October 2004

What Everyone Should Know about the Bush and Kerry Health Plans

Estimates of Senator Kerry's health plan range from $650 billion to $1.5 trillion over ten years. Despite the large difference between these numbers, all the estimates confirm that Kerry proposes to spend an extraordinary sum of money on the uninsured--a group not likely to turn out on Election Day.

Senator Kerry's proposals are ambitious, but they do not create complicated new structures, like national health insurance. Instead, Kerry builds on our existing health care system. The major provision targeting the uninsured is an expansion of Medicaid and the State Children's Health Insurance Program (SCHIP). In order to entice states to expand eligibility for these public programs, the costs of children in Medicaid would be transferred to the federal government--the Kerry "swap." Much of the cost of the Medicaid provision, therefore, is spent on individuals who already have insurance. At a cost of $880 billion, Kerry's proposed Medicaid and SCHIP expansions could cover more than 18 million of the uninsured.

Kerry also proposes federal reinsurance for high-cost cases to reduce premiums by an average of 10 percent. Under the premium rebate provision, the federal government would reimburse employer-sponsored plans for 75 percent of per-person costs exceeding a threshold. In order to qualify, firms must cover all their employees, but this requirement is not hard to meet. Fifty-five percent of employers who offer health benefits already cover all their employees. Many workers who are not offered such coverage are contract workers and are ineligible for benefits. Part-time workers will likely receive premium contributions only in proportion to the hours they work. Facing policy offerings that are still expensive, most part-timers can be expected to decline coverage. The employee coverage criterion, then, will not be a real hurdle to qualify for federal reinsurance. Another requirement to participate in the premium rebate pool is offering disease management (DM) programs. Nearly all firms already offer some type of DM, so that too will be an easy condition to meet. Senator Kerry's premium rebate proposal would be very attractive to firms and consequently, very costly--$573 billion. It would, however, have only a small impact on the uninsured, newly covering fewer than 2 million people.

Kerry's Congressional Health Plan (CHP) is not a subsidy, but rather a new way to purchase insurance. All plans with contracts in the Federal Employees Health Benefits Program (FEHBP) would be required to participate. Instead of modeling the new arrangement on the FEHBP, Senator Kerry's proposal links the two pools in a way that threatens to unravel the FEHBP.

Democrats have not traditionally embraced tax breaks for health insurance. Senator Kerry, however, has proposed various tax credits and subsidies for small businesses, temporarily unemployed workers, the pre-Medicare population, and individuals facing premiums that overwhelm their incomes. Kerry's tax provisions have a more modest price tag--$182 billion--but a sizable impact on coverage: 7 million newly insured.

The Kerry campaign touts various provisions in his health plan that would save large sums of money. Senator Kerry supports disease management, for example. In fact, all experts endorse disease management, and most health plans already employ it. Kerry's endorsement of DM is not backed by any specific provisions that would accelerate its take-up. The story is similar for information technology (IT) in health care. While its adoption is already underway, Kerry takes credit for IT provisions that do little to speed the innovation.

Certain elements of Kerry's health plan, however, could yield real savings. Professor Thorpe, an Emory professor who produced the Kerry plan estimate cited by the campaign, scored cuts to provider payments. Among those provisions is a reduction of payments to disproportionate share hospitals--inner-city and rural hospitals serving large indigent populations. While this proposal would produce real savings, it would undoubtedly be very unpopular with Democrats and Republicans alike.

The AEI and Lewin Group estimates of the Kerry proposal have been assailed for using the budget period from 2006 to 2015. That ten-year period represents the budget window facing the next president and is the soonest in which a new Bush or Kerry initiative could be considered. When the appropriate budget window is considered, even the Kerry campaign estimate exceeds $1 trillion in new spending.

In sharp contrast to Senator Kerry, President Bush has been criticized for committing too little money to the uninsured. His plan is centered on tax credits and deductions. Some have been in his budget proposal for years, while others have only recently been added to his program. One new provision is premium deductibility for high deductible health plans that accompany Health Savings Accounts (HSAs). Bush's emphasis on HSAs is part of his broader theme to encourage individual ownership of health insurance.

AEI estimated that the Bush plan would cover 6.7 million Americans at a ten-year cost of $129 billion. Other estimates of the President's plan have differed considerably on cost and impact, but the provisions considered across the estimates have also varied substantially. The Lewin estimate pegs the plan at a much higher cost but includes long-term care provisions that are not targeted at the uninsured. Thorpe estimates a far more modest impact on coverage, but he did not consider a set of new proposals that the President put forth in early September. They include a tax credit to small employers and some insurance market reforms. Among the private reforms is a proposal to allow states to compete based on health insurance regulation. This provision is both promising and interesting, but it is unlikely to yield immediate savings. State regulators are institutions with deeply entrenched interests, so a new competitive model would take time to evolve. Like many of President Bush's proposals, they would improve incentives for efficient health care over the long run but have few immediate benefits.

Will either candidate's health plan be considered if he becomes the next president? Kerry's plan is too ambitious. Any health initiative put forth by a President Kerry would be significantly whittled down from its present form. Even President Bush's proposals are not necessarily feasible. As spending demands mount, they will exert greater pressure on the federal budget and likely crowd out proposals targeting the uninsured.

Jeff Lemieux
Centrists.org

The number of uninsured Americans was estimated at 45 million this year and will likely continue to grow. Health insurance premiums for employer-sponsored plans have risen at double-digit rates for several years. Moreover, these dismal health sector statistics must be considered against a backdrop of growing budget deficits.

Senator Kerry's health plan avoids the elements of the Clinton reform plan that were its downfall. He works within the current health care system framework instead of overhauling it totally. His proposals face budgetary and political constraints, but some would have good prospects under a Kerry administration.

The premium rebate pool could be politically feasible, particularly if the threshold for the subsidy were raised to lower the cost. The Congressional Health Plan would face similarly good chances in Congress. Conservatives typically support using the FEHBP as a model for reform, and small business access to affordable insurance is a priority on both sides of the aisle. A more sensible approach would be to establish several purchasing pools across the country instead of one centralized one, but local premium adjustments could be made in fairness to areas with lower health costs. The CHP will need to attract young and healthy individuals to maintain a stable pool, which could be achieved by age-rating premiums.

Public coverage for adults under the poverty level may work where vouchers and credits have failed, giving this provision a decent prospect in Congress. Tax credits for the unemployed could also muster some bipartisan support. The health care tax credits given to individuals displaced by trade may serve as a workable model, though that program's scope has been much smaller.

A Kerry administration could likely move forward some initiative on quality and technology in health care, though its exact incarnation may not yet be known. Malpractice reform cannot be so easily predicted because both parties appear comfortable with the current gridlock. Senator Frist's proposal to create health courts that rule on the merits of individual malpractice suits may be a viable compromise. Senator Kerry has also proposed tax credits for small businesses to purchase health insurance. This policy could garner bipartisan support, as both parties face considerable pressure from small businesses struggling to afford coverage for their employees.

Other elements of the Kerry plan would have dim prospects before Congress. His proposed Medicaid expansions to parents up to 200 percent of poverty and kids up to 300 percent would not be supported by Republicans. Tax credits to low-income individuals could achieve bipartisan backing in theory, but their large price tags would stall their progress. Drug importation could pass Congress simply for its widespread popular backing. On the other hand, Kerry's proposal to require Pharmaceutical Benefit Managers to disclose the discounts they negotiate with pharmaceutical companies is a bad idea with no real prospects. His proposal to close loopholes allowing drug patent extensions has already been done.

Robert Moffit
Heritage Foundation

The Federal Employees Health Benefits Program is indeed a good model for health care reform. Senator Kerry's proposal, however, would transform the FEHBP while putting the Office of Personnel Management (OPM) at the helm of the U.S. health care system.

Both Senator Kerry and President Bush have good and bad elements in their health proposals. Kerry is embracing tax credits for the uninsured and has put forth good initiatives to reform malpractice. The President supports HSAs but risks creating yet another layer of inequity in the tax code in promoting them. Kerry believes the government should pick up high-end health care spending, but that is a very expensive proposition. The Medicare prescription drug benefit enacted into law last year with the President's support was another major unfunded liability.

The FEHBP empowers federal employees with choice among benefits packages and imposes only light regulation on health plans. Encouraging choice and free-market competition, it is the closest thing to a consumer-driven system in health care. There are, however, important distinctions between embracing the FEHBP as a model for reform and employing it as a vehicle to cover the uninsured.

In the existing federal program, the government contributes 75 percent of the average premium, based on prevailing market rates. That contribution, however, is capped at a fixed dollar amount--$3,400 for an individual and $7,700 for a family. This encourages frugality in consumers and efficiency in health plans, and it limits taxpayer exposure to rising health care costs. Caps are totally absent from the Kerry plan, in which the federal government's contributions are calculated as raw percentages. High-end plans within the FEHBP can cost $17,000. The federal government would be on the hook for some sizable share of that under the Kerry plan. Moreover, his premium rebate proposal would put the federal government at risk for catastrophic spending instead of health plans, as is the case in the program today.

Kerry's proposal invites strict governance of the Congressional Health Plan, and inevitably of the traditional FEHBP. The prevailing rates and plans in the FEHBP today are tailored to an older population. Benefit levels will need to be equal across the CHP and FEHBP, making the health insurance available in the CHP too generous and too costly for the average person seeking coverage. Many of them will seek insurance elsewhere. Tax credits may attract large companies but probably not the small firms whose employees are often uninsured. Adverse selection is extremely likely under the Kerry CHP proposal. As costs begin to soar, the OPM will impose stricter regulations on the CHP and the FEHBP. It would be politically infeasible to insulate federal employees, which ensures that Kerry's experiment would ruin the FEHBP as we know it.

AEI research assistant Ximena Pinell prepared this summary.