Kerrycare: Your Money or Your Life?

Commentary by John C Goodman

John Kerry wants your money and your life. He has proposed a bold new health plan with a 10-year cost in excess of $1 trillion, to be paid in part by rescinding President Bush's tax cuts for the highest-income taxpayers.

Mr. Kerry is seeking to completely transform the health-care system. The changes are far more radical than even he has let on. If he is successful, millions of middle-income families will enroll in Medicaid, the federal-state health program for the poor. Millions more will get their insurance through a system of managed competition, similar to what Hillary Clinton proposed more than a decade ago. Most people would be unable to remain in the private health plan they have today.

The ostensible purpose of the proposal is to insure the uninsured. By some estimates, as many as 44 million people lack health insurance at any one time. The Kerry goal is to insure about two-thirds of them.

There are no mandates here, unlike in the Clinton plan of years ago. Instead, Mr. Kerry would try to induce people to voluntarily insure with economic incentives. Very little of the spending actually would go to individuals, however. About 90% of the funds will go to state governments, employers and insurance companies. President Bush has proposed tax relief for people who buy their own insurance. In stark contrast, Mr. Kerry's tax subsidies are trickle-down -- people are supposed to get derivative benefits from checks written to others.

For example, the federal government would pick up the state's cost of insuring Medicaid children if the states expand eligibility and increase enrollment; and the government would pay the bulk of the cost of catastrophic health expenses for employers who offer insurance to all employees and cover at least one-half of the cost.

For people who get insurance through the system of managed competition, there would be additional subsidies for small businesses that insure low-income employees, for workers between jobs, and for people age 55 to 64. There would also be a limit on how much insurance could cost (as a percentage of family income) for everyone else who individually enrolls.

How well will all of this work? More than half the money in this plan will be spent expanding Medicaid and the S-CHIP program (for low-income children). Emory University professor Kenneth Thorpe, Mr. Kerry's health adviser, estimates that as many as 26 million new people will be enrolled. However, as the public sector expands, the private sector will surely contract.

Even Mr. Kerry assumes that for every 10 people who sign up, three people will lose private insurance from an employer; and it could be much worse. Studies in the 1990s found that every additional dollar spent on Medicaid led to a reduction in private insurance of 50 to 75 cents. More recent evidence suggests that private sector crowd-out is approaching one-to-one: Each new Medicaid enrollee is offset by one less person with private insurance. Moreover, most of the private sector subsidies will go to people who are already insured; and employers get their subsidies even if they fail to insure a single additional employee. Bottom line: It is entirely possible to spend $1 trillion and achieve no reduction in the number of uninsured!

Quality of care will suffer under the Kerry proposal. People who go from employer plans to Medicaid will have fewer choices of doctors, longer waits for care, and inevitable health-care rationing. Those who join the system of managed competition will experience a different problem: Health plans will face perverse incentives to overprovide to the healthy and underprovide to the sick.

On the surface, managed competition sounds attractive. Each year, people would be able to choose among competing health-care plans, much like federal employees currently do. But the community-rated premiums charged would bear no relation to actual health-care costs. Healthy enrollees would overpay. High-cost enrollees would underpay. Health plans would have strong incentives to provide more services to profitable, healthy enrollees (in order to attract more of them) and fewer services to unprofitable, sick enrollees (in order to attract fewer of them).

Mr. Kerry explicitly rejects national health insurance, and wisely so. Political pressures in other countries cause politicians to skimp on expensive, lifesaving technology even as they overprovide relatively trivial services to people who are mainly healthy. But even though Mr. Kerry would avoid the political pressures of national health insurance, the end result of his plan may be the same because of the economic pressures of managed competition.

Then there are the most important political questions: How much will the plan really cost? And who will really pay for it?

Reading between the lines, one supposes it is very important to Mr. Kerry to have the cost equal the new taxes he would impose on the "rich." In order to keep spending down in the latest 10-year projection, the Kerry team delays implementation for one year, so the first year's costs can be zero. They also claim phantom savings that basically amount to the perennial promise to eliminate waste and inefficiency.

Counting the first full 10 years in operation and only savings that seem likely to be real, I put the actual cost in excess of $1 trillion, almost $1,000 per year for every household in America. Versus the budget Mr. Kerry has promised to balance, this cost is more than three times the new revenue Mr. Kerry hopes to get from high-income earners.

This estimate may be low. The reason: People will face perverse incentives to overinsure and overconsume. For example, faced with virtually no out-of-pocket costs, the 26 million new enrollees in Medicaid will have no reason to show restraint. The bills all go to someone else. Premium caps mean that a poverty enrollee under managed competition will pay no more than $600 or $700 a year, with the remainder paid by Uncle Sam. If they insure at all, they will tend to pick the most expensive plan. Why choose a Volkswagen when you can have an Aston Martin at no extra cost?

Whatever the cost, the plan will almost certainly lead to a new round of health-care inflation. Federal spending alone will increase by more than $100 billion a year. But since there will be no increase in supply, the bulk of this new spending will buy higher prices rather than more health care.

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A major problem with the current system is that tax subsidies for health insurance are arbitrary and unfair. But rather than move to a fairer system that treats equals equally, Mr. Kerry would create a slew of new subsidies that would make the system even more arbitrary. People at the same income level would receive vastly different subsidies depending on their age, where they work and how they obtain insurance.

The structure of the Kerry health plans raises a number of intriguing questions:

  • Why spend billions on subsidies to small businesses if they join an insurance system that doesn't even exist yet, while denying them those same subsidies if they buy insurance that is readily available in the marketplace?
  • Why pay the cost of premium caps and other subsidies to individuals if they buy insurance that doesn't yet exist, while denying them any relief if they buy insurance that is already available?
  • And why spend billions enrolling middle-income families in Medicaid instead of using those same dollars to help them enroll in employer plans and individually-owned policies which they would probably much prefer?

There is only one explanation that sensibly answers all of these questions. The real purpose of this plan is not to insure the uninsured. The real purpose is to radically change our health- care system.