Tuesday, June 3, 2008

Economic Policy Institute's Health Plan

Sometime during the Democratic Primary's Health Care Mandate food fight the Economic Policy Institute (EPI) released a health care plan authored by Jacob Hacker. So, as the Democratic primary winds to an end, let's spend a minute reviewing a little of the substantive policy we missed during the madness and compare it to the Wyden-Bennett/Committee for Economic Development plan that I have already written about fairly extensively.

The Health Care for America Plan is made up of three central elements:

1. An extension of Medicare to every legal U.S. resident who is not covered by their workplace.

2. All employers will be required to provide their workers with coverage equivalent or better than the Health Care for America plan or pay 6% of payroll to fund coverage for their employees.

3. A requirement (the good old mandate) that all Americans buy into Health Care for America Plan or purchase private coverage.

Of course, there is a lot more to it than that. But those are the basics and who has time for nuance anymore? So let's get into some analysis.

To begin, both plans have mandates. So, not much to compare here. If you still aren't sure what these are about and why there was such a food fight about them, feel free to leave a comment asking for a briefing and I will oblige. So both come down on the side of universality and guarantee (and require) that every American have a health plan.

The more interesting differences come in how each tries to cut costs. Both believe that there is substantial waste in the current system and tries to create incentives to reduce it. Wyden-Bennett does this through competition, requiring that insurance companies compete to offer a basic plan that is risk adjusted for the type of people who enter their plan. (I.e they get paid extra to cover people at higher risk of getting sick.) This will presumably reduce administrative costs of insurers as they compete to be leaner and hopefully make consumers price conscious as they will be able to select a plan to cover their specific medical needs. The hope will also be that insurers will form long term relationships with customers and so will be incentivized to provide preventative care.

EPI's plan uses the bargaining power of the government to negotiate for lower prices with drug companies and providers and the administrative efficiencies of having a single large insurer to further reduce costs. Furthermore, as the government will necessarily have a long term relationship with many of its customers, it will encourage preventative care to reduce its costs.

How will these different approaches to cost cutting succeed? It is impossible to say with an certainty, but I will point to the difficulties that each will face which hopefully will give the reader some guidance on which one he or she sees as more plausible.

Wyden-Bennett plan counts on the government being able to properly price the cost of various health risks in populations across the U.S. Given how many types of health conditions there are, and how much regional variation there is when it comes to intervention this is a very difficult problem. If you don't get it right, you will have insurers either making over-sized profits or going out of business at an alarming rate leading to substandard care. Either scenario could be very expensive. Yes the "Dutch" model that Wyden-Bennett has seen some success in the Netherlands, but we are dealing with a far more heterogeneous population here. I think the argument that would be advanced by the EPI folks would be that many of the insurers under this system would be too small to negotiated significant price concessions from drug companies and providers.

The big problem EPI's plan will face will be the rationing of health care through mechanisms other than prices. As has happened in single payer countries, consumers will not be price conscious and so will demand more of certain types of coverage than the government's reimbursement schedule will supply. So it is likely that health care will be rationed by systems such as wait lists, mechanisms that will increase the cost of overall care.

Which of these problems one finds the most intractable, will go a long way to deciding which health care plan one prefers.