Analyzing Kerry's Health-Care Plan

The U.S. has two problems with its health-care system: coverage and cost. Some 44 million Americans are not covered by health insurance and the nation's medical costs are among the highest in the world. Democratic candidate John Kerry's health-care proposals are strong on extending coverage and weak on containing costs.

His plan is a good first step toward making sure all Americans get health insurance. But Kerry has to focus more on costs if he has any hope of selling his plan to independent voters in this election. He should do something radical -- borrow from President Bush. Tax-free Health Savings Accounts promoted by Bush that allow individuals who buy high-deductible plans to pay for premiums and out-of-pocket medical expenses can generate big savings. In addition, Kerry can tap into the Medicare Drug Benefit, which is so wasteful that reforming it could help pay for much of his health plan.

The strength of the Kerry plan is that it builds on the employer-based and poverty programs that make up the existing health-insurance system. Extending them would be easy. Kerry would expand Medicaid and the State Children's Health Insurance Program, which now cover very poor families and children, to insure families of four who earn up to $55,000 a year. He would help small business by creating a national pool of private insurance that is similar to one already used by federal employees. And, in his most dramatic move, Kerry would have Washington pick up 75% of company claims for catastrophic illness if companies agreed to cover all their workers. With these initiatives, Kerry hopes to cover an additional 27 million uninsured people for $650 billion over 10 years.

But how can he cover the cost? Kerry says he can pay for his health plan and also cut the deficit by 50% by rolling back the Bush tax cuts on the 2.3% of households making $200,000 a year or more. But that won't generate nearly enough money. Kerry should consider tapping into the $500 billion already committed to the Medicare Drug Benefit. It subsidizes the vast majority of seniors who are already covered or who can afford to pay for themselves. It also prohibits the government from negotiating directly with drug companies for lower Medicare drug prices.

By streamlining the Medicare Drug Benefit to defray just the cost of very expensive drug bills due to catastrophic illness, and by getting Washington to use its buying clout to negotiate lower-priced drugs, Kerry just might save enough to pay for his plan to extend health insurance. That would help solve two of America's health problems -- coverage and cost.

    Before it's here, it's on the Bloomberg Terminal.