The Workplace Agenda Presidential Prescriptions

By Jeremy Smerd

Sep. 13, 2008

Sens. Barack Obama and John McCain face a paradox in their presidential campaigns: How do you simultaneously increase the number of people who receive health insurance while lowering the health care costs that threaten to bankrupt Medicare, send jobs overseas and upend the economy?

    Using decidedly different means that reflect the ideological leanings of their political parties, Republican hopeful McCain and Democratic nominee Obama believe their health care policy proposals will strengthen the employer-based system by reducing the number of uninsured Americans. While the candidates’ plans share common goals, each has policies that could make it more costly for employers to provide health insurance.

    McCain says he will focus on refundable tax credits to make health insurance more affordable, reducing the number of uninsured Americans. Obama, meanwhile, wants to reduce the number of uninsured Americans, which will cut wasteful and unnecessary spending, thereby lowering costs.

    Yet both plans could siphon healthy employees away from employer plans, leaving companies with a higher percentage of sicker, costlier enrollees who would drive up costs.

    Whether in the long run either candidate’s plan would sustain an employer-based system is “questionable,” says Steven Wojcik, vice president for public policy at the National Business Group on Health in Washington.

    Employers, who tend to be more reactive than proactive, are hoping that whatever the outcome in the November presidential election, a new national health care policy will end the uncertainty they seem to feel every election cycle.

    “We don’t want to be going through this again four years from now,” says Andy Rosa, director of health and welfare benefits at Comcast in Philadelphia.

Employers and the McCain plan
    If elected president, McCain says he would tax the value of an employee’s health care plan while offering tax credits—$2,500 for individuals and $5,000 for families—to offset the tax increase. The rationale, says McCain health policy advisor Jay Khosla, is to provide a tax incentive for people without employer-sponsored health insurance to purchase it on their own. The McCain campaign estimates the tax credit will help 20 million to 30 million uninsured people purchase insurance. The Tax Policy Center of the Urban Institute and the Brookings Institution says that the number of uninsured would drop by 1 million in 2009 and by 5 million by 2013.

    But in the eyes of many experts, McCain’s plan could provide an economic incentive for the young and healthy to leave employer coverage for the individual market, where they could reduce their tax liability by finding cheaper health insurance. This “adverse selection” could leave employers to cover sicker, older and more expensive workers.

    Speaking to health benefits managers from McDonald’s, Com¬cast, Kraft, DuPont and others at an event for employers in Chicago this summer, Khosla summarized the philosophy behind the Arizona senator’s health policy.

    “I think Sen. McCain’s vision for health care can be described as three small phrases,” he said. “It’s your life, it’s your health, it’s your decision.”

    Khosla described McCain’s emphasis on the consumer.

    “Insurance should follow you, not follow your job,” Khosla told employers. He said the tax credit would create an incentive for individuals and families to buy health insurance on their own rather than through their employer.

    Employers would not see their taxes rise, but employees would. The McCain campaign says the tax credit would completely offset the increase in taxes. It would also encourage the use of health savings accounts.

    “You can only keep the change if you add an HSA account,” says campaign spokesman Taylor Griffin.

    For example, the average cost of a family plan, according to the Kaiser Family Foundation, was $12,106 in 2007. Taxed at the highest tax rate of 35 percent, a family could expect to pay $4,237 in extra taxes. The tax refund of $5,000 would offset that amount. The remaining $763 would go into a health savings account.

    Health care policy experts say, however, that these tax credits for individuals and families could encourage the young and healthy to find bare-minimum catastrophic plans with an HSA and forgo employer-sponsored coverage. Experts say this worries employers, who fear that young and healthy employees will leave their health plans if they think they can get cheaper, more appropriate insurance elsewhere.

    “What employers would be left with would be people who use the most health care,” says James P. Gelfand, senior manager for health policy at the U.S. Chamber of Commerce. “And their premiums would go up quite a bit and their health plan would be more expensive.”

    Another option would be for employers to offer plans that covered less, thereby reducing the tax liability of the premium. Still, the McCain tax plan could be “the beginning of the end of employment-based coverage as we know it,” says Paul Fronstin, director of the health research and education program of the Employee Benefit Research Institute in Washington.

    The tax credit may also heighten concerns among fiscal conservatives. The federal exclusion from income and payroll taxes for investments in employer-sponsored health care cost the Treasury

    $200 billion in lost revenue in 2007, according to the Congressional Budget Office.

    McCain, whose tax cuts would further reduce that revenue, says he would pay for the tax cuts by reducing spending elsewhere. McCain would balance the federal budget by 2013 and “freeze spending on all nonmilitary discretionary spending for one year,” Griffin says, while also reducing or eliminating subsidies for agribusiness and oil companies.

Employers and the Obama plan
    By contrast to McCain’s approach, Obama would create a national health plan and a health insurance exchange in which private plans would be available only to people who have no access to group coverage. Employers who do not offer “meaningful” coverage or make a “meaningful” contribution to the cost of their plan would be required to pay a percentage based on their payroll to help fund national health care.

    Speaking to employers in July, Obama health care advisor Michael Millenson said the Illinois senator would “guarantee health coverage for all Americans” by building on the existing system.

    Many health care economists believe Obama’s plan would do more to cover the uninsured. The Obama campaign says his plan will eventually cover all but 2 percent of the uninsured, or about 46 million people. The Tax Policy Center of the Urban Institute and the Brookings Institution says the number of uninsured would drop by 18 million in 2009 and 34 million by 2018. Millenson said Obama would save employers money because they would no longer have to “cross-subsidize” the cost of caring for those without health insurance. Millenson said Obama’s public plan would have the following features: No one would be turned away for having a pre-existing condition; premiums, co-pays and deductibles would be “affordable”; insurance would be independent of one’s employer; and benefits would be similar to those offered to members of Congress.

    The plan would be available to Americans who do not have employer coverage and are not eligible for Medicaid, the health insurance for the poor and disabled, or for the State Children’s Health Insurance Program.

    Some observers worry that individuals will leave employer plans for cheaper public plans, which would make employers look as if they were not doing enough to provide affordable and comprehensive health benefits to employees.

    And what constitutes a “meaningful contribution” to “meaningful coverage” has not yet been determined. The Obama campaign also hasn’t specified what size companies would be forced to pay or play.

    “The devil is in the details, and there just isn’t enough detail,” Fronstin says. Still, he believes that a law requiring employers to provide health care or pay into a health care system won’t keep employers from offering health coverage.

    How much such an expansion in government would cost and whether it would produce anticipated savings remains to be seen. Obama advisors say that by insuring all Americans, each family would save $2,500 a year. They estimate the program’s cost to be $50 billion to $60 billion a year, paid for by letting President Bush’s tax cuts expire in 2010 for people making more than $250,000 a year.

    The centerpiece of Obama’s plan is what he calls the National Health Insurance Exchange. The exchange would set standards defining what constitutes “meaningful coverage” and would be the place where people could enroll in the national plan or purchase a vetted private plan offered by health insurance companies. The exchange would make “the differences among the plans, including cost of ser¬vices, transparent,” according to the campaign’s published platform. In theory, the private plans would have to be competitive with the public plan in order to attract members.

    The looming threat to employers in an Obama-style health plan is a phenomenon that health care analysts call “crowd out.” This unintended consequence occurs when laws create incentives for employers to drop coverage. This can happen when government expands the eligibility for public health programs to the point at which people choose to leave private insurance for cheaper public programs. Crowd out is also a risk when a fine that employers would have to pay for not providing coverage is so low that employers would rather pay it than offer coverage.

    “We believe crowd out is a gateway to increased taxes and an employer mandate,” says Gelfand, of the U.S. Chamber of Commerce. “When employees are not covered by their employer, the government believes the employer is not spending enough on employees and seeks to alleviate that.”

    In a worst-case scenario, crowd out could lead to the same problem that critics see in McCain’s plan: employers unable or unwilling to provide health care to a limited number of sicker employees.

    The Obama plan has a clear precedent in a current system in Massachusetts. In 2006, the state passed a universal health care law requiring individuals to purchase health insurance. A new public plan was created to subsidize the coverage for lower-income workers. Employers that do not offer a plan and contribute to the cost of insurance for employees are required to pay $295 a year per employee into the public plan.

    Researchers have concluded that the Massachusetts program has enjoyed the support of employers, with few signs of crowd out among small employers, the group least likely to offer health insurance.

    In a February article in the journal Health Affairs, the authors wrote, “Small Massachusetts firms are no more likely than firms nationally to consider dropping coverage or restricting eligibility in the next year, and the percentage of firms planning to do so is very small [3 percent and 5 percent, respectively].”

Common Ground
    Despite the differences, both campaigns acknowledge common policy ground. Both candidates highlight the need for price and quality transparency as a way to make health care spending more efficient. The campaigns also say they want to pay doctors based on their effectiveness as caregivers, rather than simply for the services they provide regardless of whether they are appropriate or improve a person’s health.

    Both candidates say they will invest in wellness and prevention. McCain would likely focus on expanding coverage of preventive care with high-deductible plans, health care experts predict. Both McCain and Obama have said they would attempt to increase reimbursement for doctors who successfully implement disease management programs. Both would invest in creating a health information technology infrastructure, though only Obama has said specifically that he would invest $50 billion in health IT over five years.

    Both talk about reforming medical malpractice laws, a traditionally Republican cause that has been highly polarizing in past elections.

    And both candidates talk about investing more money in reimporting drugs from cheaper markets and in reinsurance programs that would cover the most catastrophic health care cases, ultimately defraying the cost of health insurance for small employers and individuals with pre-existing conditions.

Election is only the beginning of reform
    Changing the American health care system—the most expensive per capita in the world and one that leaves as many as 46 million uninsured—will take more than platforms and campaign promises. Just because Obama has pledged to insure all Americans by the end of his first term doesn’t mean that will happen. Just ask President Clinton, who, in 1992, made a similar pledge only to find his mandate for change gutted by the backlash to what critics dubbed “HillaryCare” in 1993 and 1994.

    Republican voters, meanwhile, are half as likely as Democrats to identify health care as a top election issue, according to a Kaiser Family Foundation poll in June. This could mean McCain’s plan to create tax credits for people who purchase coverage may never make the jump from proposal to policy, especially if Democrats widen their control of Congress.

    While health care is among the top domestic causes for many Americans, according to multiple polls, such priorities change. In June 2007, health care was the top domestic issue for voters and was second overall after the Iraq war, according to the Kaiser Family Foundation. In the poll a year later, with gas at $4 a gallon and the economy slumping, health care ranked fourth behind the economy, Iraq and gas prices.

    One of the best things the campaigns communicated with employers during the Chicago forum in June was their recognition that employers, as providers of health coverage for 160 million Americans, have a role to play in the health care debate and its policies.

    “There are forward-thinking but realistic people in the business community who want to be involved,” says Wayne Lednar, chief medical officer for DuPont.

    Employers, though, should recognize that the election is only the beginning of a health care reform effort. Any candidate, or president, whose plan “goes through Congress and has cost controls that take away money from any interest group will find Congress has plans of its own,” says Obama health care advisor Millenson.

    Josef Reum, associate professor in the Department of Health Policy and the Department of Health Services Management and Leadership at George Washington University, calculates that there are nine lobbyists for every member of Congress and 50 people employed by lobbyists for every member of Congress.

    “If there’s any candidate that gets up and says, ‘This will fix it,’ well,” Reum says, “they’re lying to you.”

Workforce Management, September 8, 2008, p. 28-35Subscribe Now!

Jeremy Smerd writes for Crain’s New York Business, a sister publication of Workforce Management.

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