Economy & Budget

HillaryCare Redux?

In early 2006, then-Massachusetts Gov. Mitt Romney signed into law a bill to reform the state’s health care system. Romney touted the law as an ambitious reform that assigns responsibility to the individual and uses marketplace incentives to provide affordable health insurance to all state residents without new taxes or a government takeover. The law attracted extravagant media attention.

As the health care “reform” bandwagon gathers momentum, interest groups and labor unions are eagerly jumping onboard, and announcements of new “coalitions” for health care are popping up everywhere. In January, Families USA, the liberal interest group that played an important role in promoting the Clinton Administration’s failed health scheme, publicized its new “Health Coverage Coalition for the Uninsured” (HCCU). One month later, the Service Employees International Union (SEIU)—the union representing a large percentage of the health care workers in the U.S.—established “Better Health Care Together” (BHCT), its own coalition for health-care reform.

For conservatives, it must seem like HillaryCare redux. This time, however, the reform effort is different in one important respect. In 1993-94, many industry groups opposed the attempt to nationalize America’s health care system. In 2007, industry groups are tripping over each other in their rush to endorse plans for more government involvement.

Who Wants It, and Why?

Membership in HCCU, which is the Families USA coalition, is a very select assembly of 16 “signatory organizations.” It includes AARP, the liberal lobby that poses as a seniors’ advocacy group. Insurance giants Blue Cross Blue Shield, Kaiser Permanente, and UnitedHealth Group have also signed on, along with America’s Health Insurance Plans, the trade association for health insurers, and pharmaceutical giant Pfizer. It’s worth noting that AARP announced in April that it was entering the health insurance business and intends to become the largest provider of private insurance to Medicare recipients.

But guess what? The U.S. Chamber of Commerce also backs HCCU. So does the American Academy of Family Physicians, the American Hospital Association, the American Medical Association, the American Public Health Association, the Catholic Health Association, the Federation of American Hospitals, the Healthcare Leadership Council and the medical products conglomerate Johnson & Johnson.

BHCT includes the Communications Workers of America and the Center for American Progress, a liberal Washington, D.C. think tank. But BHCT also has its own business supporters, including AT&T, Intel and Kelly Services, Inc., as well as the business-backed Committee for Economic Development. That these corporations would enlist in a union-sponsored lobbying effort is odd enough, but jaws dropped with the announcement that Wal-Mart had joined the SEIU partnership.

The liberal-labor/corporate coalition does not appear to be based on any financial quid pro quo. Instead, it’s clear that major corporations have joined these coalitions because they expect government-enacted health care reform to reduce their own costs.

To be fair, it isn’t all about the “bottom line.” No doubt, the companies have legitimate worries. They know many Americans are uninsured and many more are growing anxious about rising health insurance costs. But can the Families USA and SEIU proposals fix the health care system? A closer look at their ideas suggests that they do little more than extend the reach of ongoing government policies that are responsible for our current health care mess. Should the advocacy strategies of the HCCU and BHCT coalitions succeed, they will only make matters worse.

Truth About HCCU

Families USA is a relentless and politically savvy advocacy group that campaigns for more government involvement in health care. Established in 1982, Families USA first achieved public prominence during the 1992 presidential campaign when it offered health care policy advice to then-Arkansas Gov. Bill Clinton. But unlike other activist groups, which demanded enactment of a Canadian-style single-payer system, Families USA was pragmatic and eager to be a player in the political process. Clinton sought out the group to learn more about the health care policy concepts then promoted under the oxymoronic name “managed competition.”

As reported by Time magazine, Families USA Executive Director Ron Pollack first briefed Clinton about managed competition at a Holiday Inn in East Lansing, Mich., Sept. 22, 1992. Pollack told Clinton, “You could strike a populist chord by helping business lower costs, by providing Americans with cradle-to-grave coverage and by standing up to such special interests as doctors, drug companies and insurance firms. Best of all, the plan created no new taxes.” Clinton loved it.

Families USA served candidate Clinton by coordinating the details of its “bipartisan” health care plan with the health care proposals of the Clinton campaign. After the election, the pressure group served President Clinton by building a coalition of 184 special-interest groups to demand passage of its proposal, which Clinton essentially had made his own.

Despite the failure of the Clinton health package, Families USA has continued as a high-profile player in the battle over health care reform. Since George W. Bush became President, it has strongly criticized market-oriented reforms such as Health Savings Accounts and proposals to permit consumers to buy health care insurance out of state. It supports legislation allowing Medicare to negotiate prescription drug prices, and it urges states to pass laws to require employers to pay for their employees’ health insurance.

The HCCU goal, announced on the Families USA website, is “to cover as many people as possible, as quickly as possible.” The strategy focuses first on children. HCCU proposes to expand two programs: Medicaid, the state/federal health insurance program for the poor, and the State Children’s Health Insurance Program (S-CHIP), a government health insurance program for children whose parents earn too much to qualify for Medicaid. HCCU wants children to be automatically enrolled in Medicaid/S-CHIP whenever their parents apply for any means-tested program such as free school lunches or food stamps. And if their income is too high to be eligible for S-CHIP, then parents would get a new tax credit for buying their children insurance.

Next are uninsured adults. The coalition proposes to increase Medicaid funding so that all poor adults have government health insurance, and it gives a tax credit to adults who don’t qualify for Medicaid but earn up to 300% of the poverty level, which is currently about $28,000 for a single adult.

Members’ Motives

It’s not hard to figure out why some HCCU members favor these proposals: They know that Medicaid and S-CHIP often have the lowest reimbursement rates among health insurance programs, whether public or private. According to the American Hospital Association, Medicaid reimburses only 87 cents for every dollar hospitals spend on Medicaid patients. Funneling more tax dollars into these programs would increase reimbursements to doctors and hospitals and probably encourage more prospective patients to seek medical care.

The motive of other coalition members is less obvious. For instance, why would Pfizer join a coalition organized by Families USA, which has a history of accusing pharmaceutical companies of price-gouging?

Yet it is not unprecedented for Pfizer to support government programs. Pfizer supported the Bush Administration’s 2003 Medicare prescription-drug program, which gave seniors and companies an incentive to drop private insurance for government-sponsored drug coverage at subsidized prices. A program that expands Medicaid/S-CHIP benefits would also benefit pharmaceutical companies.

As for the insurance companies, while more government-funded health insurance might mean fewer customers, in fact, Blue Cross Blue Shield, Kaiser Permanente and UnitedHealth Group would also benefit from increased Medicaid/S-CHIP funding. According to the Department of Health and Human Services, many people get their Medicaid benefits through managed-care organizations run by private health insurance companies. In 1991, only 2.7 million Medicaid recipients received their benefits through managed care. By 2004, 27 million did. The number of children enrolled in S-CHIP through a managed-care organization is unknown. However, a 2001 report to Congress noted that 43 states use managed-care organizations to deliver S-CHIP benefits, and in 20 states, it is the dominant method of delivery.

Data on UnitedHealth Group, a shareholder-owned for-profit company, are available in its detailed annual reports. The nation’s largest health insurance provider serves about 1.4 million Medicaid and S-CHIP recipients in 13 states. In 2006, its Medicaid premiums increased to account for $3.7 billion of UnitedHealth Group’s total $71 billion in revenue. Health insurance providers don’t benefit when more and more of their premium payments go to pay patients’ medical bills. But the insurance companies in HCCU are betting that more Medicaid/S-CHIP funding will expand their managed-care networks of doctors and hospitals. The benefits are even greater when income-eligibility standards are loosened.

Indeed, the correlation between income and health status shows poorer people are on average less healthy. Hence, the greater the pool of people of higher income covered by the program, the lower the risk that the insurance companies will bear inordinate high-cost medical expenses. That’s a lesson insurance companies well understand, and it explains why they favor looser program eligibility.

BHCT’s Strange Bedfellows

The SEIU has long championed “universal” health care. It boasts a membership of more than 1.8 million workers, most of them working as low-paid caregivers in hospitals and nursing homes, as office-building janitors and security guards, and in public-service jobs. SEIU recently launched an effort to unionize Wal-Mart workers through a nationwide smear campaign against the business. Alleging that Wal-Mart is exploiting its 1.3 million workers by not giving them adequate health care is a key part of its public relations offensive.

Imagine then the disbelief on all sides when SEIU and Wal-Mart appeared together at a February 7 press conference in Washington to announce a new partnership to fix the national health care system.

Just as the proverbial Baptists and bootleggers came together to support Prohibition — but for different reasons — so, too, SEIU and Wal-Mart may each have its own reason for issuing a common appeal for more government involvement in health care. It’s implausible to think Wal-Mart joined BHCT to become a “good corporate citizen” or to appease SEIU, a naïve strategy in either case. Wal-Mart executives have a different motive and CEO Lee Scott called attention to it at the press conference: “Businesses should not share a disproportionate share of the [nation’s] health care cost.”

BHCT elaborates on this “Health Principle”: “We believe that businesses, governments and individuals all should contribute to managing and financing a new American health care system.” The website further states: “Government must play a stronger role in ensuring the availability of affordable, quality health coverage. Financing seamless coverage under such a system should be a shared responsibility. We believe it is not in America’s economic interest to have a disproportionate share of health care costs borne by business and workers. This hurts wages, job creation and global competitiveness.”

Of course, whenever a labor union says government “must play a stronger role,” it means taxpayers should pay the bill—but that is also what Wal-Mart and other corporate executives appear to want. Their concern is understandable even if their solution is not. According to research by the Kaiser Family Foundation (not affiliated with Kaiser Permanente), premiums for employer-based coverage have risen annually by an average of 10.5% since 2000. With costs rising, companies face the choice of either dropping coverage or paying more for health insurance.

What Makes Insurance Expensive?

The business, labor and nonprofit groups that joined the HCCU and BHCT coalitions may have different reasons for wanting more government control over health care. But they all focus on one point of concern: “the uninsured.” The “fact that 47 million of our neighbors lack health insurance is a national disgrace,” observe the labor and business groups in the BHCT. This number, reports an HCCU press release, is “more than the aggregate population of 24 states plus the District of Columbia. It amounts to more than 15% of the population or more than one in seven Americans.”

These figures are constantly repeated, but they exaggerate the problem. For instance, they don’t distinguish between people, many of them young and healthy, who are between jobs for brief periods from those who are “chronically” uninsured (i.e. for a year or more.) When the Congressional Budget Office (CBO) took that factor into account, it tabulated the uninsured at between 21 and 31 million. In addition, people who make enough money to afford health insurance but don’t buy it are counted as uninsured, and so are those who could be included in their employer-based coverage but for various reasons choose not to do so. Further, the Census Bureau and the CBO fail to take into consideration people who are eligible for Medicaid but have not enrolled in it as well as people who receive Medicaid, but don’t admit it. All these groups are dumped into the “uninsured” category. Health policy analysts who have taken these factors into account conclude that the true number of uninsured is more likely between 8 and 10 mil
lion.

If it’s doubtful that the population of the uninsured is responsible for the increase in the cost of health insurance, then there is also reason to doubt the financial costs the uninsured impose on the rest of us. According to the most recently compiled data, the Urban Institute calculated that in 2001 the uninsured used about $34.5 billion in “uncompensated” health care (i.e. costs not paid out of pocket or by an insurer). In inflation-adjusted 2005 dollars, that would be about $40.8 billion. That’s very little in a nation that annually spends almost $2 trillion on health care.

Impact of the Tax Code

The real culprit for rising health insurance costs is the U.S. tax code. Our tax laws give employees an unlimited tax break for the cost of health insurance as long as their employers provide it as a benefit. This encourages employees to select the most expensive policies that provide “comprehensive” coverage and often leads to the overuse of health care, which puts upward pressure on prices. Employers benefit, too. They lower their salary costs by compensating workers with health insurance purchased at lower group rates. The losers are the self-employed or those who work for employers who don’t offer health insurance: They often pay much higher individual rates with after-tax dollars.

President George W. Bush offers one way out of the box. In his 2007 State of the Union address, he proposed to offer individuals and families a tax deduction of $7,500 and $15,000, respectively, for the purchase of health insurance, no matter what the cost of the policy. The proposal lets individuals, not employers or government, determine their health insurance needs. Moreover, buying a policy that costs less than the full deduction puts tax-free money in the individual’s pocket, thereby discouraging the over-consumption of health care. But don’t expect Families USA or the SEIU to organize a coalition for this proposal.

Greater Demand

Another reason that health care is expensive is that our current health insurance system, in place since World War II, shifts responsibility from the individual to the employers and the insurer. Workers expect their employer to pay for health insurance and they expect the insurer to pay for all their health care expenses, big and small. This system has exacerbated the rise in costs. In 1965, about 48% of what Americans spent of health care was spent out of pocket. By 2006 the amount was down to just more than 12%. When employees have to pay only a tiny slice of their health care expenses directly, they have no incentive to curb their appetite for health care. That leads to higher prices for health care and health insurance, and it removes most of the competitive pressure from providers.

One way to deal with the consumer problem is to expand access to Health Savings Accounts (HSAs) and high-deductible health insurance policies. Under this system an HSA helps people pay for health care costs up to the deductible—at least $1,000—at which point the insurance company starts paying for health care expenses. An HSA is a tax-free savings account in which an individual can put money to pay for lesser health care expenses.

This has two benefits: It encourages patients to behave as “health care consumers,” shopping for price and paying only for health care that is genuinely necessary. And it encourages doctors and hospitals to compete for patients, which leads to innovation, better quality and lower prices. But don’t bet on HCCU or BHCT to support an expansion of HSAs either.

Both Families USA and SEIU say they want to hold down the costs of health care, yet at the same time both are committed to policies that pump up demand for health care. Without recourse to the price mechanisms of the market, these promises can never be met. Increased demand raises the price of health care, which increases the price of private sector health insurance. As the price of health insurance increases, fewer people will be able to afford it, which adds to the ranks of the uninsured.

Unintended Consequences

Supporters of an effective health care delivery system for all Americans face daunting new foes. Liberal advocacy groups such as Families USA and labor unions such as SEIU have always favored more government-run programs, but they are now joined by powerful business interests.

The corporations that have joined Families USA in the HCCU coalition and SEIU in the BHCT coalition are legitimately worried about their rising health insurance costs. As profit-maximizing firms, they are motivated by a central feature of the free market: the principle of rational self-interest. But in collaborating with Families USA and SEIU to build a political coalition to reduce their cost burdens, they should remember another of the free market’s lessons: the law of unintended consequences. n


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