Nice work, if you can get it

I love the Hacker plan for healthcare: set up a new federal insurance plan like Medicare which anyone could join, and require employers to either offer equivalent coverage or kick in to that plan. But I can’t make the numbers add.

Jacob Hacker’s Health Care for America plan, as summarized by Ezra KIein:

The government will create a new, Medicare-style health plan that’s open for enrollment to any and all individuals interested in jumping in, covers mental health and maternal care, and has strict limits on out-of-pocket spending. Simultaneously, all employers will be required to offer insurance as good or better than the new government plan. If they don’t want to contract out with the private sector, they’ll pay 6% of payroll to enter their workers into the government plan. The unemployed and self-employed will have to buy coverage, and there’ll be heavy subsidies tied to income.

Yes, that includes prescription drugs. And the price is right:

The maximum monthly premium—phased in between 200% and 300% of the poverty level—would be $70 for an individual, $140 for a couple, $130 for a single-parent family, and $200 for all other families.

I’m (1) enthusiastic and (2) skeptical. It sounds great; in fact, it sounds too good to be true. $70/mo is $840/yr.; let’s call it $1000 to keep the arithmetic simple. If all 300 million Americans joined at the maximum individual rate, premiums would total 300 million x $1000 = $300 billion. Last time I checked, $300 billion was a lot less than $1.6 trillion, which is the current national health care bill. Some of that is stuff that wouldn’t be covered. Not much of it could be made up for in co-payments, as there’s a strict limit on out-of-pocket expenses. The Health Care for American clientele would be younger and therefore on average healthier than the Medicare clientele, so the average cost of covering them would be smaller than their pro-rata share of total health-care spending. Still, I don’t see how the gap gets closed.

Hacker claims, plausibly, that the program would lead to important cost savings. (Merrill Goozner argues that it therefore can’t pass, since every saving means a reduction in the income of some health care provider or middleman.) But he doesn’t claim an 80% reduction in total costs. How is this loaves-and-fishes miracle supposed to work?

If, as Hacker claims, about half the population would wind up in Health Care for America, can we still expect it to get as big a discount as Medicaid now does? Yes, it would be a half-monopsony, with huge market power. But wouldn’t it be too big to play the Medicare trick of making everyone else in the system cross-subsidize by getting concessionary rates? And if it is, then it will tend to make Medicare itself more costly (though of course eliminating unpaid care would make Medicare, and private insurance, less costly).

One of the plan’s benefits, as I understand it, is getting the Medicaid monkey off the back of the states by incorporating Medicaid (and S-CHIP) enrollees in Health Care for America. If the plan is truly Medicare-like, then it would represent an enormous upgrade from Medicaid. Can that really be done within the budget constraint?

Finally, there’s the question of progress. Excessive drug prices (compared to marginal cost) finance and incentivize the development of new drugs. Some of today’s expensive procedures will get cheaper through learning-by-doing. (Think LASIK.) It’s not clear to me that reducing the fraction of GDP that goes for health care (as opposed to the cost at any given quantity/quality mix) ought to be an objective, especially if more health care comes out of other consumer spending by the comfortably-off (as opposed to spending by the poor or spending on, say, education). Much of that consumer spending has low utility, net of “Luxury Fever” effects. (If everyone drove a somewhat smaller and less fancy car, keeping the status effects of car ownership unchanged, most non-car-buffs wouldn’t mind; to some extent, the same is true of housing, where the last 1000 square feet of a 5000-square-foot house may have small benefits except in status competition.) So I’m sympathetic to the conservative/libertarian claim that cost containment at the expense of R&D might be a bad bargain socially in the medium-to-long run.

When AT&T was The Phone Company, it made its customers pay for research through Bell Labs. (The loss of that national treasure is the only reason I can think of for regretting the AT&T breakup.) Health Care for America would be in more or less the same position; maybe a portion of its budget ought to go to the National Institutes of Health, to a greatly expanded Agency for Healthcare Research and Quality &#8212 the now-tiny outfit that works on service-delivery issues such as medical errors and electronic medical records &#8212 and perhaps to an entity that would develop new drugs all the way through the FDA process without claiming patent rights, making them immediately available through the generic-drug manufacturers. While NIH is a giant compared to the National Science Foundation, the current public-plus-private health and healthcare R&D effort is really pretty small: NIH and the pharmaceutical industry spend about $60 billion a year between them, which is less than 5% of the total health-care bill. Is there any reason we can’t fix the bad effects of cost containment on the rate of medical progress by just spending some of the savings directly on R&D?

[These are real questions; I don’t pretend to be an expert on health care. If you are, please enlighten me.]

So much for the substance. Now for the politics. Goozner is right that the providers will fight this. But I’m not sure they can beat it. “Harry and Louise” worked by telling the insured that HillaryCare would take from them something they had: fairly low-hassle access to whatever care they wanted. (That was true; of course, it was also true that the insurance companies were going to take it away in any case, as they indeed have.) The Hacker plan gets around that by telling those with good health care coverage at work that they can keep it. It’s also, as Ezra points out, explainable in four sentences. As GWB has demonstrated, the fact that a program doesn’t add up is really no political liability at all.

So if the Democrats were able to coalesce around a plan like this, I think it would be a huge winner.

Footnote The plan as proposed applies only to legal residents. I suspect that’s for political rather than policy reasons. The whole logic of the plan is that leaving people without coverage doesn’t really eliminate costs, it merely shifts them to the unpaid-care account. That said, the political judgment seems sound, though brutal. (Ahnoldcare includes the illegals, but California’s politics are different.)

Second footnote As to the individual mandate, which seems to be a politically scary idea, why not “enforce” it through the income-tax system? Your form 1040 or 1040 EZ, and the form you fill out to tell your employer how much tax to withhold, each would have a line on which you write your health-care policy number; if the line is blank or the number doesn’t relate to an actual policy, there’s a tax surcharge or withholding increase. That way no one commits the “crime” of being uninsured.

Third footnote The plan is community-rated: i.e., everyone pays the same. Why should that be so? I see the arguments against individual-level underwriting, but why should 25-year-olds, who have on average lower health-care bills and lower incomes than 60-year-olds, pay the same premiums? Life is rough enough on young families as it is; I see no reason to make it rougher.

Update A reader points out that 6% of payroll is generally going to be more than $70/person/month, so the arithmentic may not be as grim as made out above. (But why should those on payrolls subsidize the self-employed?) Jacob Hacker emails that the plan would require general-revenue subsidies somewhere in the low twelve digits. I’m still having problems making the arithmetic come out.

I got several outraged emails about age-ratimg premiums. No, I don’t think age-rating is at all parallel to charging people more based on their health status: no perverse incentives, no reason to hide your health status from your doctor, no adverse selection. It’s just a generation question, and I see no reason to take more from twenty-somethings to give it to my fellow boomers.

Author: Mark Kleiman

Professor of Public Policy at the NYU Marron Institute for Urban Management and editor of the Journal of Drug Policy Analysis. Teaches about the methods of policy analysis about drug abuse control and crime control policy, working out the implications of two principles: that swift and certain sanctions don't have to be severe to be effective, and that well-designed threats usually don't have to be carried out. Books: Drugs and Drug Policy: What Everyone Needs to Know (with Jonathan Caulkins and Angela Hawken) When Brute Force Fails: How to Have Less Crime and Less Punishment (Princeton, 2009; named one of the "books of the year" by The Economist Against Excess: Drug Policy for Results (Basic, 1993) Marijuana: Costs of Abuse, Costs of Control (Greenwood, 1989) UCLA Homepage Curriculum Vitae Contact: