingly, state
legislatures have produced a flurry of state health reform
legislation. However, confining state reform efforts to a narrow,
single federal standard would effectively end any serious
experimentation and discourage any outside-the-box innovation.
In this sense, the Obama health care plan would follow a path
opposite from that of the successful welfare reform of the
1990s, which gave state officials broad goals and a high degree of
flexibility in designing approaches to encourage work and reduce
welfare dependence. There is serious bipartisan interest in
replicating this success in health care policy. State flexibility is not only
desirable, but also necessary because the provision of health
care varies widely across the states, reflecting differences in
demographics, political culture, and insurance markets. Of course,
this flexibility would be undesirable only if the real goal of the
process is to centralize health care decision-making in Washington,
The Parents' Mandate
I will also require that all children
have meaningful health coverage and will allow young people up
to the age of 25 to continue coverage through their parents'
Obama's proposed insurance mandate extends only to children, and
"allow" appears to be a mandate on insurers to cover young
adults on their parents' coverage until they reach age 25.
The Parents' Mandate. While the Obama plan does not
recommend a universal individual mandate, as supported by
Senator Hillary Clinton (D- NY), Obama does not appear to be
philosophically opposed to an individual mandate. To the contrary,
his endorsement of a mandate for children could be seen as an
incremental step toward a full-blown universal mandate for health
insurance. As Dr. Kavita Patel, an Obama adviser, explains,
"[Obama] has voiced his disagreement with having [an individual
mandate] be a part of his health-care plan last year. But he is not
opposed to the idea itself."
However, even with a mandate, universal compliance is
rarely if ever achieved. If "near universal" coverage is an
acceptable policy goal, it can be achieved using more benign means
than a mandate. In any case, mandates without
penalties are meaningless. Much would depend on how Senator Obama
would enforce his mandate on parents and what the penalties for
noncompliance would be. The Senator has not specified any of
Given his proposed expansion of public programs, the
Senator's mandate for children's health insurance coverage would
likely result in millions of children becoming dependent on the
government for their health care for their entire lifetimes.
For example, it would be easy for these government health
programs to serve as the default option, automatically enrolling
children if their parents fail to act.
For families who obtain coverage for their children,
federal bureaucrats would define what constitutes qualified
coverage. The federal government would have significant control
over the type of health insurance coverage that a child receives.
In a number of highly sensitive areas, such as the provision
of contraception to minors, parents may be permitted little or no
control. Even if parents provide health
coverage for a child, federal officials could deem that coverage
inadequate, regardless of what the parents think. As with the
proposed mandate on employers, parents would be required to
obtain a plan that conforms to the federal standards or face a
Senator Obama's proposal to raise the age at which a dependent
may remain on a parent's health care plan is misguided and would
further centralize regulatory control of health insurance in
Washington. It is true, of course, that people ages 18 through
24 comprise the largest cohort of uninsured and have an
uninsurance rate of 28 percent. This population
tends to be healthy, and many could obtain coverage, especially if
state officials took steps to make health coverage more
affordable. Insurance rules are predominately matters of state
jurisdiction. In overregulated state health insurance markets, some
states compel young persons to pay the same price as older persons
even though they are a much lower risk and to buy coverage
that includes mandated benefits and services that they may not want
or need, pricing many young adults out of the market.
Federal Regulation in the Delivery of
As part of a comprehensive strategy
to improve health outcomes and reduce waste, I will establish an
independent institute to engage in comparative effectiveness
research that helps doctors understand what therapies actually
contribute to better patient outcomes.
I will also ensure that all public
programs implement disease management programs- systems that help
patients with chronic illnesses better manage their conditions. My
plan will improve care coordination and integration by supporting
team-based approaches, such as medical homes. To promote
transparency and provide Americans a greater role in health care
decisions, I will require hospitals and providers to collect and
publicly report quality and cost data, including rates of
preventable medical errors and hospital acquired infections-and my
plan will accelerate efforts to align reimbursement with the
provision of high quality care…. My plan will reward
providers in all public plans for achieving performance
thresholds based on physician-validated outcomes.
This ambitious agenda focuses on using delivery reform to
control costs and improve quality:
- Disease management programs, particularly in all public
insurance plans, such as the new national health plan, Medicare,
Medicaid, SCHIP, TRICARE (the military health plan), the Department
of Veterans Affairs, and even the Federal Employees Health Benefits
- Care coordination in developing new reimbursement
systems that focus on care coordination based on the "medical
- Transparency, including new requirements for health care
providers to report to the government on cost and
- Pay for performance, to be achieved by developing
and applying best-practice models to realign reimbursements for
providers participating in the new public health program,
Medicare, and the FEHBP;
- An independent institute to oversee research on comparative
effectiveness, with research focused on developing comparative
information on drugs, devices, and procedures for use in diagnostic
and treatment options;
- Elimination of disparities by diversifying the workforce
to ensure "culturally effective" care, implementing and funding
evidence-based interventions, and expanding safety-net
- Information technology, which under the Obama plan would
involve investing heavily in implementing a national health
information technology system.
Analysis. The current structure of third-party
payments-which Senator Obama wants to preserve-creates serious
problems in the delivery of care. In this system, insurers and
medical professionals have little direct accountability to
individuals, either as consumers of insurance or as patients.
The existing financial and insurance arrangements compromise both
the interests of consumers who demand health insurance that meets
their individual needs and the interests of patients who demand the
best and highest value of medical services. Insurance may encourage
either too much or too little of certain types of care. As
many prominent economists have suggested, the best policy response
to that problem is to restructure the market to align the
incentives of insurers, doctors, hospitals, and patients to ensure
the delivery of value to patients.
When market forces are robust or employers are engaged to keep
costs low, innovations emerge as private plans explore ways to keep
their enrollees healthier and provide better, cost-effective
services. If the plans compete directly for market share, as they
would in a consumer-driven system, insurers will be compelled to
develop approaches that keep their claim payments down and reduce
costs for their enrollees. The healthier the enrollees are, the
fewer claims insurers need to pay out, and the lower health care
spending will be-all very desirable outcomes.
However, if the federal government mandated care tools on
insurers, this would directly undercut flexibility, entrenching
these government-approved delivery tools for current and future
use, while politicizing the process. Moreover, it would
further shift control of health care decisions to Washington.
The Obama plan avoids spelling out important details needed to
understand the scope of these initiatives, both individually
and as a whole. One danger of having the federal government
coordinate these delivery reforms is that they could become
regulatory tools for controlling costs by limiting access to
care and services that fall into official disfavor. These measures
would establish a federal infrastructure for such rationing,
regardless of whether or not the Obama plan intends this
Medical Homes. Senator Obama wants to develop new
reimbursement arrangements for care coordination based on the
"medical home" model. The concept of a medical home dates back to
the 1960s, but this idea can mean different things.
The American Academy of Pediatrics and the Maternal and Child
Health Branch of the Health Resources and Services Administration
(HRSA) have focused on the utility of the medical home in serving
children with special needs. In 2004, HRSA awarded $2.2 million to
promote medical homes that "include family members in decisions on
treatment and seek to coordinate comprehensive,
culturally competent care for [children with special health
care needs] who have health and behavioral needs beyond those of
most other children."
More recently, medical homes have been authorized for
seniors in Medicare demonstration projects. This demonstration was
established "to redesign the health care delivery system to provide
targeted, accessible, continuous and coordinated, family-centered
care to high needs populations."
The various definitions of "medical home" make it difficult to
determine precisely what Senator Obama envisions. However, if the
federal government, followed by states and third-party payers,
is to use new payment systems to move segments of the population
into medical homes, federal officials will need to define the term.
This could significantly affect medical practices, which
presumably would be required to comply with federal rules for the
coordination of care. Federal rules would also be required to
determine which institutions could be defined as medical homes,
such as health plans, managed-care organizations, or group
The better alternative is to create a consumer-driven health
insurance market and allow medical homes and various other
institutions to evolve as natural features of the health care
sector, in which individuals can obtain the kind of care they want
and need at competitive prices.
Transparency. For the vast majority of ordinary
Americans, the health care sector is opaque and mysterious.
Transparency, especially in terms of the price and performance of
medical providers, is unquestionably a good thing. Senator Obama is
to be applauded for promoting clarity of information with respect
to the cost and quality of medical services. The Senator's
proposal does not specify how the information will be made
available and used.
The information could be organized and used in different ways.
For example, the federal government could be the central
depository of such information, in effect creating a monopoly
over the data. In an alternative system based on personal freedom
and choice, individuals and medical professionals could obtain
information on price and quality from multiple sources, including
government sources. Most important, such a system would focus on
enabling consumers, not the government, to make informed health
care decisions for themselves and their loved ones.
Pay for Performance. The Senator's
pay-for-performance proposal is a variation of a Bush
Administration initiative. President George W. Bush first
introduced the pay-for-performance proposal in conjunction with
reforming the Medicare payment system for physicians. The key idea
is to base physician Medicare reimbursement on compliance with
Medicare standards for best medical practices. Yet Senator Obama
would go further than the Bush Administration's initiative by
"accelerat[ing] efforts to develop and disseminate best practices"
and by applying this new payments structure across all federal
This, like the original Bush Administration initiative, is
an undesirable policy. Under the original Medicare statute, federal
officials are specifically forbidden from interfering with the
practice of medicine-a legal recognition of the profound need to
protect the independence and integrity of the medical profession
from government interference. The Obama proposal would breach
that wall of separation between the financing of medicine and the
practice of medicine. This should cause concern among both doctors
As Heritage Foundation research on its application to the
Medicare program has shown, the pay-for-performance agenda rightly
recognizes that patients are not receiving the best value from the
health care system. However, a federal
pay-for-performance system would treat patients according to
"cookbook medicine," undermining high-quality, personalized
care and retarding innovation in care delivery. It would also
encourage doctors to game the system at the expense of patients,
further weakening the already attenuated doctor-patient
Comparative Effectiveness. In light of wide
geographic variations in health care spending without any
meaningful difference in health outcomes, various analysts
want to reduce costs by improving the quality of care delivered.
Endemic to the drive toward "evidence-based" medicine is the
analysis of the comparative effectiveness of drugs, devices, and
procedures. This is intended to shed light on which treatments work
best for patients and on whether more effective but more expensive
treatments are worth the additional financial costs.
In principle, researching the comparative effectiveness of
different medical options is an excellent thing. Like pay for
performance, the concept is attractive, but it is also potentially
harmful, depending on how the quality-of-care strategy is designed
and implemented. The Obama plan would create a new
institute-another government-sponsored agency-to analyze the
"comparative effectiveness" of medical treatments, procedures,
drugs, and devices.
If the institute's findings were used to control costs by
binding medical professionals through law, Regulation, or
reimbursement, they would compromise professional independence,
intrude into the practice of medicine, and directly affect
patients' access to the full range of care options. Without such
harsh application, the investment is unlikely to yield any
significant cost savings. The CBO notes:
[T]o affect medical treatment and reduce health care spending in
a meaningful way, the results of comparative effectiveness analyses
would not only have to be persuasive but also would have to be
used in ways that changed the behavior of doctors, other health
professionals and patients.
As Urban Institute scholars point out, "these cost-containment
initiatives can only be successful if they are aggressively
pursued." Examples of aggressive application
of comparative effectiveness emphasize the potential hazards. For
example, in Great Britain, the National Institute on Clinical
Effectiveness makes such decisions, including a controversial
determination that certain cancer drugs are "too expensive." In short, it serves as a
sophisticated instrument for rationing care to British
Eliminating Disparities. Unquestionably, there are
disparities in American health care. The issue is whether Congress
or an authorized agency is capable of improving these outcomes
without first addressing the health care system's underlying
problems. Dr. Sally Satel, a resident scholar at the American
Enterprise Institute and practicing physiatrist, has found
that socioeconomic status is more likely than race to drive
disparities. Furthermore, she argues,
continuity of care and better reimbursement are two critical
components in leveling out these disparities.
Simply having coverage from Medicaid, for example, does not
necessarily "correlate to having a regular source of coverage." Medicaid and employment-based
health insurance are often unstable sources of coverage for
individuals and families because the coverage is often determined
by external factors over which individuals have little
control, such as unemployment, legal eligibility for public
assistance, or an employer's decision to offer or drop
Researchers at the American Cancer Society have found that
individuals on Medicaid or without private health insurance
are more likely than those with private insurance to be diagnosed
with cancer. This reinforces the point that
attempting to address disparities in the abstract without first
addressing the problems of the public programs or the unequal tax
treatment of private health insurance would only scratch the
surface of the problem.
Information Technology. Health information technology,
which could significantly increase efficiency in the financing
and delivery of medical services, has emerged as a kind of
painless alternative to major structural reform of health insurance
markets and financing. Like comparative effectiveness and pay
for performance, increased use of information technology (IT)
is expected to deliver major savings and superior medical outcomes.
Yet the CBO has warned that "[b]y itself, the adoption of more
health IT is generally not sufficient to produce significant
The achievements of the IT revolution can save time, money, and
lives, but they would be far more promising in an open economic
environment in which individuals personally control their health
care dollars and choices. As consumers, individuals would purchase
coverage based on what services they desire, such as a plan that
offers a personal health record, and could demand that providers
communicate with them using 21st century technology. Banks and
credit card companies, in which the widespread reliance on
information technology and fast transactions are simply taken for
granted, are prime examples of how consumer demand and market
competition can drive massive change without massive federal
Addressing the Medical Liability
Medical liability is an enormous problem for physicians and
other medical professionals. The fear of lawsuits and their
destructive impact on a doctor's professional reputation and
medical practice encourages doctors to practice defensive
medicine, which often leads to providing excessive,
unnecessary, and inappropriate care to protect against
Senator Obama's approach to reforming medical malpractice would
focus on preventing insurers from overcharging physicians by
strengthening antitrust laws. He would also focus on new models for
reducing medical errors and strengthening the doctor-patient
relationship to lessen the need for medical malpractice suits.
Senator Obama is to be applauded for his concern about the
burdens on doctors and other medical professionals and for
seeking to reduce medical errors and restore the doctor-patient
relationship, but his proposal sidesteps the major obstacle to
serious medical malpractice reform: the incentives in the current
system that encourage attorneys to pursue frivolous lawsuits, which
have caused medical malpractice insurance premiums to
Tort law is an issue of state jurisdiction, and states should
address the problem because high medical liability insurance is
affecting access to critical services. States can choose from a
variety of reforms, including adopting effective damage award
caps. Not only is this issue best
addressed under state law, but the variation in remedies among the
states provides an excellent opportunity for the states to learn
from each others' successes and failures.
Increased Regulation of Prescription
Drugs and Insurers
Senator Obama proposes several initiatives that are focused
specifically on influencing the pharmaceutical and insurance
Senator Obama would permit the importation of pharmaceuticals
provided that they are purchased from other developed
countries, can meet a safety threshold, and are priced lower than
in the United States. The proposal would also require increased use
of generics in government plans and would prohibit keeping generics
out of the market.
Senator Obama would also authorize Medicare to "negotiate"
directly with pharmaceutical companies to set prices for
Medicare drugs. In tandem with this price setting, the Senator
would also cancel what he deems "excess" subsidies to the
competing Medicare Advantage plans.
Insurers would also be required to allocate a "reasonable" share
of collected premiums for care and to limit their allocations for
administrative costs and profits.
Drug Importation. Senator Obama's prescription for
drugs replicates policy proposals that have been routinely advanced
Americans lead the world in pharmaceutical innovation, but the
American people pay the largest portion of the costs for
American research and development of new drugs. America's problem
is that foreign consumers, such as those in Europe and Japan,
directly benefit from these advances but do not bear the research
and development costs in the prices they pay for drugs because
foreign governments impose price controls on drugs, thus
shifting additional costs to American consumers.
Drug importation is, in effect, a policy response to this
international cost shift. The basic idea is to take advantage of
these artificially cheaper prices by importing price-controlled
drugs into the United States. The concept seems simple in theory,
but its consequences are many and complicated.
First, by taking such an approach, the U.S. would be
endorsing price controls and discouraging pharmaceutical
companies from developing other life-saving drugs.
Second, importation raises basic safety and cost
concerns. The U.S. Secretaries of Health and Human Services under
Presidents Bill Clinton and George W. Bush could not guarantee the
safety of imported drugs. Even if the federal government
could guarantee safety and was willing to allocate significant
resources to address safety concerns, the potential cost savings
are minimal. The Congressional Budget Office estimated that
drug importation would save less than 1 percent of overall
prescription drug spending in the U.S.
Third, beyond these basic issues, conditions on the
ground change the relevance of the earlier debate. The main
rationale was the lack of a prescription drug benefit in the
Medicare program. The Medicare Modernization Act of 2003 gives all
Medicare beneficiaries access to a prescription drug benefit,
including heavily subsidized coverage for low-income seniors.
Therefore, pharmaceuticals are widely available and more affordable
than ever before to seniors, the largest cohort of American drug
consumers. As a result, demand for drug importation has
Finally, persons who are still unable to obtain needed drugs at
affordable prices can receive help. For example, consumers can
avail themselves of retail discounts or private
initiatives, such as the successful Partnership for Prescription
Assistance, which helps needy persons
As for accelerating use and access to generic drugs, the
Senator's plan offers no specifics. However, the use of
generics has already increased significantly: 68 percent of
all prescriptions are filled with generic drugs.
In addition, any reexamination of patent laws should be
conducted with great care to preserve the delicate balance between
rewarding innovation and opening access to generics. Loosening drug
patent protections could run the risk of undermining incentives for
future pharmaceutical development.
Undermining Success. Whatever the overall merits of the
Medicare drug entitlement may be, it has produced one development
that has surprised supporters and critics alike: Private health
plans have succeeded dramatically in delivering prescription
drugs to seniors at affordable and transparent prices. Since the
program's inception, the projected annual premium for drug coverage
has declined by 40 percent.
However, along with some other Members of Congress, Senator
Obama proposes to break a feature of the Medicare drug program
that is not broken by giving the Secretary of Health and Human
Services the authority to intervene in the private negotiations
between private health plans and pharmaceutical companies. This
would essentially substitute Medicare-style pricing for prices that
reflect the real conditions of supply and demand. Normally, the
government price fixers set prices too high or too low, but rarely
As the CBO has observed, such a drug pricing strategy cannot
achieve measurable savings unless government officials also limit
seniors' access to drugs. Both the Veterans Administration
program and Medicaid deliberately limit access to certain drugs to
Similarly, the Medicare Advantage program, a new system of
competing private health plans in Medicare, has been a genuine
policy success. More than one in five Medicare beneficiaries are
enrolled in Medicare Advantage plans. These plans offer broader
benefits, more health care options, and increasingly better value
for seniors' dollars.
Senator Obama's contention that Medicare Advantage plans are
"overpaid" compared to traditional Medicare ignores the
substantial benefit differences between traditional Medicare
and Medicare Advantage. A better policy would be to build on
Medicare Advantage's success and the success of competitive health
plans in delivering Medicare drugs, extending these features of
consumer choice and competition to the entire Medicare program.
Furthermore, Senator Obama's proposal to legislate the
distribution of insurance premiums among patient care,
administrative costs, and profits is shortsighted and undermines
consumer choice. His proposal is similar to the failed attempts in
California to set an 85 percent "minimal loss ratio." Sometimes, higher administrative
costs, such as those for better care management, are good,
especially when they help to bring down overall costs. For
example, one insurer might charge a $200 premium but meet the
85 percent loss ratio, while a second insurer might charge a $150
premium but have a 75 percent loss ratio.
From a consumer's standpoint, the premium cost is a more
important consideration than the arbitrary minimum loss ratio.
Instead of mandating a certain minimal loss ratio, the government
should empower consumers with the information and allow them to
decide whether the $200 plan is worth the extra $50 per month.
Encouraging Healthy Behavior
Senator Obama's plan includes prevention, public health
initiatives, and measures to promote "shared responsibility"
among employers, schools, workers, individuals, families, and
For employers, the Obama plan would "expand and reward" efforts
that incorporate preventive services in employer-based benefit
packages and work-site interventions, such as offering nutritious
foods in cafeterias and vending machines.
For schools, the plan would help schools to create
"healthier environments" for children by assisting with
"contract policy development for local vendors, grant support for
school-based health screening programs and clinical services,
increased financial support for physical education, and
educational programs for students."
The Obama plan would "expand funding" for the health care
workforce (doctors, nurses, and other medical professionals)
through "loan repayments, adequate reimbursement, grants for
training curricula, and infrastructure support to improve
For individuals and families, the Obama plan would require
preventive services in all federally supported health programs,
including Medicare, Medicaid, SCHIP, Obama's new government health
plan, and (theoretically) the FEHBP. Senator Obama says that he
would also pursue policies to develop "healthy environments,"
including "sidewalks, biking paths and walking trails; local
grocery stores with fruit and vegetables; restricted
advertising for tobacco and alcohol to children; and wellness and
Within the government, the plan would assess and make changes at
all levels of government (federal, state, and local) to
develop "a strategic plan" to improve coordination and realign
government policies to support public health.
To liberals in Congress and elsewhere, "shared responsibility"
in health care financing means new mandates and more taxes. In the
context of federally promoted prevention and public health,
the precise meaning of "shared responsibility" is unclear. In
public health, Senator Obama envisions the government adopting a
strategic plan that would involve all levels of government in
"realigning" government policies. This would likely mean new
federal rules, or at least new federal guidance, combined with
grants or other economic incentives permeating all areas of
national life in America. If federal officials are to pursue
policies that encompass "fruits and vegetables" sold in local
grocery stores, it is hard to imagine what if any limits on the
federal government's power an Obama Administration would
Focusing on personal responsibility rather than shared
responsibility is a better way to promote health and well-being.
For example, if government officials would allow individuals to
take advantage of health insurance premium discounts for
enrollment in prevention and wellness programs, the economic
incentives would align with personal behavior. Similarly, health
insurers should be permitted to charge higher premiums to
persons who insist on smoking, drinking alcohol excessively, or
engaging in other risky behaviors.
Such a health policy strategy would preserve personal freedom
but would make personal choices transparent and consequential. This
type of approach would comport with the ideals of a civil society
based on personal freedom and responsibility, in sharp
contrast to Senator Obama's collective undertaking based on a vague
and coercive idea of shared responsibility.
Costs, Savings, and Coverage Under the
Estimating the exact costs, savings, or coverage of the Obama
health plan is difficult without clearer, more specific policy
details. Therefore, existing estimates depend heavily on
assumptions. As James Capretta observes:
Obama's plan is calculatedly short on detail. He will never
admit that it would lead to rationing of care, and he won't make
the same mistake the Clintons did when they issued their
1,300-plus-page legislative proposal.
On overall costs, there is a broad range of cost estimates. The
Lewin Group estimates that the Obama plan will cost $1.17 trillion
over the first 10 years. Other estimates range from $1.6
trillion to $6 trillion over 10 years.
On overall savings, the Lewin Group estimates that the Obama
plan would reduce family spending by $426 in 2010, an amount
far less than the Obama plan's promised $2,500.
Finally, on coverage, the Lewin Group estimates that the
Obama plan would reduce the number of uninsured by 26.6 million by
2010 and increase the number of people
on public coverage by 48.3 million.
Regressive Taxation of Health
Senator Obama has not proposed any changes in the one area of
health care policy where a broad intellectual consensus argues for
significant change: the inequity and inefficiency of the existing
federal tax treatment of health insurance. This is a
profound mistake. He would retain one of the most regressive
features of the federal tax code, thus propping up the largest
component-and one of the most inefficient components-of the health
care status quo.
Instead of pursuing a rational alignment of economic incentives
through serious tax policy changes, the Senator resorts to an array
of new mandates, taxes, and subsidies in an attempt to force an
industrial-age insurance model to serve the needs of a highly
mobile post-industrial workforce. The unreformed health care sector
contrasts sharply with other economic sectors, in which individuals
seek increasingly personalized services and receive higher quality
service, which is routinely provided by competitive
Meanwhile, the existing tax exclusion for employer-based
health insurance encourages excess spending, discriminates against
low-income workers and workers without employer-based
coverage, and discourages consumer engagement in health care
Improvements in health care delivery are supremely important,
and Senator Obama is right to focus on the need to make sure that
Americans secure high-quality care from doctors and other medical
professionals. Nonetheless, focusing on health care delivery
without first reforming health care financing is a fundamental
Washington policymakers first need to fix the federal tax
treatment of health insurance, the major force that shapes
America's health care financing and its insurance markets. They
could do this by replacing the existing tax exclusion on health
benefits with universal tax relief for individuals and
families, regardless of where they work.
This straightforward change would force insurers to compete
for consumers' dollars and enable persons to buy and own their
health policies. This would result in affordable and portable
coverage and would start to align the economic incentives
throughout the entire system in a rational way, making insurance
plans both competitive and accountable and driving innovation and
improvements in the delivery of health care. This is the way
to secure the highest value for individuals and families who
ultimately pay 100 percent of the nation's medical bills.
A Better Way
The broad goals of the Obama plan are laudable, but his
proposed policies to achieve those goals are largely recycled
proposals that would require a high degree of coercion. They
- Federal domination and control of health insurance,
- An employer mandate,
- A mandate on parents to cover their children,
- A comprehensive standardized benefits structure,
- Unspecified new taxpayer subsidies to business to cover their
high-end health care costs, and
- Expanded federal involvement in the delivery of care by doctors
and other medical professionals.
Despite Senator Obama's rhetoric of "choice and competition,"
his plan is a vehicle for new regulations and federal power
that would leave ordinary Americans with even less control of their
health care dollars than they exercise today.
Instead of using the massive power of the federal government to
impose a top-down change on the health care system, Senator Obama
and other policymakers would be wise to transfer direct
control of health care dollars to individuals and families. This
would enable Americans to exercise real personal choice of
health plans and benefits while making health plans and providers
compete directly for consumers' dollars by providing value to
The next President and Congress should start to level the
playing field through tax and regulatory changes designed to
harness the power of free-market competition to improve access,
promote portability, and restrain health care spending.
Specifically, they should reform the tax treatment of health
insurance, expand options for employers to help their workers
purchase health insurance, and restructure poorly performing public
programs to help those in need buy superior coverage through
private health insurance.
Such policies would constitute real change from the status quo.
They would empower individuals to make informed choices and enable
the marketplace to respond rapidly to their needs and wants rather
than placing them at the mercy of government bureaucrats and
politicians in Washington.
Robert E. Moffit, Ph.D.,
is Director of and Nina
Owcharenko is a Senior Policy Analyst in the Center for Health
Policy Studies at The Heritage Foundation.
Read: The McCain
Health Care Plan: More Power to Families