Health Care: No Radical Surgery

Kerry's plan aims to bridge the gaps in the current system. It won't be cheap or easy

For John Kerry, health-care reform is what cutting taxes was for George W. Bush in 2000: More than just a signature issue, it would be the fulcrum of his Presidency and top his domestic to-do list. He would extend health coverage to 27 million of the nation's 44 million uninsured at a cost of $650 billion over 10 years.

But so far, Kerrycare has attracted little notice. One reason is that, for all its expense and complexity, the plan simply patches the current system. It would greatly expand public programs for low-income families. And rather than doing away with existing employer-based insurance -- as President Clinton proposed in 1994 -- Kerry would bridge gaps in that system. "Kerry is saying: 'Let's maintain the status quo by pouring more money into it,"' says American Enterprise Institute health economist Joseph Antos. "It is go-with-what-you-have and try to make it better."

The Democrat hopes his formula will appeal to employers, who provide insurance for 160 million Americans. "What we've done is create powerful incentives for business to say: 'That makes so much sense that I'm buying in,"' Kerry told BusinessWeek on July 16. "I want to have the marketplace work. I don't want Washington mandates."

By building on the current system, Kerry is offering what Bruce Reed, president of the Democratic Leadership Council and a Kerry domestic policy adviser, calls "ambitious incrementalism." That's in sharp contrast to Bush's health plan, which might be called modestly revolutionary: He hopes to replace government and employer-based coverage with individuals buying their own insurance -- but is taking just tiny steps in that direction.

Kerry's plan is built on four pillars: a $500 billion-plus expansion of two big health programs for low-income families, Medicaid and the State Children's Health Insurance Program (SCHIP); a new $250 billion federal subsidy for employers hit with hefty medical claims; a $135 billion private insurance pool that would make it easier for small businesses and some individuals to get coverage; and cost savings of as much as $300 billion from greater use of information technology and better identification and prevention of chronic diseases.


The net cost to the federal government, according to Emory University economist Kenneth E. Thorpe: $650 billion over a decade. Kerry argues he can pay the bill by rolling back all of President Bush's tax cut for families making more than $200,000 a year. That would generate $800 billion over 10 years and fund Kerry's health plan. But it would leave little to pay for education and other initiatives and to cut the deficit in half, as he promises.

Kerry's biggest health initiative would expand Medicaid and SCHIP, which now cover poor families and children. Kids in a family of four with an annual income of less than $55,000 would be eligible for public insurance. So would singles making less than $18,000. Kerry hopes this will cover about 18 million uninsured. But critics say there's a downside: They fear employers would dump low-wage workers and their dependents on to the public program. "He's going to the heart of the employer system," says Thorpe. "He could disrupt the existing market."

Some argue that a more workable, if less ambitious, solution might be to promote these two programs to the 10 million children and adults who are already eligible but haven't enrolled -- largely because they are unaware of the benefits. Says House Ways & Means Committee Chairman William M. Thomas (R-Calif.): "First, let's get everybody eligible for Medicaid and SCHIP on the books."

Much of the rest of Kerry's plan is aimed at shoring up the employer-based insurance system, which has serious flaws. If you change jobs, you may lose coverage. And while the system works for large companies, it fails for smaller outfits, which often can't afford the premiums.

Kerry tries to remedy some of those problems. To start, he would create a national pool of private insurance, open to small businesses, workers between jobs, and early retirees aged 55 to 64. Insurers would have to offer coverage to all eligible individuals but could compete on price and benefits. Small businesses would pay at least 50% of premiums. But they'd get an extra 25% tax credit to defray costs.


The idea of such purchasing pools is drawing interest from companies, says Mary R. Grealy, president of the pro-business Healthcare Leadership Council. Yet she questions whether Kerry's government-based approach will work. "Small businesses are trying to become part of larger groups," she says, "but they worry about mandates" -- rules for richer coverage or specific treatments. Kerry hasn't proposed them yet, but it has happened with the federal employee plan.

Kerry would also provide another generous subsidy for employers. Today about 10% of premiums pay for annual claims exceeding roughly $50,000. Just one such event -- an emergency surgery, or a case of cancer -- can make insurance unaffordable for a small business.

To try to slow the rise of premiums, Kerry would have taxpayers pick up 75% of those costly claims. In return, participating companies would have to cover all workers, use money they save to lower premiums for employees, and use disease-management programs to identify and prevent costly chronic illnesses.

That new subsidy raises a big question: What will the government do in the face of huge, unlimited liabilities for pricey care? Some analysts wonder whether the feds might eventually ration big-ticket expenses. "At the least, you know the government will start asking questions" about the cost of such care, says Jeff Lemieux, executive director of Centrists.Org, a bipartisan Washington think tank.

Kerry says picking up catastrophic costs could trim premiums by about $1,000 for a family of four. Independent experts are split on how much savings consumers would see. Dearborn (Mich.) consultant Maureen Cotter says it will be closer to $100 a person. But Roland McDevitt, director of health research at consultants Watson Wyatt Worldwide (WW ), thinks Kerry is close to the mark.

Still, conservatives say the biggest flaw in Kerry's plan is that he does little to contain exploding health costs. In separate proposals, Kerry would try to hold down expenses by letting consumers buy prescription drugs from Canada and by having the government negotiate directly with manufacturers for drugs purchased through Medicare. But his broad health plan includes only modest cost savings.

Kerry does figure the government can save about $300 billion by expanding electronic processing of insurance claims and improving the use of disease-management programs. Thorpe figures the tech programs would reduce costs by about $7 billion a year. And while Cotter says "there is real money to be saved in the management of chronic care," achieving those savings will require up-front investment in diagnostic and education programs that companies may be unwilling to make. Done right, these changes may save $30 billion a year, as Kerry claims. But that would be just a tiny fraction of the $1.8 trillion the nation spends annually on health care.

Kerry is presenting voters with a stark question: Should the government be spending hundreds of billions of dollars to patch the holes in today's fragmented health-insurance system? No doubt, his plan would insure millions of Americans now without coverage. But it also would shift some of the cost from companies and workers to taxpayers. The 2004 election will signal whether voters want to make that trade.

By Howard Gleckman in Washington

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