The 2008 Race to Fix Healthcare

Proposals to reform health care are miles apart, but there is common ground.

By Kimberly Lankford, Contributing Editor

From Kiplinger's Personal Finance magazine, January 1, 2008

VOTE: Rank the Candidate's Healthcare Plans

Presidential hopefuls have outlined detailed plans to reform the health-care system -- so detailed that just trying to understand them can give you a headache. And, not surprisingly, Democrats and Republicans approach the issue from opposite sides of a philosophical divide.

Intent on providing universal coverage, the Democrats' proposals tend to rely on subsidies and other government involvement. The Republican plans, which treat health insurance more as a consumer purchase, concentrate on tax incentives, increased competition and cost-cutting. No plan is a panacea, and each has its Achilles' heel.

Democrats

The plans. Hillary Clinton, John Edwards and Barack Obama have put forth complex proposals to make coverage more accessible and affordable. All were inspired by health reforms already under way in Massachusetts, says Paul Ginsburg, president of the Center for Studying Health System Change. "If you have a mix that expands public programs and provides subsidies for private insurance," he says, "you can make a deal."

Like the Massachusetts plan, the proposals of the top three Democratic contenders would prohibit insurers from rejecting individuals or charging them higher rates because of preexisting health conditions.

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The drawback. Simply forcing insurers to cover everyone doesn't solve the problem. States that have so-called guaranteed-issue laws for individual insurance, such as New York and New Jersey, have some of the highest health-insurance rates in the U.S. So it isn't encouraging when John Edwards praises those two states for having "led the way in guaranteed issue." The unintended consequence of guaranteed issue is that healthy people often decide not to buy coverage until they get sick. That boosts the cost for everyone.

Possible solution. Guaranteed issue could work if everyone were persuaded to buy coverage, which would spread the risk among more people and push down prices. "Otherwise, you have the New York problem," says Cori Uccello, of the American Academy of Actuaries. So Clinton, Edwards and Obama have each proposed a so-called mandate requiring individuals to be covered by insurance. Clinton and Edwards, for example, want all individuals to be insured, and their plans would require most employers either to provide coverage or contribute to the cost. Clinton would exempt most small employers but offer them a tax credit as an incentive to provide coverage.

Obama breaks with his opponents. He would require that all children have insurance but not all adults. Like the other Democrats, he's counting on employers to foot the bill.

The cost. Mandates need teeth to encourage people to sign up, and that means premiums have to be affordable. Otherwise, healthy individuals can decide it's less expensive to pay a penalty for not enrolling than to buy the insurance. That's what has happened in Massachusetts, where the only penalty in 2007 for not having coverage was loss of a personal income-tax exemption of just $217 ($437 for families). The penalty will gradually increase.

For low- and middle-income people, affordability means subsidies. In Massachusetts, the state shifted money from a fund that paid hospitals for the care of uninsured patients. Among the Democratic candidates, Obama plans to help low-income people by expanding eligibility for government plans, such as Medicaid and the State Children's Health Insurance Program (SCHIP). He's hoping that getting more people to sign up would lower premiums and encourage higher-income people to enroll on their own, without being required to do so. Both Clinton and Edwards would also expand Medicaid and SCHIP, and they'd offer a refundable tax credit for middle-income families.

Subsidies, tax breaks and expanded government health plans all cost money -- anywhere from an estimated $50 billion per year for the Obama plan to $120 billion for Edwards's proposal. But those numbers are just funny money. The one thing that's certain is that the plans would be expensive. All three candidates propose covering a chunk of the costs by rolling back tax breaks for households with incomes of more than $200,000 or $250,000.

All three candidates would also use market incentives to make it easier to buy coverage on your own. Clinton offers a slew of options. For example, you could keep your existing employer-based or individual coverage, or you could choose from a menu of private plans similar to the choices that federal employees have. Under Obama's proposal, small businesses and individuals could buy insurance through a National Health Insurance Exchange. Edwards would offer regional Health Care Markets -- purchasing pools for businesses and individuals that would encompass one or more states.

Significantly, each of the candidates would also set up a public insurance program based on Medicare as an option -- the closest they come to proposing national health insurance.

Republicans

The plans. Rudy Giuliani, John McCain and Mitt Romney all focus on free-market strategies for improving the private health-care system. Instead of relying on employer-provided insurance or expanding government programs, they'd offer tax breaks and other incentives to encourage more people to buy individual coverage.

Currently, employees don't pay income taxes on the premiums they and their employers pay for health insurance. But people who buy individual policies generally can't deduct their premiums. All of these Republican candidates would change the rules to let everyone get a tax break, which they hope would encourage more people to buy coverage on their own.

Giuliani, for example, would offer a deduction of up to $15,000 to people who don't have employer-based coverage, and he'd provide a refundable tax credit for low-income households. McCain proposes a refundable $2,500 tax credit for individuals ($5,000 for families), because tax credits (as opposed to deductions) are more valuable to low-income households.

Romney would like to make all unreimbursed health-care expenses -- including premiums and other out-of-pocket costs -- tax-deductible. Like the other Republican candidates, he favors expanding health savings accounts.

Interestingly, Romney has distanced himself from some elements of the Massachusetts plan that he signed as governor. He no longer advocates guaranteed issue or mandated coverage. But, as in Massachusetts, he'd still shift money from paying hospitals for the care of uninsured patients to providing subsidies to help low- and middle-income people buy private insurance.

The drawback. Republicans would like to encourage more people to buy individual insurance, which they could take with them if they were to leave a job. Individual policies are also guaranteed renewable, so insurers generally can't raise rates because of your health once you're covered.

However, the big downside to individual insurance is that people who already have health conditions may have a tough time finding affordable coverage, and some may not be able to get coverage at all. "If you're proposing to rely on the individual health-insurance market, you're going to have to deal with those issues, and right now the candidates aren't," says Sara Collins, of the Commonwealth Fund, which specializes in health-care policy.

Possible solution. One alternative would be to expand the high-risk pools that 33 states now operate to provide insurance to people who have been rejected by private companies. High-risk pools can be effective, but only if they're sufficiently well-funded to keep premiums affordable.

McCain would like to offer grants to help states finance insurance for people with medical problems. Both Romney and Giuliani also want to increase funding to encourage states to come up with their own health-reform plans.

The cost. To boost competition among private companies and keep premiums low, the Republicans would allow people to purchase health insurance across state lines, which you may not do now. They also hope that this would discourage states from requiring that every policy include coverage for certain conditions -- something that raises premiums across the board (instead, you would probably pay extra for a more-comprehensive policy).

Candidates from both parties have plans for controlling health-care costs. But the Republicans tend to make it a higher priority than ensuring that everyone has coverage. McCain offers the most detailed list of cost controls -- such as encouraging the development of generic drugs, expanding the number of walk-in clinics in retail stores, approving reimportation of drugs from Canada, limiting malpractice lawsuits, and providing more information about costs, prices and quality of care.

Kiplinger's outlook. Among all the candidates' proposals, Clinton's and McCain's seem to be the most detailed and well-thought-out, and the least likely to end up with unintended consequences. Despite the philosophical divide, plans from candidates of both parties have features in common, such as cost-cutting measures and proposals to make it easier for groups of individuals and businesses to purchase coverage.

But, as Clinton has pointed out, no matter what a president proposes, it will ultimately be up to Congress to pass the law. Let's hope members of both parties will be willing to talk to one another.

VOTE: Rank the Candidate's Healthcare Plans

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