An Analysis of Senator John McCain's Health Care Reform Plan By Robert Laszewski

Robert Laszweski has been a fixture in Washington health policy circles for the better part of three decades. He currently serves as the president of Health Policy and Strategy Associates of Alexandria, Virginia. Before forming HPSA in 1992, Robert served as the COO, Group Markets, for the Liberty Mutual Insurance Company. You can read more of his thoughtful analysis of healthcare industry trends at The Health Policy and Marketplace Blog.

John McCain's campaign reinvigorated, I am reposting my earlier analysis of his health reform plan.

McCain very rightly points to health care costs as the biggest issue, "We are approaching a 'perfect storm' of problems that if not addressed by the next president will cause our health care system to implode."

Therefore, his focus  is on the health care costs that make health insurance so expensive that individuals can't afford it for themselves, employers can't afford to provide it to their employees, and government can't afford a wider safety net for the poor. He also reminds us that costs can't be improved without dealing with quality in tandem. so expensive that many

Senator McCain's health plan clearly reflects a belief that we need to put as our first priority getting at the things that make health care so expensive and frustrating for consumers rather than, as he would put it, promising everyone a painless access to a system that isn't working.

In his words:

"For all the grandiose promises made in this campaign, has any candidate spoken honestly to the American people about the government's role and failings about individual responsibilities? Has any candidate told the truth about the future of Medicare? Its costs are growing astronomically faster than its financing, and leaving its structural flaws unaddressed will hasten its bankruptcy. Has any candidate warned that we have a personal responsibility to take better care of ourselves and our children? Yet that is the only way to prevent many chronic diseases. Has any candidate insisted that genuine and effective health care reform requires accountability from everyone: drug companies, insurance companies, doctors, hospitals, the government and patients? Yet that is the truth upon which any so-called solution must be based.

“Democratic presidential candidates are not telling you these truths. They offer their usual default position: If the government would only pay for insurance everything would be fine. They promise universal coverage, whatever its cost, and the massive tax increases, mandates and government regulation that it imposes. I offer a genuinely conservative vision for health care reform, which preserves the most essential value of American lives — freedom.”

So, how effective would Senator McCain's plan be in making health care, and insurance, affordable and better? Let's take a look at his very brief outline:

Allowing people to buy health insurance nationwide instead of limiting them to in-state companies.

His focus here is on making individual health insurance lower in cost so people can buy it. Creating one national health insurance policy form which would save insurers the need to comply with insurance regulators in each of the states would make things more efficient. However, this tackles only the non-medical expense portion of a health insurance policy and only a small part of that. Non-medical policy expenses increase each year with inflation--maybe 3% a year--while by far the larger individual health insurance medical costs have been trending at 10% or more in recent years. While making the distribution of insurance more efficient is a good thing, it is the far smaller part of the problem--and it's a one-time fix.Often when we hear of these proposals, we also hear that the states should continue to do the consumer protection work since they tend to be closer to their citizens than one big national regulator could ever be. McCain is not clear on this.

In this context, we also sometimes hear proposals to give insurance companies greater freedom to set policy and rating provisions (Romney has suggested this). That begs the question, would McCain allow insurers to have greater flexibility in rating the healthy versus the sick and continuing to be aggressive in applying pre-existing condition provisions?

It will be most important for McCain to make the individual health insurance system more workable than it is now. Today, healthy and young people can get very cheap policies. But if you are 55, an individual policy can cost more than $10,000 for a couple. If you are 55 and have hypertension, or diabetes, or heart disease, you won't get any coverage.

It is not clear how Senator McCain will make the individual market more viable and robust beyond dealing with these marketing expenses.

Permitting people to buy insurance through any organization or association they choose as well as through their employers or buying direct from an insurance company.

Here Senator McCain endorses a vibrant insurance market as a way to use competition to meet the very different needs one consumer has compared to another. The buzz words we very often hear in regard to this point are, "choice" or "freedom of choice." These are all good principles but he does not answer the issues I outlined above about just how people will know they will have access to an affordable health insurance policy given the issues of rating, medical underwriting,  and pre-existing conditions.

He clearly says that the employer market would be a part of his future system.

His mentioning of  associations as one way to purchase health insurance reminds me of the big debate we had a few years ago in Washington about letting trade associations offer their own health plans and exempting them from certain rating and underwriting laws. That debate led many to believe that brand of association heath plans would take us back to "cherry picking." Senator McCain needs to clarify what he means here.

Providing tax credits of $2,500 to individuals and $5,000 to families as an incentive to buy health coverage.

This provision is not unlike the proposal made by President Bush at this year's State of the Union Address. The President called for ending the longstanding tax exemption consumers get on any health insurance benefits paid for by their employer. The President would replace that with a standard $7,500 deduction for individuals and a $15,000 deduction for families.

McCain would also end the employer tax exemption--meaning that if your employer spends the average $12,000 a year on family health insurance for you, you would now have a tax bill on $12,000 of benefits.

Like Bush, McCain would offer a tax offset but he would do the new offset a bit differently than Bush---who would give a family a new $15,000 deduction on their personal return. McCain would give each single person a $2,500 tax credit and a $5,000 tax credit for a family. A tax credit means that when you calculate your taxes, instead of taking a deduction as Bush would do, you just subtract the amount ($5,000 for a family) from your final tax bill (and you would likely be able to take advantage of it during the course of the year to pay your monthly premiums).

By exchanging the longstanding tax deduction for this tax credit McCain swaps money around and creates what should be a revenue neutral scheme in the short term. President Bush's budget numbers actually showed a lower cost program in the long-run as health care inflation out-striped his new deductions. Senator McCain did not provide financial projections.

If you are in a 33% tax bracket, it works out the same. But, McCain's way of doing it helps low income people the most. If you are in a 15% tax bracket, a $15,000 tax deduction is worth only $2,200 off your taxes toward your health insurance bill. By making it a flat $5,000 for a family, McCain is giving low income people more and high income people less--consistent with a progressive tax policy strategy.

However, the real question is, will McCain's plan give you enough to buy health insurance? With the average cost of employer-provided family health insurance at $12,000 a year a $5,000 tax credit will often come up way short--especially for higher age people and those who don't have the benefit of an employer contribution. High deductibles and HSA plans will help but families who don't have employer contributions should be prepared to pay at least a few thousand extra dollars.

He calls for the states to develop a "risk adjustment" bonus for high cost and low-income families to supplement tax credits and Medicaid funds. But just who will pay for this (the states alone?) and how it would close the cost gap is not explained.

Families who have an employer paying a large part of their health insurance costs may actually come out ahead--at least in the early years before health care inflation erodes some of the tax credit's impact.

This kind of structure is also designed to encourage the individual market over the traditional employer-based market that many conservatives believe has led to employer plans that are too rich and shield consumers from the true costs--all of which contributes to overspending and the high health care costs we have. With the tax benefit of health insurance moving to the individual, the employer arguably has a smaller incentive to continue providing these benefits. Many employers may simply say, "Here's the money I was paying--go find your own coverage." It may just be easier for the employer to drop the coverage and freeze his contributions.

McCain does not have a mandate to buy insurance for individuals or employers. So, people can still opt to go without coverage.

Again, the big question is how does McCain see his individual health insurance market working? How will he deal with age rating, medical underwriting, and pre-existing conditions? If McCain does not develop an individual health insurance market everyone can access, no matter how old they are or how sick they are, his scheme will fall way short.

Allowing veterans to use whatever provider they want, wherever they want by giving them an electronic health care card or through another method.

McCain has always had a special place for veterans and his health plan is no exception. While his goal of giving veterans access to any provider is noble, it will also be very expensive and there is no mention of what he estimates the costs will be or how he will pay for it.

Supporting different methods of delivering care, including walk-in clinics in retail outlets across the country.

McCain makes the common sense suggestion here to deliver care in more efficient places. However, there is no estimate for just how much this would save. It's like his health insurance proposal to cut administrative costs--a good idea on the surface but likely relatively small in scope. It is also not without controversy as the physician lobby has been opposing walk-in clinics that use nurse practitioners rather than physicians to deliver care.

Developing routes for cheaper generic versions of drugs to enter the U.S. market, including allowing for save reimportation of drugs.

In fact, drug "reimportation" from Canada has dropped in half from its height a few years ago. With Part D, seniors are now able to get prescription drugs, in great part because of the managed care discounts that underly the plan, for a lot less than before the program. Generic drugs are already very cheap and readily available. It is not clear how McCain sees any major savings here. It is also not clear to what degree this free market conservative would use drug "reimportation" schemes to use the single-payer systems in places like Europe and Canada to negotiate his drug prices ("allowing for safe importation of drugs"). If he believes using the Canadian government to negotiate drug prices, why not the U.S government?

Revamping Medicare payment systems to pay providers for diagnosis, prevention and care coordination without paying them for preventable medical errors or mismanagement.

McCain would use the Medicare program to lead the market in the development of a system of bundled service payment--often referred to as "coordinated care". Effectively, he would create a budget for each treatment program thereby putting providers at risk for delivering the care effectively and efficiently. He's really talking about pushing the market back toward capitation as  a means of controlling costs. This may be the only real cost containment proposal that any of the candidates, Democratic or Republican, have made.

However, as we learned, when capitation was in vogue in the mid-1990s, it is hard to do and providers push back.

Senator McCain is a big believer in the value of "coordinated care." The Kaiser Permanente medical group is a good example of a system of coordinated care. In fact, lots of data points to that as the best provider model to follow for both cost and quality. Many doctors love it and most don't want to be "managed" by it.

This McCain payment system proposal needs to be developed further and McCain will have to show us how he is going to get the broad provider community to allow themselves to be put at risk once again.

If the cheapest way to get high quality care is to use advances in web technology to allow a doctor to practice across state lines, then let them.

His proposal to let doctors practice across state lines is another idea that makes sense. However, it will be the physician community looking to protect their markets that will question this on quality grounds.

We cannot let the search for high-quality care be derailed by frivolous lawsuits and excessive damage awards. We must pass medical liability reform, and those reforms should eliminate lawsuits for doctors that follow clinical guidelines and adhere to patient safety protocols.

Senator McCain also favors medical malpractice reform that would place a cap on the damages a patient can collect. This traditional approach to tort reform went nowhere when George Bush and his Republican Congress pushed it when they controlled the government between 2001 and 2006. So long as at least 40 Democrats are in the U.S. Senate--almost a certainty during any McCain presidency--his medmal proposal will also go nowhere.

McCain would go further on tort reform by eliminating law suits to doctors that followed established clinical guidelines and adhered to patient safety protocols--a good idea. But here again, the details are difficult and getting agreement among doctors about "appropriate protocols" has been a struggle. The trial bar will also likely expect their Democratic allies to block it.

Senator McCain has also called for a greater use of health information technology to confront the cost and quality problems. So have about all the other Democratic and Republican candidates. While this is a good idea, these efforts have been underway in the U.S. health care system for many years. It has been slow going because like every other effort to control health care costs its always harder to do then it first sounds.

And like all of the other Democrats and Republicans he would promote disease prevention, healthy diets and exercise. But, like all of the other candidates, exactly how would he be any more effective in this regard?

So, how does Senator McCain come out toward his objective of dealing with health care costs and quality?

Will the McCain Proposal Work?

Like all of the other presidential health care proposals, this is a political proposal in outline form--well short on details.

We will need a great deal more detail than a few bullet points. But generally, Senator McCain has prompted many more questions than he has provided answers.

His program won't cost a lot since most of his spending comes from rearranging the existing tax exemption on employer-provided health insurance. But it is not at all clear how he would give the individual health insurance market the fundamental overhaul it would need to become the primary insurance market he would make it. Age rating, medical underwriting, and pre-existing conditions are on top of that list of overhaul questions.

He also needs to show us how a $5,000 tax credit will give a near-poor family enough assistance to buy a health insurance policy with meaningful benefits when the average cost of employer-provided care is $12,000 a year. Even HSA-style employer-based plans still develop costs in the $10,000 area. Cheaper plans are available to young and healthy people in the individual market but it will be the sick and old we will need to hear more about. Beware of claims that cheap individual insurance is already available--it is if you can pass medical underwriting.

He says that cost containment and improved quality are essential to a sustainable system--and he is clearly right on that point. But he has very little in the way of cost and quality improvement in his outline. The primary proposal here is to put providers at risk in Medicare by taking us back to the days when the market believed the same thing and unsuccessfully tried to implement capitation.

His system would also take many years to implement before it finally begins delivering the benefits he believes it has the potential to give us. How would he manage the transition and what would we do with 47 million uninsured in the meantime?

My sense is that his plan is a patchwork of largely good ideas. It is hard to see how he would focus a national initiative toward accomplishing so many disparate goals. Make no mistake, I am not suggesting the big government program he disdains. But I will suggest he needs a cohesive approach.

He makes a good point when he says we need to fix the cost and quality problems before we just load tens of millions more people on a dysfunctional system. OK. But he needs to fix the problems quickly or justify why so many have to wait outside the mainstream care system while the work is underway--perhaps for years.

Mr. McCain's health care proposal is one that will appeal to conservative Republican voters more than centrists or certainly liberals. But it is the conservative Republican voter he is fighting for in the primaries.

If that is the current standard for him--really to survive the contest for Republican votes and go on and win the Republican nomination--then this proposal will help him in that effort.