Healthcare and Your Cost of Living : McCain Vs. Obama

While we're waiting to see how our country's pressing financial crisis gets handled by a government that was unworried about the consequences of ever broadening de-regulation of financial markets, the issue of health care has fallen to number two (from number one) on the list of what Americans are most concerned about as the election approaches. Since the cost of health care is rising for every American, this is actually an issue tied both to physical and economic well-being of all Americans and to us collectively as a society. Since there has been so much talk about 'main street' and 'the worker' during this election, an analysis of the McCain and Obama positions on health care and what effects each will likely have is necessary.

First, look back to 1968 and to 1988, one a period in the wake of the Great Society programs enacted by President Lyndon Johnson (of which Medicare and Medicaid remain two of the remaining few cornerstones), and the other a period into the de-regulation era, but a time when most Americans still had health insurance.

In 1968 virtually all Americans had affordable access to health care, in part due to the introduction earlier in the decade of Medicare and Medicaid, to ensure poor Americans and retired Americans would not suffer catastrophic illness, etc. due to a lack of ability to pay for healthcare. From a public health perspective, these programs were viewed as solid investments as a healthy populace presents less of a tax burden in the long run. Also in 1968, most private health insurance and the overall cost of accessing medical care, were more than affordable to a middle class wage-earning family (household income of $19k 1968 dollars), and under the Kaiser model, many corporations were expanding their subsidization of health maintenance costs (premiums). In 1968 employees belonging to the newly expanding model of Kaiser, paid no premium and paid as little as $1 for a doctor visit or a prescription, with hospitalizations generally fully covered through premiums paid in part or whole by the employer. Employees of larger companies who did pay health premiums, paid less than $20 per month for a family on average, with similar out of pocket costs to the Kaiser Health Maintenance Organization (HMO), and even the self-employed or those who worked for small businesses paid very low deductibles under health plans available and as non-insured health care costs remained basically affordable. Average out of pocket medical costs (including monthly premiums) per capita in 1968 were $342, compared to $143 per capita in 1960 (Health Affairs,org, 1988 survey in constant dollars). As a point of comparison, average home price was $14.9k, average rent was $130 per month and gasoline was $.34 per gallon, and the federal minimum wage was $1.60 (annual minimum wage income - $3,216) (1968 cost index). When expressed as a percentage of the GNP, in 1968 National Health Care expenses represented 2.6% for private health and 1.3% for government health. As a percentage of the middle class houehold income, that $342 per capita health care cost is 1.8%, and of a minimum wage income it was 10% .

In 1988, most large employers offered HMO coverage to employees and many employers covered 50-100% of premium costs. Government employees enjoyed full coverage of health care premiums in 1988. Eight years into a period of de-regulation and at a time when requirements for providing health coverage to employees were being revisited, the per capita cost of heath care in this country stood at $2,124 in constant dollars (Health Affairs,org, 1988), up a staggering $1,065 from 1980, and $1,778 from 1970. Private health costs were now at 26.3% of GNP and Government health costs were 15.9%, up significantly from pre-deregulation percentage in 1980 of 12.2% for private and 7.2% for government. In 1988, when middle class household income stood at $35.9k, and the cost of a new house was $115,000, gas cost $.97 per gallon and rent averaged $495 per month, the health care cost per capita was 6% of average household income. With a federal minium wage of $3.35, annualized to $6,756, health care costs represented 31.4%.

The focus of much of the national debtate on health care cost containment in the 1980s and 1990s was on reducing corporate costs of healthcare, and this was most aggressively pursued beginning in 2000. When stated as a percentage of GDP, by 2006 health care costs had risen to 16.0%, a figure GM, etc. said factored into the cost of every car produced in this country, as a measure of how health care premium costs impacted America's competitiveness. Lost in this analysis of the issue, however, was the reality employees were by 2006 paying a much larger share of overall health care costs, with shifts from HMOs and fully subsidized health to PPOs and Health Savings Accounts, and only partially subsidized premiums. Today, with middle class average household income at $49.2k, annual health care costs per capita are at $6,626 (HealthAffairs.org, 2008) as of year end 2007. That figure represents 13.5% of household income, and when coupled with the reality housing prices are now $227k, rent averages $735 and gas prices are at $3.59 per gallon, it is a fairly staggering amount.
Taking the current federal minimum wage of $6.55, annualized to $13,200 - health care costs would amount to 50% of annual income.

While health care costs have escalated precipitously since 2000, the ratio between employer/employee percentages of total costs paid has skewed in the last eight years decidedly toward the employee paying a greater share of overall costs. Shifting the cost burden disproportionately to the employee, who has no leverage in the marketplace, has the preverse effect of not encouraging cost containment in a fully competitive health care market. Even government employees, the majority of whom are provided access to HMOs and who pay less than 50% of premium costs, find health care costs escalating. And, when comparing costs of services at Kaiser versus cost of services provded under a PPO, private payment, or a hicap PPO with a Health Savings Account (HSA) , the costs at Kaiser remain significantly lower for the same classes of service (HealthWatch, 2006). This is important to note in an environment where employers are being allowed to shed larger and larger portions of their health care cost burdens, because the cost of living impact becomes heightened. The employee has fewer overall benefits and higher overall out of pocket costs. In an inflationary cycle, such as we are currently experiencing where the cost of consumer goods is also increasing, real wages continue to shrink well ahead of the rate of inflation.

Two things are clear as we look at health care in the waning months of 2008 - provider costs overall are growing and continue to grow at rates unprecedented before 1980. In looking at how to manage this issue - the two presidential candidates have strongly divergent views.

MCain - Tax the User
John McCain's health care plan falls decidedly on the side of employers and decidedly against the interest of decreasing individual (and ultimately, overall) costs of health care. Mr. McCain wants to change how health premiums are treated under our tax system, increasing the taxes paid by all individuals who have some of their health premiums covered by their employers. Mr. McCain believes that by taxing premiums, individuals will be incentivized to pay a higher share of their monthly health care costs and will migrate to PPOs and HSAs. Currently 60% of non-retired working Americans receive health care through a plan at their workplace in which some portion of the premium is covered by the employer and is exempt from individual taxation. Under McCain's plan the increased tax revenues would then be provided in the form of credits to individuals who could use them to either offset their higher taxes or to purchase individual insurance on the open market.

Frankly, I see this as a major flaw of his health care plan. Corporations that purchase insurance in bulk have more leverage for both pricing of premiums (as they are able to spread risk over more employees, etc.) and for most expansive coverage. Individuals are assessed on presumed risk and experience has shown that when negotiating terms of coverage, individuals often have to opt for less scope of coverage (wellcare, hospitalization, outpatient care). And, tac credits have a way of evaporating over time or not materializing in the complete form in which they were envisioned. When revenue is deposited in the US Treasury it is the property of the Treasury and get apportioned according to need. There is no guarantee that $100 deposited for a medical tax credit would actually be available for that purpose twelve months later. By keeping medical premiums tax exempt, there is a direct assurance that the tax-free income was used for the specific public good of providing health insurance.

While proposing to tax health premiums of employees, Mr. McCain also wants to move to a more de-regulated health care market overall where individuals will find insurers 'competing' for their business at the 'lowest prices'. He also wants to eliminate state insurnace requirements and federalize the system to allow for 'big-box', one stop health programs where one size fits all regardless of where you live. This is both a blow to state's rights ans sovereignity, but also a very bad move for the medical consumer. A fully-competitive mass market for health insurance means one or two or maybe three ultimate providerswith great leverage, and hundreds of millions of consumers individually looking for plans. Medical care is both a necessity and is the ultimate measure of public health. What more than 20 years of competition in the health care market has demonstrated is an appalling lack of cost containment. Where Kaiser, a regulated HMO, has managed to keep costs down, and operate under individual state control from market to market, other insurers post annual premium increases in the double digits, and out of pocket costs escalate even as these premiums continue to grow.

There is a basic myth of choice with medical care. An insurer can provide a PPO and an HMO that to the end use consumer offer identicial care. The PPO charges more per month and more out of pocket by allowing the end use consumer to 'choose' which doctors and hospitals to go to without reference to in or out of network and without having to obtain referrals from a primary care physician. In reality, the way most hospital organizations work, there remains a general interface required with a primary care physician, and there is little time constraint associated with getting a referral before seeing a specialist. And, PPOs charge mor for out of network hospitals and doctors, and even an HMO will negotiate through a care advocate for obtaining care elsewhere. At Kaiser, for example, a member can get a procedure at a non-Kaiser facility within existing co-payments and deductible levels when this is necessary or recommended.

The insurer that provides both an HMO and a PPO often negotiates fees downward much more aggressively under the HMO because there is more downside risk to the HMO and to the large network of employers paying premiums, under that plan. In a PPO situation where an individual pays 20-50% of costs, the insurer can actually negotiate a reduction only on the provider side of that equation, so that a hospitalization that might be billed at $150,000, gets billed at $60,000 or less to the insurer for its half, but at the full $75,000 to the individual for his or her half. In may cases the insurer negotiates a lower fee overall, in fairness, but the larger the percentage paid on the individual side, the less aggressive the insurer is or has to be to continue to negotiate down fees. Providers are very aware of this metric. And as the number of private, for profit providers grows, it is counter-intuittive to presume that these providers will work to keep prices down in an unregulated market, especially if individuals are doing the negotiating and are paying every higher proportions of the overall costs of health care. While frantic esitmates estimate health care costs (employer and individual) will reach 19.% of GDP by 2017, the reality is, most Americans are already seeing more than 15% of their net incomes covering health care costs, and the percentage rises to 18% for median incomes and gets much higher for lower income working Americans without access to Medicare or Medicaid.

McCain's health care proposal also includes a component to make sure even people with pre-existing conditions can get health care if they cannot buy it on the open market. This insurance would be partially government subsidized, and he estimates the cost at $7-10 billion annually (MSNBC 9/22/08). If insurers can pick and choose who to insure, they will be able to increase profits and decrease risk by eliminating people with pre-existing conditions from their rolls. Many states currently have policies in place to prevent this, and have had to actively litigate and fine insurance companies that routinely 'thin the herd' of diabetics, cancer survivors, people with histories of heart disease, or who have been treated for other conditions. Under McCain's plans states would lose this leverage, and I believe an estimate of $7-10 billion in taxpayer costs is extremely low and is probably more like 1/10th the annual cost of such a program . Without adequate regulatory oversight insurers will drop people for identified conditions and will not have to enroll others whose health histories are not private and whose prior or existing conditions are easily identifiable upon application for insurance.

The American worker will be very hard hit by the policies McCain advocates. There is no incentive to cost containment for a fully privatized, largely individual payee insurance system. When that system is nationalized by removing existing state by state regulations, customer service will also suffer greatly. There will be no insurance ombudsman in your state who can deal directly with the insurer who has denied your claim or with the provider who has overbilled you for services. And the individual will lose the current tax exemption on any portion of premiums paid by employers, and will also now be privileged to pay higher taxes to cover the pool of people who cannot obtain private insurance on the open market due to prior or pre-existing conditions. Far from learning from the disasterous experiences of the last 20-25 years under more privatization of medical care and escalating provider costs that have resulted in higher insurance rates (which also suffer from lack of regulation), McCain's plan not only perpetuates the myth of markets being able to operate absent regulation for absoluste necessities like health care. When you have a good that people must purchase, you have all the leverage with price. It is basic economics. The other element that is being ignored is the reality consumers cannot absorb more price increases, yet the plan seeks to put the consumer on the front line alone to absorb the higher taxes and helath care costs associated with the plan.

Obama - Offer Benefits or be Taxed
Senator Obama also has some nationalization in mind for health care, but he envisions nationalizing on the access side. Obama would federally fund a National Health Plan similar to Medicare, and a National Health Insurance Exchange (an employer based health insurance system). Rather than tax the employee, Obama's plan would require employers to provide health insurance to employees or pay a tax to fund a publicly available plan. Obama's plan does not mandate that employers pay a certain proportion of health premiums, just that they provide insurance to employees. Obama's plan also would more closely regulate insurers to stem the practice of 'shedding' enrollees based on prior or pre-existing illness and to diminish the ability to charge higher premiums based upon this type of discrimination. Obama's plan also has a reinsurance pool that helps subsidize businesses for the costs of catastrophic care. Obama's camp estimates their cost at $50-65 billion, paid primarily through retired tax cuts for families earning more than $250k per year.

Obama's plan basically retains and strengthens the existing system of employer-based insurance. It creates an incentive for employers to use their leverage to obtain more affordable insurance for employees, and in retaining the most effective element of the current system (volume pricing of provider services through large health plans), it has a cost-containment element. The controversial element of Obama's plan is the expiration of tax credits for the wealthy (this year I would qualify for this tax credit, but my income varies between $200-300k per year) to subsidize costs of catastrophic care borne my employers. The reality is, without this element, these costs would be spread among people earning below $250k, who pay higher proportional taxes. I would assess this part of his proposal as the lesser of two evils - but he may need to spread a wider net depending on the cost of this reinsurance pool.

Obama's plan seems to address individual affordabilty of health care as well as expanded access to health care. Obama's plan also retains the elements of the current that work toward cost containment (by providing more leverage to the buyer of goods by centralizing this at the business and insuance level instead of centralizing it with the individual insured), and both the Obama and McCain plans have elements to reduce existing administrative and other costs burdening the health care system.

How do We Really Contain Costs?
Each plan seeks to expand access, but McCain's plan has a major affordability downside and his plan would ultimately further contribute to concentration of wealth at the top by reducing business costs of operation as individual cost of living would rise based solely on his plan. By shifting cost burden to individuals McCain's plan all but assures no additional cost containment will take place for health care services. It abandons the portions of our current system that work - collective purchasing of insurance, state regulation of health insurers, and large scale provider health plan offerings that provide systemwide pricing. Obama's plan provides an incentive to insure employees and a tax if you don't to do it for you - while McCain's plan discourages employees from seeking insurance at work by taxing them on the premiums their employers cover. McCain's plan centralizes all the power with the providers and the insurer, while Obama's plan appears to take major steps in the direction of centralizing power with the purchaser of health care - by providing incentives to insure and maintaining a volume purchase environment. Without long term cost containment our health care system will collapse, and long before it collapses it will pose an afforability paradox that will rapidly increase social costs.

I work for a private employer that no longer offers access to HMOs other than Kaiser, and that has shifted more of the premium cost to the employee by offering a low cip (high premium) PPO or a HiCap PPO with an HSA. Two years ago my firm was still offering good HMOs that were absolutely parallel in care to what we receive now under the PPOs. The difference is the employer now pays less of the cost. Not surprisingly, costs of procedures, co-payments and deductibles all increased year over year after the switch to full PPO and HSA. It's not because all employees were sick more or used services more, it's because we are at the mercy of the providers. We need access to care and we don't purchase in bulk, we get health care individually as we go. My counterparts at a slightly larger firm still have access to an HMO. But the more companies that make the switch (often pressured by their insurance companies to move to lower cost options) the less the overall cost containment - the higher the costs for everyone. That means HMOs cost more. That is the direction John McCain wants to continue to lead us in. On paper corporate costs will be lower in the short term, but the stresses of employees attempting to pay higher health costs on their own always impact the workplace. Also, as we get choosier and choosier about just how serious an illness or injury has to be before we still shell out big dollars for care, more and more employees will come to work sick, or injured, or distracted. We will recreate the very public health and public cost detriments that worker health insurance was supposed to minimize or eliminate.

Frankly, if you look back to the days when Henry J. Kaiser made the move to workplace insurance and provision of health care - you'll remember his motives were both altruistic (a healthy workplace is a happy workplace, and employers value employees enough to want them healthy) and capitalistic (he was better positioned to compete, based on size of his enterprise and the better health of his broad workforce). In today's global economy, government has to assume some paternalistic responsibility for the overall public health and for the viability of its workforce since it has allowed privatization to create unchecked healthcare costs . It cannot continue to burden the individual with greater and greater shares of both the social and the personal costs of health care. McCain's plan overburdens the individual and sets up a path to unaffordability. Obama's plan probably needs work to minimize centralized costs of reinsurance, but is otherwise best situated to contain costs going forward - for the worker and the corporation alike.