With respect to political considerations, there are two important questions to be asked:

• Is Kerry’s plan likely to be adopted?
• If it is adopted, how is it likely to evolve?

Let us consider both these questions in brief.

A. Political Resistance.

Congressional passage of Kerry’s plan, at least as currently proposed, would be very difficult - unless Kerry’s election were seen as a national mandate for the Kerry health plan. The easiest part to pass is the expansion of Medicaid and SCHIP, because this would give financial relief to state and local governments. But this idea may be opposed by some Democrats in Congress. A much harder reform will be the imposition of managed competition nationwide. Harder still will be the vast and expensive system of employer subsidies.

B. Hidden Subsidies.

One could argue that the business of politics is the activity of imposing costs on some for the benefit of others. But of all the transfers politicians are asked to make, the least popular idea is to impose taxes on one group in order to subsidize another group. The reason: The people who are going to experience pain will know its source precisely, whereas the people who are going to benefit may not even be aware of their benefits, let alone know the source.

Kerry’s proposal to cover three-fourths of the cost of catastrophic illness is very expensive. It accounts for more than a fourth of the cost of his entire health plan. When subsidies to small business are included, employer subsidies make up more than one-third of the cost of the plan. Note: These subsidies go directly to the employers and/or their insurers. There will be no line item on any worker’s pay stub. Indeed, employees are likely to be completely unaware of the subsidy.

Economic theory teaches that the benefits of such subsidies will eventually devolve to the employees. But if this plan were proposed by a Republican, the benefits would be characterized as “trickle down.” They are precisely the type of benefits that politicians don’t like.

A similar principle applies to the politics of medicine in other countries. The biggest problem with government-run health care systems worldwide is the temptation to skimp on expensive technology. In principle, everyone benefits from an MRI scanner because everyone is a potential beneficiary. But if people do not understand the benefit (because it is subtle and not obvious) politicians do not get much credit for buying the equipment and maintaining it. That is why the temptation is to forego the scanner and spend the money on services that touch lots of people in obvious ways — even if it does little to improve their health.

Against these considerations is the hope of Kerry advisors to get support from a business community that is clearly concerned about rising health care costs. But this support may be tepid or nonexistent for reasons given below.

C. Managed vs. Nonmanaged Competition.

As noted above, a likely consequence of the Kerry health care plan is the virtual disappearance of the individual and small group markets. Commercial insurance for larger companies will also likely disappear. Obviously, most insurance companies and the agents who sell their products would oppose such changes. Also, all the insurers who have left the FEHBP or never participated in the first place will oppose the plan. There is a reason why they are not selling their products to government employees.

Against this opposition, who can be counted on to favor the change? Even insurers who currently participate in the FEHBP may not like the Kerry plan. The reason: uncertainty about how they will fare in a new, untried system.

D. Distributional Effects.

Roughly three-fourths of the cost of the entire Kerry plan is designed to benefit (either directly or by trickle down) lower income households. In this sense, it is consistent with traditional Democratic ideology. But Democratic politicians in recent years have been moving in a different direction — competing for middle class votes by promising middle-class benefits, often paid for by low-income families. For example, tobacco taxes, lotteries and other forms of gambling are popular with Democratic politicians almost everywhere. Yet these are among the most regressive ways to raise revenue. The proceeds from these taxes on the poor often fund middle-class benefits, such as education or tax cuts.

E. The Slippery Slope.

If the Kerry plan is adopted, a slippery slope will likely emerge. Problems at each stage will to lead to a new stage. Ultimately we will likely evolve the way the German system has: with mandated benefits, mandated participation, managed competition and a small “private” sector that will cater to the few who can afford it.

Mandated Benefits. Once the federal government gets involved, special interests will soon follow. Currently, health insurance is a state issue. As a result, the sea of special interest activity that surrounds health insurance regulation resides primarily at the state level. But if Kerry succeeds in making health insurance a federal concern, all the problems of state regulation will elevate to the federal level.

For example, mandated health insurance benefits are laws requiring insurers to cover specific providers and procedures not usually included in basic health care plans. In 1965 there were only seven state-mandated benefits nationwide. Today there are close to 1,500.

Mandates cover services ranging from acupuncture to in vitro fertilization, and providers ranging from chiropractors to naturopathy. They cover bone marrow transplants in Georgia, hairpieces in Minnesota, marriage counseling in Connecticut and pastoral counseling in Maine. These laws mean that if people buy insurance at all, they must purchase a bloated and expensive package of benefits designed by politicians. They are forbidden to buy insurance that reflects their own preferences, tailored to individual and family needs.

Mandated benefits raise the cost of insurance and make it considerably more expensive than barebones insurance. As a result, mandates price otherwise healthy people out of the market. In fact, studies estimate that as many as one out of every four uninsured Americans has been priced out of the market for health insurance by mandates. 68

Mandated Employer Participation. As special interest legislation (as well as adverse selection) forces up the cost of the FEHBP look-alike plans, employers with healthier work forces may leave the system — or choose not to join in the first place. As noted earlier, there have been numerous attempts to set up systems of managed competition for employers, including health marts and purchasing pools. These arrangements inevitably fail because firms leave the pools (for cheaper insurance) when their employees are healthy and join the pools when their employees are sick (because alternative insurance is more expensive). One way to prevent this instability, perhaps the only way, is to require employers to participate.

Mandated Employee Coverage. The problem of instability caused by employer behavior also applies to individuals. People who buy their own insurance, as well as people who obtain insurance through an employer, are tempted to remain uninsured (and save on premiums) while healthy and enroll only after a serious illness has occurred (when the expected health care is worth more than the premium). The more expensive insurance becomes (again, because of mandates and adverse selection), the more likely people will engage in such behavior and the more unstable the insurance pool will become. As in the case of employers, a solution - again, perhaps the only solution — is to require individual participation.

Mandated Employer Funding. In a Kerry administration, employers will likely be required to cover all employees and to pay almost all the cost of that coverage. This stage of evolution is almost unavoidable for two reasons. First, politicians around the world are very reluctant to try to force individual voters to buy anything. And they certainly never do so if mandating employer payments is an alternative. Second, for reasons discussed above, the Kerry plan will cost much more than he projects, and in the face of such budget pressures the inevitable temptation will be to shift costs to employers. Employers, therefore, will find that they are required to enroll their employees and pay for the cost of health insurance that they have absolutely no control over.