Monday, October 5, 2009

Cost Containment v. Universal Coverage - Part I

The Senate Finance Committee has essentially completed work on the Baucus health reform effort, the committee is waiting for the preliminary CBO score before taking a final vote. That report should come by mid-week. I suspect that it will find somewhat less in savings than did the CBO score of Baucus’ original bill – but will still see the promise of deficit reduction. I also expect that one or two Democrats on the panel will vote "no." Not moderate Democrats opposed to a liberal bill, but rather more liberal Democrats concerned that the bill does not do enough. Ron Wyden (D-OR) and Jay Rockefeller (D-WV) are likely candidates. With 2 defections, Baucus would need one GOP vote and I suspect that he’ll get it from Olympia Snowe (R-ME) – all other Republicans will vote "no." In the end, committee members know that the bill has to be reported out of committee in order to move this process along. The bill will then be placed in the less than capable and uninspiring hands of Harry Reid, a majority leader unlikely to survive the 2010 mid-term election.

Unknown is what any final bill will look like. The LA Times reports that the White House has begun a concerted behind the scenes effort to win support of a public option, but – but as I argued in a post to the FreeStater Blog – not all public options are built the same.

Enter into all of this a new wrinkle. The US insurance industry signaled support for reform at the start of this latest endeavor to reform our health system. They were willing to accept a requirement that they cover all comers, (guarantee issue) with no pre-existing condition limitations, so long as any reform contained employer and individual mandates. Insurers knew that the pre-existing condition folks would be more expensive and increase an insurer’s risk, but that new risk would be more than offset by requiring young, healthy people to purchase insurance and by requiring that employers provide insurance (the employed tend to be healthy). So for insurers the deal with the Obama administration was simple – “we’ll take the bad, but you better send us the good.”

That deal is now starting to sour. The only way that an individual and employer mandate can work is if the penalty for non-compliance is sufficient to compel someone to buy insurance. However, to placate Democratic and Republican concerns over imposing new costs on business and individuals the Finance Committee dramatically reduced the penalty for not obtaining coverage and essentially eliminated the employer mandate. Originally, the bill would have imposed a penalty not to exceed $3,800 for families and $950 for a person for a failure to obtain insurance. These amounts were important as they corresponded to the average employee share of an employer sponsored insurance plan – so a rational person would opt to accept employer sponsored insurance instead of paying the fine.

Those fines have now been reduced to a maximum of $1,500 per family and $750 per person – and the fine would be phased in between 2013 and 2017 (see page 35 of the Finance plan). Taken together, employers would not be compelled to offer insurance and with the reduced penalty for non-compliance individuals would be less likely to purchase what is offered (if anything), even a public option. So insurers will be required to cover high risk folks with pre-existing conditions, but will not get to bring all of those young, healthy folks into the risk pool – suddenly reform looks like a bad deal for the insurance industry – and they are expressing their concern. The insurance industry is a powerful lobbying force that has shaped health policy for more than four decades. If they turn against reform it will mark an entirely new, and from the Obama Administration’s perspective, unwelcome chapter in the reform battle.

In 1993, the leading managed care insurers initially endorsed the Clinton health reform efforts. Then, as now, they were promised individual and employer mandates and a dominant role for managed care. In the end, insurers turned against the plan after President Clinton proposed heavy regulation of the insurers and the creation of National Health Board to regulate the health care market and control costs. Insurers reacted by working, effectively, to defeat reform.

In 1993/1994, as now, the key conflict was between the competing interests of universal coverage and cost containment – this battle has been at the heart of reform battles since President Carter and Senator Kennedy tussled over reform in the late 1970s. So long as we pursue policies that simply seek to provide coverage, without addressing the problem of ever rising costs, cost containment will always win the day and universal coverage will always wait. How we go about controlling costs, and why no politician wants to go down that path, will be the subject of a future post. Stay tuned.

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