Obama’s Health Policy Options: 3 Scenarios

Barack Obama won the presidency campaigning on a promise substantially to expand health coverage. His ability to achieve this promise rested on the capacity to raise and spend about $1.6 trillion over ten years to subsidize private coverage for individuals and small businesses that could not otherwise afford to buy it themselves, as well as to mandate that all but the smallest businesses give coverage to their workers.

There are two major constraints to achieving his promise: the federal fiscal outlook and the ability of business to afford an employer health mandate. In both cases, there are significant complicating factors that will force Obama to set priorities and decide how urgent and immediately achievable his health reform promises are. This essay offers three possible scenarios for implementing Obama’s plan given those complications.

The federal fiscal outlook is the grimmest since the depth of the 1981-82 recession. The federal government faces as much as a $1 trillion deficit, or about 7% of gross domestic product (GDP), including the cost of the financial industry refinancing passed by Congress in October. This deficit could grow yet more, because it does not factor in the cost of any new fiscal stimulus program Congress may devise, nor the substantial new federal spending initiatives Obama promised during the campaign – clean energy subsidies, housing and energy support for lower-income Americans, tax relief to “95% of Americans,” increased foreign aid, etc. A lengthy and deep recession, which is a possibility, would further enlarge the federal deficit. $1 trillion looks more like an opening bid than a final figure.

A more significant barrier may be the impact of an employer mandate on restoring job growth in the private economy. Obama ran on an aggressive platform of mandated cost increases to private business: a $9.50 minimum wage indexed to inflation, “play or pay” health insurance coverage, expanded paid sick leave and parental leave, comparable-worth pay standards for women, a 10% increase in the tax rate paid by S-corporations, and expanded unionization.

The combined effect of implementing all these promises would be substantially to increase the cost of employment for American business, trading off richer benefits for current workers (for example, higher wages and benefits) against cash flow for expanding employment – the same trade-off that has stifled job growth in the EU countries like France, Sweden, and Germany. It is hard to image a less likely formula for climbing out of a recession. Thus, both fiscal constraints and economic constraints impose limits on the ability of the new president to fulfill his campaign promises.

President Obama has (at least) three broad policy choices on the timing/financing of health reform, each of which will be explored below. They are:

1) Finish the New Deal

2) Braveheart

3) Wait and Lay the Groundwork

Let’s look at each of these and see what they involve.

Finish the New Deal. Sen. Ted Kennedy will probably not survive long into the new Congressional term. His staff are drafting health reform legislation on the premise that Congress will wish to memorialize Kennedy’s passing by implementing what is, in effect, the dying wish of the godfather of congressional health policy. Kennedy actually voted to enact Medicare in 1965, as part of a wave of legislation in the wake of the assassination of his brother, which legislation came to be called the Great Society.

Rather than the Kennedy perennial “Medicare-for-all” health plan, the Kennedy proposal could look a lot like Massachusetts’ play-or-pay initiative with both individual and corporate mandates. Supporters will probably argue for financing the extensive federal subsidies required with steeper tax increases on the “wealthy” and corporations.

Congressional Democrats could press for implementation of the full range of Obama’s domestic spending initiatives, particularly infrastructure, clean energy, and health reform, on “emergency grounds.” Someone will invent a New Deal/Great Society label for a host of progressive domestic reforms (let’s have a contest!) and argue that concerns about the deficit simply do not matter, given the gravity of our economic problems. Newly minted Nobel laureate Paul Krugman recently made such an argument.

In the last resort, if tax increases don’t cover the cost of all these initiatives, advocates of the new program will argue for financing the resulting $2 trillion deficit by issuing a ton of new debt and printing a ton of new dollars, risking igniting a run on the dollar and a ruinous new round of inflation by doing so. It’s a big gamble, but as numerous people will undoubtedly argue, desperate times require desperate measures. It’s time to finish what Roosevelt and Johnson began, and a lot of Democrats will argue that the time is now.

Braveheart. This option is premised on the idea that putting new dollars into a health system that already consumes double per capita what any other country spends is questionable in the midst of an economic emergency. If we cannot afford a 10% of GDP type federal deficit, perhaps an wealthy and resource-rich health sector could fund most of the cost. It is, after all, a $2.5 trillion industry, and you only need to find about $150 billion a year to fund Obama’s program.

Obama took the largest single funding source off the table during the campaign: the estimated $240 billion tax preference for employer-paid health insurance. Union opposition to taxing any portion of their rich benefit packages will probably doom this approach, although Obama could sneak back into this lucrative funding source by capping the employee deduction for the “wealthy” (those making more than a Detroit auto worker).

However, there are other possible “inside the envelope” funding sources: ending the tax exemption for nonprofit hospitals and health plans, eliminating the extensive Medicare and Medicaid subsidies for medical education and disproportionate share (this latter source was the funding engine for the Massachusetts health reform), aggressively reducing Medicare prescription drug spending, levying a surcharge on health insurance premiums financed by capping their medical loss ratios, and whacking the big-ticket items in the current hospital and physician Medicare payment schedules.

This approach would be incredibly costly politically, and would require wading into a dense of mass of alligators, snapping turtles, and industry lobbyists and aggressively reallocating dollars from the wealthy and privileged portions of the health care industry to fund coverage for the uncovered. It would look a lot like the famous climactic battle scene from Braveheart, but, again, someone will argue that desperate times require desperate measures. If Obama does not wish to put off implementing a coverage expansion, this is a way to do it that does not require him to postpone the other items on his ambitious domestic agenda.

Wait/Lay the Groundwork. The third broad approach is to postpone coverage expansion until the economy and fiscal outlook improves, but set the stage by fixing the immediate constraints on expanding coverage. When Massachusetts implemented its health reforms, newly insured citizens discovered an acute shortage of primary care physicians and lengthy waits for appointments. Other states with larger numbers of uninsured residents would have much more serious capacity and access problems than Massachusetts did.

Obama could move aggressively and quickly to expand primary care physician payment under Medicare (through a version of the Medical Home idea), double federal funding for community health centers, and create a medical student loan forgiveness program for students entering geriatrics and primary care specialties. He could also expand clinical information technology subsidies to safety-net providers and implement new administrative cost reductions by requiring all Medicare-contracting private health plans to use a single, end-to-end electronic payment process for all of their business, federal and nonfederal. He could launch a new federal Comparative Effectiveness Institute along the lines of the British National Institute for Health and Clinical Excellence (NICE). And he could do all of the above for less than $10 billion a year.

And finally, he could create a bipartisan Commission on Health Reform to explore what other structural and payment system reforms would be require to make efficient use of new federal funding when fiscal conditions permit. He could use the reauthorization of the State Children’s Health Insurance Program (SCHIP), which expires conveniently in March 2009, to take the aforementioned steps, reserving until the economy resumes growing to actually implement his campaign promises, by which time his commission provides him the political cover to do so.

Both the new administration and Congress are going to shortly discover a major bandwidth constraint in addressing the numerous domestic policy challenges they inherit from the previous regime. Although there is tremendous pent-up demand for solving numerous domestic problems, the new president will be severely limited in his options if he cannot move quickly to restore economic growth. What priority health reform has in this complex mix of policy challenges will be a major question for all stakeholders in the health system.