The Case against John Kerry's Health Plan
Incentives to Spend More
The costs of the Kerry plan will surely be greater than what Thorpe estimates. The reason: The plan would encourage people to over-consume health care. At the same time, Kerry seems to have rejected all forms of managed care and appears to be indifferent to cost controls through Health Savings Accounts and other consumer directed health care.
A. Perverse Incentives.
Numerous features of the Kerry plan would encourage people to overinsure and overspend on health insurance and health care.
“The Kerry plan would subsidize wasteful health care spending.”
Open-Ended Subsidies. Kerry’s plan would continue the current, deeply flawed system of open-ended tax subsidies. That is, the more employers and employees spend on health care, the greater subsidy they receive. People can always lower their taxes by spending more. This approach contrasts with the Bush administration's proposed fixed-sum tax credit, which subsidizes the core insurance we want people to have but leaves them free to purchase additional insurance with their own aftertax dollars. For example, the administration has proposed a $1,000 tax credit for individuals and a $3,000 credit for families. Once the $3,000 limit is reached, however, additional expenses would be paid with unsubsidized dollars.
Income Cap Subsidies. The theory behind managed competition is that people should be able to choose among a wide array of health plans - from somewhat Spartan to very rich.30 The government (or employer) subsidy, however, should be limited to an amount that covers the cost of basic insurance, with individuals paying for the bells and whistles out of their own pockets. Kerry’s income-based premium caps violate this principle. Once the cap is reached, the individual's incentive is to choose the richest, most expensive plan available, since someone else will be paying 100 percent of the extra cost.
For example, someone at the poverty level, buying into the managed competition system, would pay no more than $600 in premiums — even though the average cost of a family policy in the current Federal Employees Health Benefits Program (FEHBP) is $8,051. Once this individual decides to obtain insurance, there is no reason to settle for a moderately priced plan — especially when there are plans available in the $14,657 price range. Why choose a Hyundai, when you can have an Aston Martin at no extra cost?31
The irony is that the lowest income families under this system are likely to end up in the most lavish health plans - with much of the cost paid for by middle-income families who cannot afford to enroll in those very same plans!
Subsidies for Low-Income Individuals and Families. In addition to the premium caps, other subsidies for low-income families will change incentives and encourage perverse behavior. For example:
- The 75 percent subsidy for workers between jobs encourages people to purchase insurance until the value to them is only 25 cents on the dollar.
- The subsidy for low-income employees of small business will encourage people to obtain insurance until it is worth less than 50 cents on the dollar.32
- The 25 percent subsidy for people age 55 to 64 will encourage insurance that is worth 75 cents on the dollar.
Catastrophic Insurance Subsidies. The proposal to subsidize catastrophic insurance by paying for 75 percent of all medical expenses in excess of $50,000 also distorts incentives. Employees are likely to choose aggressive, unproven therapies, and mostly at taxpayers’ expense. As Helen Darling, president of the National Business Group on Health, said in a recent Wall Street Journal interview, such a scheme shows a “blank check mentality,” because once the $50,000 limit has been met, there will be weak incentives for anyone (employers, patients, insurers) to pay attention to costs.33 As a result, many more unnecessary procedures will be performed.
“Kerry appears to reject standard methods of controlling costs.”
For example, in the United States each year, doctors perform more than 500,000 heart bypass surgeries and another million angioplasties.34 Depending on the extent of the surgery, each procedure can cost well in excess of $50,000.35 Some experts believe that many of these operations provide no real benefit and may even put patients at unnecessary risk.36 Shifting most of their cost to taxpayers will not encourage employers and employees to make sure they are getting value for the money spent.
Though only a small percentage of insured workers use more than $50,000 worth of medical care in a given year, if government begins to pick up three-fourths of the tab, medical bills in this range will become more common.
B. Opposition to Cost Control.
Currently there are two broad ways of controlling health care costs: (1) managed care and (2) consumer directed care. Kerry appears to reject them both. In his ideal world, no one would choose between health care and other uses of money.
Opposition to Managed Care. Thorpe’s technical description implies that employers and insurers would have to engage in “case management” as a condition for receiving the new tax subsidies. However, in his acceptance speech at the Democratic Convention, Kerry said, “You’ll get to pick your own doctor — and patients and doctors, not insurance company bureaucrats, will make medical decisions.”37 This appears to be a blanket rejection of all forms of managed care.
Opposition to Consumer Directed Care. If employers and insurers cannot choose between health care and other uses of money, what about individuals? We assume Kerry opposes that, too; but we could be wrong. Kerry’s staff has indicated opposition to Health Savings Accounts, but we are not aware of any public statement by the Senator on this topic.