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McCain’s Free-Market Health Plan Would Boost Role of High-Risk Pools

By admin | June 23, 2008

The Wall Street Journal

June 2, 2008

McCain’s Free-Market Health Plan Would Boost Role of High-Risk Pools

By Laura Meckler and Anna Wilde Mathews


John McCain’s plan for a health-care system built around consumers shopping for their own insurance comes with a significant downside: for people with a history of illness, it can be impossible to find coverage on their own.


The Republican presidential candidate’s main answer is to bolster the role of high-risk pools, which sell insurance to people with pre-existing conditions such as diabetes, cancer and AIDS.


These pools, typically created by state governments, require significant government subsidies, charge high premiums and sometimes sharply restrict benefits or enrollment. Nationally, fewer than 200,000 people are enrolled in such pools, while 47 million people in the U.S. are without insurance.


“They tend not to work particularly well,” said Sara Collins, an assistant vice president at the Commonwealth Fund, a nonprofit health-care-research group. “States have really struggled to finance these adequately.”


Sen. McCain… would rely on tax cuts, market forces and consumers themselves to broaden access to coverage, and give a smaller role to employers as a source of coverage.


To fill the gap, Sen. McCain proposed new high-risk pools that would scoop up those who can’t get insurance on their own. He called it a Guaranteed Access Plan. Premiums would be reasonable, with subsidies for low-income participants, but he has given few other details.


(Douglas Holtz-Eakin, Sen. McCain’s chief policy adviser) has suggested the federal government might need to spend $7 billion to $10 billion to subsidize these pools — an estimate he calls “extremely preliminary.” Many experts said that is nowhere near enough, particularly given the large number of people with pre-existing conditions who would need this help if employers send their workers out to the open market.





Comment:  Sen. John McCain’s initial proposal for health care reform was simply to change tax incentives, reducing support for moderately-regulated, employer-sponsored health plans, and providing tax credit incentives that would encourage individuals to shop in the less-regulated, individual insurance market – a market capable of providing a much greater choice of innovative health plans. It quickly became obvious that these innovative products would be designed to avoid paying for much of our health care. He had to come up with a proposal to answer critics of his plan.


Over half of us receive our coverage through employer-sponsored group plans. Although employer-sponsored plans cover a lower-cost, healthier segment of our population, health care has now become so expensive that premiums for these more comprehensive plans have become much less affordable. Employers have been attempting to reduce their costs by trimming benefits and expanding out-of-pocket expenses for their employees, but even these changes have failed to make premiums affordable.


Sen. McCain contends that a less-regulated individual insurance market is capable of offering innovative products with premiums that would be affordable for most of us if we were to use his proposed tax credit. In reality, the tax credit is not large enough to make premiums affordable for plans comparable to what most employers provide. For premiums to be competitive, the plans would have to reduce benefits and require much greater out-of-pocket cost sharing. These plans would work only for individuals who are healthy and who will remain healthy, defeating the purpose of insurance. 


In a less-regulated market, more comprehensive coverage comparable to current employer-sponsored plans attracts individuals who have greater health care needs. It is unlikely that those plans would even be offered in the individual market under Sen. McCain’s proposal, but if they were, they would rapidly withdraw from the market because of the death spiral caused by the ever higher premiums that must be charged as the sick enroll and the healthy drop out. People who need care would be shut out of the individual market.


Sen. McCain could not really sit on a proposal that would cover only the 80 percent of us who are healthy. He had to propose some mechanism of paying for the 80 percent of health care that is used by the 20 percent of us who have significant health care needs. His solution is to promote state-run high-risk pools that would provide that coverage. 


We do already have considerable experience with these pools, and it certainly is not good. The primary problem is that the cost per participant is extremely high. Most states severely restrict the number of participants, and many states haven’t even established such pools. The high premiums are even less affordable, and coverage is very skimpy, usually with very low lifetime caps.


In 2006, private plans, out-of-pocket expenses, and other private spending financed 54.7 percent of national personal health care expenditures (KFF/Urban Institute). CMS projects for 2008 a total personal health care expenditure of $1,999 billion. Thus private health care spending is projected to be $1,093 billion this year. The 20 percent of health care consumed by the 80 percent of us who are relatively healthy would cost about $218 billion. The 80 percent consumed by the 20 percent of individuals with significant health care needs would cost about $874 billion in private spending. 


It is much of this $874 billion that would be transferred to the state high-risk pools under Sen. McCain’s proposal. His adviser, Douglas Holtz-Eakin, provides an “extremely preliminary” estimate of $7 billion to $10 billion in federal subsidies for these pools. Who pays the other $864 billion? The individual?


Excluding those covered by Medicare, Medicaid and other public programs, 225 million of us have private insurance or are uninsured. Twenty percent of those, or 45 million people, theoretically would be in the high-risk pool if everyone were to obtain coverage under his program. If the high-risk individuals were responsible for the remaining $864 billion, each would have to pay $19,200. Obviously, that can’t work.


Others propose that high-risk pools be funded by an assessment on commercial insurers. But that moves the financing for high-risk individuals back into the private insurance risk pools. Not only would that drive up premiums, which are already unaffordable, it would also add another layer of administrative costs in a system that is already overburdened with administrative excesses.


Now you know why state high-risk pools don’t work. There is only one reason to propose them in the first place – that is to relieve the private insurance industry of its responsibility of paying for necessary health care, merely to enhance its successful business model of selling insurance primarily to the people who don’t need care now, and hopefully won’t in the future.


As John Geyman says, the private insurance industry is dying, and we shouldn’t try to resuscitate it – certainly not if we we taxpayers are the ones who are going to be indemnifying those who actually need health care. 


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