Why Healthcare Reform Will Fail (Again)

In Washington this time of year, thoughts turn to getting the hell out of Dodge for climates not shaped by former swampland.  The coming weeks will be decisive for the fate of healthcare reform, as members of Congress go home to hear from constituents, interest groups dig in for the coming battle royale, and the press looks for something to cover other than kidnappings and hurricanes.  Healthcare reform is now as close to passing as it has ever been in modern America.  But I'm going out on a limb and predicting it will fall short again.

From the beginning, reformers have been most interested in expanding coverage to the uninsured and only secondarily interested in bending the cost curve.  But adding coverage costs lots of money.  Even absent coverage expansions, as current Office of Management and Budget director Peter Orszag made clear while director of the Congressional Budget Office, healthcare costs threaten to explode the federal budget.  Trying to expand coverage without addressing this explosion—indeed, making it much bigger—was never going to be an option politically.  (You think the Blue Dogs and Senate Finance Committee Republicans are dissatisfied now?)

The problem is that the evidence on how to reduce health spending either doesn't exist or involves policies such as greater cost-sharing that are unattractive to progressives.  Instead, reformers lashed themselves to evidence from Dartmouth researchers that much of what Americans spend on healthcare is wasteful.  From this conclusion, the solution that suggested itself to reformers was that to control costs, the delivery of care should be rationalized in some way that at the very least will require federal incentives.  And here the reformers pinned their hopes to a number of policies that came to be known as "game-changers": health IT and medical records, comparative effectiveness research, and a public plan with strong bargaining power against providers.

But they were unduly hopeful.  CBO crushed their strategy by declaring these first-wave game-changers not very game-changing at all.  This blow led to a scramble to find other game-changers.  Suddenly "IMAC"--an independent commission that would make decisions about Medicare reimbursement--and taxing overly generous health plans became the ideas for savings that would allow healthcare reform to succeed.  But then CBO last week poured cold water on IMAC, saying that it had a high probability of not saving much at all.  (At any rate, it was always unlikely that Congress was going to cede authority over Medicare spending policy.  Plus, all the factors that prevent Congress from cost-cutting in Medicare today would work toward pressuring them to overturn IMAC decisions, making cuts unlikely.  Plus the whole IMAC idea raises the threat among skeptical voters of rationing by a body that is relatively unaccountable to the public.)  

Progressive Democrats balked at taxing workers for generous health plans because many of those workers are union members.  This fall, look for John Kerry's proposal to tax insurance companies when they offer too-generous plans to get a boomlet of discussion—but then look for it to fail for the same reason that taxing workers failed.  The idea that insurers will absorb the cost of the tax rather than pass it on to workers is a fantasy, and unions will see this.

Ultimately, the reformers' game-changer strategy suffered from two additional problems.  First, the inefficiencies in American health care are not the driver of cost increases – they just make levels higher.  If we could somehow root out all inefficiency, that would be a one-time cost savings but would still leave the cost-curve unbent.

Second, insured Americans prefer maximal choice with inefficiency rather than ceding power to the federal government to limit their choices (even if the result is more efficiency).  To be sure, they don't like that anyone limits their choices, whether it's the government, their employer, or their insurance company.  When insurers tried to move toward more managed care in the 1990s, workers rebelled and insurers gave up.  As for employers, they knew better than to push their workers in this direction.  And despite the myth that employers have resorted to more and more cost-shifting to workers, what has actually happened is that employers pay as great a share of their employees' insurance as they did 20 years ago, but at the expense of wages and salaries (see page 8 of the linked chapter).

Reformers appealed to the insecurity of insured Americans that they might lose their coverage.  They also appealed to dissatisfaction with the status quo.  The problem is that anxiety about losing coverage is relatively modest--with not many more people concerned about it than are worried about crime or even dangerous errors while flying (page 20).  And polls show that the majority of the insured is happy with everything about its care except for rising costs.

Ultimately, progressive healthcare reform offered the insured highly uncertain promises that their costs would go down and that their current coverage would not otherwise be affected.  The latter claim was disingenuous—regulating insurers is sure to shift costs between the healthy and the unhealthy, the young and the old, the rich and the poor.  In New York, younger workers saw huge increases in premiums when community rating was instituted.  And those whose benefits would be taxed would either pay more or lose that coverage for cheaper plans.  Meanwhile, for those uninsured by choice, progressives offered to increase their taxes on April 15 though a fine unless they spent their limited dollars on health insurance.  

Progressives bemoan the fact that the healthcare system today rations by ability to pay, but rationing by willingness to pay is likely to be the only way that we will control health spending.  Federal limits on healthcare choices will never command enough popular support to ensure that 60 Senators enact game-changing reform.  Employers will continue choosing to invisibly make their workers pay for costly coverage by limiting wage growth rather than explicitly make their workers pay for it.  Insurers will never have the bargaining power to bid down reimbursement to providers enough to matter.

If progressives want to get serious about universal coverage, they will need to get serious about cost control.  And that is likely to require that we stop the unequal treatment of health benefits versus wage and salary compensation and unequal treatment of health insurance when provided by employers or unions versus purchased individually or through other means (page 33).  Changing the tax status of employer-provided health insurance should not be a source of revenue for healthcare reform; it should be coupled with offsetting tax cuts.  The federal government can make it easier for individuals to band together in insurance pools and can even sponsor such pools.  It can subsidize the poor and sick.  But then we should let markets work, and individuals will need to choose between more generous coverage and cost-reducing rationing of care.  If we choose more generous coverage, then who cares about bending the cost curve?  But then we will have no one to blame for rising costs.  If we choose less generous coverage, then we will have rationed our own care by choice.

In the end, reformers may get an expansion of Medicaid or SCHIP for their efforts--though probably not unless the feds subsidize states at an enhanced rate, given the governors' opposition to taking on more costs when their budgets are in such a mess.  But I'm betting that come 2010, we will have lost another opportunity to do a lot of good by not facing up to hard political and economic realities.