Why Obama's Health Plan Is Better

The big threat to growth in the next decade is not oil or food prices, but the rising cost of health care. The doubling of health insurance premiums since 2000 makes employers choose between cutting benefits and hiring fewer workers.

Rising health costs push total employment costs up and wages and benefits down. The result is lost profits and lost wages, in addition to pointless risk, insecurity and a flood of personal bankruptcies.
[Why Obama's Health Plan Is Better] AP

Sustained growth thus requires successful health-care reform. Barack Obama and John McCain propose to lead us in opposite directions -- and the Obama direction is far superior.

Sen. Obama's proposal will modernize our current system of employer- and government-provided health care, keeping what works well, and making the investments now that will lead to a more efficient medical system. He does this in five ways:

- Learning. One-third of medical costs go for services at best ineffective and at worst harmful. Fifty billion dollars will jump-start the long-overdue information revolution in health care to identify the best providers, treatments and patient management strategies.

- Rewarding. Doctors and hospitals today are paid for performing procedures, not for helping patients. Insurers make money by dumping sick patients, not by keeping people healthy. Mr. Obama proposes to base Medicare and Medicaid reimbursements to hospitals and doctors on patient outcomes (lower cholesterol readings, made and kept follow-up appointments) in a coordinated effort to focus the entire payment system around better health, not just more care.

- Pooling. The Obama plan would give individuals and small firms the option of joining large insurance pools. With large patient pools, a few people incurring high medical costs will not topple the entire system, so insurers would no longer need to waste time, money and resources weeding out the healthy from the sick, and businesses and individuals would no longer have to subject themselves to that costly and stressful process.

- Preventing. In today's health-care market, less than one dollar in 25 goes for prevention, even though preventive services -- regular screenings and healthy lifestyle information -- are among the most cost-effective medical services around. Guaranteeing access to preventive services will improve health and in many cases save money.

- Covering. Controlling long-run health-care costs requires removing the hidden expenses of the uninsured. The reforms described above will lower premiums by $2,500 for the typical family, allowing millions previously priced out of the market to afford insurance.

In addition, tax credits for those still unable to afford private coverage, and the option to buy in to the federal government's benefits system, will ensure that all individuals have access to an affordable, portable alternative at a price they can afford.

Given the current inefficiencies in our system, the impact of the Obama plan will be profound. Besides the $2,500 savings in medical costs for the typical family, according to our research annual business-sector costs will fall by about $140 billion. Our figures suggest that decreasing employer costs by this amount will result in the expansion of employer-provided health insurance to 10 million previously uninsured people.

We know these savings are attainable: other countries have them today. We spend 40% more than other countries such as Canada and Switzeraland on health care -- nearly $1 trillion -- but our health outcomes are no better.

The lower cost of benefits will allow employers to hire some 90,000 low-wage workers currently without jobs because they are currently priced out of the market. It also would pull one and a half million more workers out of low-wage low-benefit and into high-wage high-benefit jobs. Workers currently locked into jobs because they fear losing their health benefits would be able to move to entrepreneurial jobs, or simply work part time.

In contrast, Sen. McCain, who constantly repeats his no-new-taxes promise on the campaign trail, proposes a big tax hike as the solution to our health-care crisis. His plan would raise taxes on workers who receive health benefits, with the idea of encouraging their employers to drop coverage. A study conducted by University of Michigan economist Tom Buchmueller and colleagues published in the journal Health Affairs suggests that the McCain tax hike will lead employers to drop coverage for over 20 million Americans.

What would happen to these people? Mr. McCain will give them a small tax credit, $5,000 for a family and $2,500 for an individual, and tell them to navigate the individual insurance market on their own.



For middle- and lower-income people, the credits are way too small. They are less than half the cost of policies today ($12,000 on average for a family), and are far below the 75% that most employers offering coverage contribute. Further, their value would erode over time, as the credit increases less rapidly than average premiums.

Those already sick are completely out of luck, as individual insurers are free to deny coverage due to pre-existing conditions. Mr. McCain has proposed a high-risk pool for the very sick, but has not put forward the money to make it work.

Even for those healthy enough to gain coverage in the individual insurance market, the screening, marketing and individual underwriting that insurers do to separate healthy from sick boosts premiums by 17% relative to employer-provided insurance, well beyond the help offered by the McCain tax credit.

The immediate consequences of the McCain plan are even worse. The McCain plan is a big tax increase on employers and workers. With the economy in recession, that's the last thing America's businesses need.

Finally, Mr. McCain does nothing to bend the curve of rising health-care costs downward. He does not fund investments in learning, rewarding and preventing. Eliminating state coverage requirements will slash preventive service availability.

The high cost-sharing plans he envisions will similarly discourage preventive care. And as he does nothing about the hidden costs of the uncovered -- expensive ER visits, recurring conditions resulting from inadequate follow-up care.

Everyone agrees our health-care financing system must change. But only one candidate, Barack Obama, has real change we can believe in.

Mr. Cutler is professor of economics at Harvard and an adviser to Barack Obama's presidential campaign. Mr. DeLong is professor of economics at University of California, Berkeley. Ms. Marciarille is adjunct law professor at McGeorge School of Law.