4 August 2009 
The President and Speaker Pelosi have shifted their health care message for the August Congressional recess. They are no longer talking about health care reform and covering all of the uninsured. They are instead:
- talking about health insurance reform;
- stressing how changes in insurance rules will benefit those who already have insurance; and
- attacking health insurers for opposing reform, and Republicans for allying with health insurers.
The last point is problematic on four fronts:
- Three months ago the President spoke at the White House flanked by a health insurance CEO (George Halvorson of Kaiser Permanente) as part of his message that he was working productively with affected interests to produce savings.
- Insurers are trying to remove the so-called “public option,” but are not opposing these bills broadly. And they’re certainly not running ad campaigns against the bills as they did in 1994. The head of the health insurance lobby is stressing that the industry wants to continue working with the Obama Administration and both parties in Congress.
- Republicans and health insurers have a common interest in opposing the public option, but are not in the same place on many other issues, and they’re certainly not coordinating their public messages.
- Democrats received more (60%) campaign contributions in the last election cycle from the health insurance industry than Republicans (40%). Six of the top 10 Congressional recipients, and 12 of the top 20, were Democrats. Particularly notable are two Chairmen writing the bills: Sen Baucus (#4) and Rep. Rangel (#6).
Here’s the President on May 11th in the State Dining Room:
Well, I just concluded a extraordinarily productive meeting with organizations and associations that are going to be essential to the work of health care reform in this country — groups that represent everyone from union members to insurance companies, from doctors and hospitals to pharmaceutical companies.
Attending the President’s meeting for the insurance industry were George Halvorson, Jay Gellert of Health Net Inc., and the top lobbyist for health insurers, Karen Ignani.
Some in Washington think the White House/Pelosi messaging shift is a strategic retreat, laying the groundwork for a fallback position in which the President could declare victory by enacting just the insurance reforms. As a matter of abstract legislative strategy this is a reasonable supposition. The health care reform legislative effort is going poorly for the President, and now is a logical time to make an initial shift to position for a partial win later.
But I don’t see it. The health insurance reforms cannot be separated from the rest of the bill for substantive and procedural reasons. While the spending numbers could obviously be dialed way down, I don’t see how one would substantively separate the health insurance reforms from the rest of the bill and have it still work. Even if you could, I don’t see how you could procedurally get this done given the likely vote situation. Even if the abstract legislative strategy is correct that it’s time for the Administration to cut their losses and prepare for a partial victory, I cannot figure out how they could execute such a strategic shift and deliver the desired result. They may be stuck with something close to an all-or-nothing choice.
A better explanation is that the President and his allies remain committed to the full reform package, and are just choosing to sell a different facet of it over the next month. Their prior communications efforts have failed. I think they’re sticking to their strategy and just changing their message.
Policy: four sides of a box
The President, his Cabinet and staff, and Congressional Democrats are fanning out across the country to talk about proposed legislative changes to health insurance rules. The most important for this discussion are:
- Guaranteed issue and renewal: Everyone can buy health insurance, no matter what their medical condition. And everyone can renew their insurance, no matter what their medical condition.
- Community rating: Everyone pays the same premium, no matter what their medical condition.
(Caveat: The pending legislation would mandate modified community rating. Premiums could vary, but only within certain limits.)
These provisions would mean lower premiums for people who are sick (e.g. with cancer) or have a high risk of getting sick (e.g., disease free, but with a family history of cancer, or a lifetime smoker). They would mean higher premiums for those who are healthy and have a relatively lower chance of getting sick. These are redistributive policies that benefit the sick or likely-to-be-sick at the expense of the likely-to-be-healthy.
To make them work you have to make the low-risk people buy health insurance.
Here’s an extreme example. The numbers are silly, but I’m trying to illustrate the concepts.
- Imagine the world consists of two people, Bob and Charlie.
- Bob is healthy. His expected health costs next year are $5,000.
- Charlie has cancer. His expected health costs next year are $95,000.
- Under current law, Charlie probably can’t buy health insurance. If he can, he has to pay about $95,000 for it, which may be more than he can afford.
- If you implement guaranteed issue and (strict) community rating, then Charlie can buy health insurance, and Bob and Charlie each pay the same $50,000 premium.
- Under this new policy Charlie is a big winner, Bob a big loser.
- Bob may choose instead to go uninsured, rather than pay $45K more in premiums than his expected health costs. If he does, then Charlie’s back to paying $95K, since there’s no one to subsidize him.
For this system to work you have to require that Bob buy health insurance and pay the subsidy implicit in his community rated premium. You need an individual mandate to make guaranteed issue and community rating work.
If you want the biggest health insurance reforms being pushed by the President and Speaker (guaranteed issue and renewal, and a version of community rating), then you also have to have an individual mandate.
But an individual mandate means everyone must have or buy health insurance. There will be low-income people not covered by Medicaid who won’t be able to afford health insurance. If you want them to buy, you’ll either have to subsidize them or force them to make some extremely difficult choices within their already tight budgets. Elected officials will choose the subsidy route.
You need to subsidize lots of low-income (and even low-to-moderate income) people if you implement an individual mandate.
Now the President has said that any increased spending must not increase the budget deficit. The subsidies necessitated by the mandate must therefore be offset with spending cuts or, in the Congressional Democrat view of the world, with tax increases.
You need to cut spending [or increase taxes, or both] if you want your subsidies not to increase the net budget deficit.
We have completed the four-sided box. Start by presuming that it’s too hard to enact a big bill. Assume that strategically you want to enact only the insurance reforms that you think are the most politically attractive component of the bill:
- You want to enact only the health insurance reforms.
- You need an individual mandate to make the health insurance reforms work.
- You need to subsidize lots of people if you implement an individual mandate.
- You need to cut spending or increase taxes if you want your subsidies not to increase the budget deficit.
You’re right back where you started. To enact the health insurance reforms, you need a complete bill that includes an individual mandate, subsidies, and politically painful offsets. You can drop the employer mandate, and you certainly don’t need an obscene $1+ trillion of subsidies. My point is simply that you can’t hive off the insurance mandates and make the policy work.
Procedure: Return of the Byrd rule
Suppose you ignored the substantive problems and had a bill that just contained the insurance reforms. Could you enact it?
You could, but only if you have 60 Senate votes. You could not use the fast-track reconciliation procedure to enact guaranteed issue and community rating because of the Byrd rule. I think (but am not certain) that the same would apply to an individual mandate.
Long-time readers of this blog may remember that a reconciliation bill requires only 51 votes to pass the Senate, instead of the usual 60. Everyone is therefore tempted to ask, “Can I get my bill done through reconciliation?”
The Byrd rule contains several “prongs.” For our purpose the relevant prong is that every provision in a reconciliation bill must directly affect federal spending or taxes, or be a “necessary term or condition” of another provision that directly affects spending or taxes. If a provision fails both of these tests, then it has to come out of the reconciliation bill unless you have 60 votes to “waive” the Byrd rule.
Insurance mandates fail both these tests. Changing the relative prices that insurers can charge different customers has no direct effect on the federal budget. And while you could argue that these mandates make the rest of a health care reform bill work better, that’s not the “necessary term or condition” test. To pass that test, you have to successfully argue that a spending or tax provision would no longer work if the insurance mandates dropped out of the bill. That’s just not the case. I think it’s a slam dunk that a guaranteed issue/renewal mandate, as well as community rating mandates, would violate the Byrd rule.
If the Senate Parliamentarian agrees with me, then you could not use the reconciliation process to do a “health insurance reform” bill. And if you tried to enact a broader “health care reform” bill like the House Tri-Committee bill through reconciliation, those insurance mandates would drop out of the bill through the Byrd rule unless 60 Senators supported them.
To simplify, unless the Senate Parliamentarian has a radically new view (which I seriously doubt), you need 60 votes in the Senate to enact the health insurance reforms being championed by the President and Speaker this month. Reconciliation won’t let you pass them with just 51 votes in the Senate.
Conclusion
Other than the shift in communications strategy, I see no other signs of a change in strategy by the President or his team. They do not appear to be preparing for a health-insurance-only fallback bill.
I cannot see how one would make such a bill work in practice. You need the individual mandate, the subsidies, and offsets to make it work as a policy matter.
Even if you could make the policy work, going with a narrower insurance-only bill would not work through reconciliation, so you don’t buy yourself a big procedural benefit.
I disagree with those who say this is a new strategy. It’s a new message to try to sell the same strategy, and with the same desired policy outcome as we’ve seen over the past few months.
(Photo credit: whitehouse.gov)
Excellent article, Keith, and most helpful (as usual).
I have two questions, one of which has been bothering me since you first wrote about reconciliation.
1) If it is a “slam dunk”–and you persuasively argue it is–then how can the Dems even threaten such a thing without looking absurd? The media, at least, reports it as if it it’s a serious threat, and I haven’t heard any Republican in Congress say what you’re saying. They just say, “Oh that would be dastardly, partisan, etc., etc.”
I’m surely revealing my ignorance here, but couldn’t they just argue exactly what you’re arguing to the parliamentarian? That is, couldn’t they say, “Look, health insurance is designed to cut costs, or reduce the deficit. Hence, the mandates are indeed necessary, since like the stimulus they are the only solution, a necessary condition of budget slashing. They therefore go hand in hand with the new taxes.”
2) For the life of me, I do not understand what is keeping Grassley, Enzi, and the other guy at the table with this “co-op” nonsense. Is there some endgame strategy going on here? Hatch dropped out, so leaving the three to negotiate keeps the bad ideas on life support long enough for them to drop out at the eleventh hour and tank the whole thing.
Again, I don’t know. If it isn’t strategic, then I don’t see the point in what they’re doing. It only seems to lend bipartisan legitimacy to the co-op notion.
Thanks again for your insight.
Keith, you do a great job of explaining the nuts and bolts on the flip side of the flowery rhetoric.
The government cannot give to you without taking from someone else.
For whatever reason, Americans are not mature enough to realize this. They seem to think if we just stop those evil insurance companies and greedy drug manufacturers we can pay for everyones health care. Eventually, when we run out of rich people and evil profit seekers the only someone left is you.
The key to affordable health care is self insurance. The more you are willing to self insure (through higher deductibles and higher co-pays), the lower your monthly premiums. Apparently, advocating that individuals pay for their own health care is not too popular right now.
Yesterday, I wrote about the White House change in message but I focused on the message that insurers profits were to blame for rising prices. Speaker Pelosi calls them villains and I provided a clip of her statement making that point quite clearly. I believe leading into the recess, with polls clearly showing the Administration message not selling, there was a decision made to try a different tact. I noticed in clips of town halls, which are clearly a PR disaster for Dems, Kathleen Sebilius doing her level best to show government health care is good, she points to Medicare as proof. To sell a message government run health care is not a bad or scary thing, they need to have a “villain,” they chose the insurers. I can see why they might do this as of all the participants in the health care arena, insurers were the most likely to be believable villains.
If you look at the performance of insurers recently, though, it is tough to make the case they were gouging obscene profits, the facts just don’t bear that out. It is quite likely they were feeling the pains of overuse of services and high costs as much or more than anyone. This makes more sense to those of us who expected them to fight this tooth and nail as they had done in the Clinton reform. I believe the insurers were willing to take a place at the negotiation table with the precondition they would fight a public option. I had suspected that the House at a minimum and the President expected to get the legislation through in such record speed, by the time the public option became the evident path, insurers would find themselves late out of the gate to fight the inevitable course.
My guess is the House believes there will have less trouble passing legislation with a public option than without. That may not be the case after these town halls are completed. I think the Administration overestimated their ability to persuade people the insurers were a worse threat than government. Rasmussen had a poll yesterday showing increased belief in the current health care system. People seem to be well aware a public plan run by government spells disaster for health care as we know it. Given the release of the massive loss in revenue yesterday as well as the PR disasters the Town Halls are proving to be, I think it would be time for the WH to think of a fall back position. They don’t appear ready to give up yet though and how long they hold on to a failing strategy would give me an idea how ideologically driven the reform may be. There is clearly a need for reforms, will the Administration listen to the public or plow ahead. Budget reconciliation would make 2010 a slaughter house. People are very concerned about government taking over health care.
Mary M–
See, what you said at the end captures my first question exactly. I cannot see how using reconciliation wouldn’t turn 2010 into a bloodbath. Even IF they could ram it through, the outrage would be thermonuclear. Many, many of these dems who (hypothetically) went for it would simply be kissing their careers good-bye. And are they all really THAT ideological? I don’t think so.
Nonetheless, here I am watching the news and listening to some phone conversation where Chuck Schumer is not mincing words, explicitly threatening to use reconciliation.
I don’t get it. If it not only has a slim chance of working, but would also, if it did work (and for that matter, if it didn’t) produce a bloodbath, why the grim threats? Hell, the Republicans could go out today and start pounding home that the Dems are threatening this, in an environment where they ram through 1,000 page monstrosities sight unseen. The public is certainly in a receptive mood for that kind of message.
And if the Republicans know this, and the Dems know that the Republicans know this, then again–why bother with the threats? They can call the Republicans obstructive without risking the backlash of threatened reconciliation. And yet they threaten.
My point is that none of it makes sense (unless I’m missing something) unless they believe it could work. Presumably they know the parliamentary protocols as well as Keith. Maybe Keith is overlooking something? I have no idea what; it’s just an inference.
It just makes me nervous.
Very informative + interesting post Keith.
This guaranteed issue/community rating kind of reminds me of the social security quagmire we are in. With SS, we need a lot of young people to, in effect, subsidize the older people. That ratio has dropped thru the years to the point where it cannot be continued.
With community rating/guaranteed issue, we need a lot of healthy people to, in effect, subsidize the less healthy. With an aging population, this too will be unsustainable in the same way the social security system is.
Once the link is broken between an individual’s premiums + his individual benefits, then you end up with an actuarily unsound + unsustainable model – just like social security.
Chris -
When you asked if it was possible that Keith was overlooking something, I would say I am sure he knows the rules and sees the reconciliation strategy as unworkable. The only thing I heard to the contrary was the suggestion that whether a bill could go through reconciliation would end up with Joe Biden deciding? I have no idea how true or not true that is. The Democrats have loads of votes and the idea that somehow Republicans are stopping this is absurd. The Democrats have 60 votes and one thing I considered was getting 60 votes to waive the Byrd rule and then getting 50 votes to pass the legislation. The ones who voted for waiving the rule would be left explaining to constitiuents why they voted for a procedural matter rather than voting for the bill itself.
I still think Keith is right this is a message change and I believe they are overestimating their ability to sell it to the public. I also think there is a concerted effort to paint Republicans as villains along with the insurers and they have a willing media to assist. It’s no coincidence this whole “birther” nonsense suddenly takes center stage when no such effort was taken to refute the crazy idea that George Bush engineered 911. It’s like they are orchestrating a message to the public, you may not like some of how we are governing but remember how crazy the Republicans were? Here is the problem with that strategy, though, memories fade and they will be infinitely more distant come 2010. I see now the Democrats who met with the President today are holding a press conference. Harry Reid described the obstructionist efforts of those who wanted only to derail productive communications with the people at Town Halls. It looks to me from the press conference, there is no change in strategy here at all.
Mary M–
You’re right. I too heard something about that Biden-decides stuff, although it made no sense to me. And getting 60 votes to wave the rule would be hilarious (in a mordant way, of course), considering that they could just pass it if they had the supermajority. I guess it would be a way for cowards to half vote-yes and half vote-no, if indeed the Byrd rule can be waved with 60 votes. In any case, it wouldn’t fly with constituents, as you noted. Something about the teapot feels like it’s about to boil over.
I’m still left wondering, if what Keith knows is common wisdom among the beltway pointy heads, just who the Schumers & co. think they’re frightening? It’s like threatening to throw a snowball into hell to cool the place down.
I agree that there’s no change in strategy; I’m not even sure there can be a change. The endgame would be amazing and fun to watch if it weren’t so unbelievably serious. Diluted proposals that “merely” want to touch-up insurance will bring “Hennessey’s Box” down on their heads, plus infuriate the left; public options and their ilk, as we’ve seen at the town halls, will blow it all to smithereens and leave the detritus strewn with teabags.
What else can they propose? Co-ops and VATs? They are definitely trying to square a circle here. They must know that they’re boxed in, unable to get what they want but unwilling to take nothing.
What then are they going to take? Krauthammer suggested it would be some kind of insurance reform, but Keith showed that so long as it requires community rating and guaranteed issue it’s a bust, since it brings us back to the VAT or taxing employee benefits.
And how sick is it that there is not a peep about tort reform? And entitlement reform? Wherefore art thou?
On the other hand, they do have a bridge to sell us.
Couldn’t the Dems challenge the Parliamentarian’s ruling and overrule with just 51 votes? Is there a supermajority requirement for overruling the Parliamentarian?
As a health economist, let me add that the real problem with the poor (“Medicaid”) population is that they are likely to be less healthy than the general population, and hence have a greater demand for care if the resource barrier is lifted. This is one of two reasons (the other being the politics and political economy of administrative pricing, easily understood from the standpoint of Stigler’s models) that Medicaid spending vastly exceeded the pre-passage estimation of program costs. Eliminating the resource constraints on the use of health care (which is the real underlying view of the proto-Marxist backers of healthcare reform) would create a tremendous moral hazard issue.
The solution lies in an pure version of Enthoven’s managed competition models. Unfortunately, the Leftist reform models (both Clinton’s 1990s plan and all the current administration and congressional proposals) reject a key component of Enthoven’s model, which is allowing coverage to vary between plans, while requiring employer and/or public subsidies to be LESS than the cost of the “cheapest” plan, which would create a consumer awareness of the marginal cost of additional coverage and remove much of the moral hazard problem. Under this model, consumers would select plans where the marginal cost of additional coverage is equal to the marginal utility of the coverage to them, and the market would favor plans which most efficiently provided desired coverage. Alain seems to believe that this would favor Kaiser-model pre-paid group practices – I’m not sure that is true due to the transaction costs of establishing such plans (as we saw after the 1973 HMO Act), but a case can be made that due to the higher quality of care and lower costs evident in Kaiser, Group Health of Puget Sound, HealthPartners, etc. that these plans might be favored. I think, however, that Alain underestimates the value of patient autonomy to the consumer, which after all was a big motivation for the HMO backlash of the late 1990s.
The current proposals, however, seem to be very insistent on mandated coverage, which means that there will be no signals to the consumer of the marginal value of coverage, which means that these plans will result in market failures and information asymmetry issues that are probably GREATER than exist under the current system. Beyond that, they require much more government interference than the already tremendous burdens (estimated at over $128 BILLION/year over benefits by Conover). I find it interesting that the reformers always are quick to yell “market-failure” and point at the arguments Arrow made about information asymetry in his ’63 paper, but are even quicker to overlook that he points out that the then-much lighter governmental role was as big or bigger a factor in market failure.
A second problem is that community rating would deny plans the ability to adjust premiums based on risk, which would lead to a quick adverse selection/death spiral problem in a good managed competition program. If premiums are set by the risk in the pool, and plans can adjust benefits packages periodically (as a REAL insurance program, or even care-prepayment plan would do), then this problem would be self correcting, as plans and consumers would adjust choices to obtain the best value. Unfortunately, absolutely nothing in the current proposals allows this.
Excellent post George.
What is your opinion – the pros + cons – of the Swiss healthcare model. Should you need a quick overview, here is a link on its salient points:
http://healthcare-economist.com/2008/04/23/health-care-around-the-world-switzerland/
Good question Chad. Simple answer: I have no idea. I find this reconciliation stuff to be extremely murky. I wasn’t even aware until Mary M. mentioned it that the parliamentarian could be overruled. I hope Keith lays out the possible reconciliation strategy that the Dems think could work, so we all get a better understanding of this business. In any case, it’s all Byzantine to me, and sometimes I get this sneaking suspicion that Congress intends it that way.
Well, we get what we pay for. Or… maybe not.
Guaranteed renewal for health insurance isn’t a reform. It’s been federal law since 1996, but the President doesn’t know this because he keeps saying “your insurers will drop you if you get sick.” If this were really occurring, Obama should be reporting these insurers to their state insurance departments. 42 U.S.C. §§ 300gg-12 (group insurance market), 300gg-42 (individual insurance market).
Despite being a left of center independent, I have found this blog to be very useful. Mainly to understand the ‘other side’ of the argument. I’m also not a fan of a single payer system (although I am in support of a publicly available option). So I’m glad I found a civil discussion/site that seems to stay away from empty rhetoric. That being said, I have a few comments…
Keith’s example, although he admits is extreme, is a little overly extreme and seems to leave out one part. The 95k that the sick person will pay, will most likely increase when the healthy person decides not to take coverage. It makes sense for Bob to not take coverage since it’ll cost him 45k. But the reality of a pool will be considerably less. This is one reason for an individual mandate. When healthy people don’t take insurance it decreases the pool causing those with insurance to pay more. I know that you all understand this, but it was left out of his example.
In that same area, I am slightly shocked at the attitude that people have towards sick and poor people, i.e. we are going to subsidize their health care. It’s great that people are healthy and have little to no health related expense. But for there to be almost no outward compassion is a little troubling to me. Believe me when I say that, while you may have to pay a higher premium, I can guarantee you that the sick person would switch places with you in a second. ALTHOUGH, I’m in favor of discounts/lower premiums for clear attempts at preventive care or healthy living. And certainly I’d be in favor of some type of increased premium for smokers and drug addicts. But these restrictions can become politicized VERY quickly so I’m cautious to support them.
While it’s true that the lobbyists for insurers are saying they’d like to work with the administration, big Pharma has spent six times the amount they normally spend. I get his point, that Dems are ‘finding a villain’, but it can not be claimed that the insurance companies have been altruistic in their business practices. In response to Roberto and the Federal Law of guaranteed renewal since 1996. It’s going to fall on the individual to bring charges against the insurance companies. On Bill Moyers, Wendell Potter discussed how 8 million people were trimmed from the roles in order to bring stock values up. I seriously doubt all 8 million people were dropped or left for honest reasons. I believe the point is, with mandated care and no condition in which a company can drop you, there will never be a time in which you’ll uninsured.
@ Mary M – The difference between the ‘birther’ movement and the 9/11 truth movement, is that no networks or elected officials took it very seriously at first, if ever. In fact, many called them unpatriotic lunatics and threw ‘treason’ around. I don’t think there was a Democratic elected official that wouldn’t have said it was ridiculous if they were asked point blank “do you think Bush planned the attacks?”. But there are GOP leaders and pundits that have given the birther’s validity.
There will probably be a public option in any bill that makes it to a vote because a majority of Americans want at least some type of public plan.
NOTE: if anyone has their hackles up at anything I said, put them down. I’m not trying to argue or be inflammatory. Just interested in people’s thoughts.
@Kevin Mc – Thanks for the thoughtful comment.
The solution lies in an pure version of Enthoven's managed competition models. Unfortunately, the Leftist reform models (both Clinton's 1990s plan and all the current administration and congressional proposals) reject a key component of Enthoven's model, which is allowing coverage to vary between plans, while requiring employer and/or public subsidies to be LESS than the cost of the "cheapest" plan, which would create a consumer awareness of the marginal cost of additional coverage and remove much of the moral hazard problem