Despite all of the parallels drawn between President Obama and Franklin Roosevelt, the new administration initially responded to the health care crisis as though it were 1993, not 1933. Obama sought a minimalist health care reform solution, rather than seizing on the exceptional political moment to strike out in a bold new direction.

Held captive for so long by neoliberal ideas about how best to organize the U.S. economy and society, Obama and many other would-be reformers put competition and consumer choice at the center of their efforts to reform the U.S. health care system. Dozens of major organizations close to the Democratic Party, ranging from the AFL-CIO to MoveOn.org to the Children’s Defense Fund, mobilized over the last year or so on behalf of a breathtakingly modest solution: creation of a public health care plan—essentially a nonprofit insurance company—to compete with the commercial health care insurers. They largely abandoned the call for a single-payer health care system (modeled after Canada’s) around which many progressives have rallied since the demise of the Clinton administration’s Health Security Act. This faith in market-led solutions for health care remained largely unshaken in spite of the recent financial collapse.

The Public Plan Panacea

The centerpiece of their efforts was the creation of a new government-sponsored health care plan for uninsured Americans under age sixty-five who lack employer-based health benefits and do not qualify for Medicaid. This group would be able to choose between a standard package of benefits offered by the public plan or a comparable one provided by private insurers.

Private insurers insisted that a public plan would not compete on a level playing field and would ultimately drive them out of business. Their contention subtly recast the debate over health care reform. The focus shifted to how to make the public plan a “fair” competitor and away from the enormous inequities of the under-regulated private insurance market that have contributed so significantly to the country’s health care crisis. In order to rally support for a public plan and neutralize charges of unfair advantage, some supporters of the public plan watered down the original proposal beyond recognition or bargained away (or shunned) key reforms needed to rein in insurers and providers.1

Supporters of a new government-sponsored health care plan extolled the public sector for its reported superior ability to contain costs and pursue innovations that improve the quality of care.2 They heralded Medicare in particular for retaining wide access while containing expenditures on health care through cost-saving innovations like the prospective payment system introduced in 1983 and fee schedules for doctors introduced in the 1990s.3 Left out of the story is that, for many years, Medicare was largely an unregulated cash cow for providers. The quid pro quo to get physicians and hospitals to end their jihad against Medicare in the mid-1960s was an agreement to reimburse them on a fee-for-service basis and eschew imposing serious cost or budget controls.

For public programs, the devil is in the details. Medicare has been able to spread risks broadly and maintain wide access for the simple reason that the government bluntly requires it to do so. Nearly everyone qualifies for Medicare upon reaching age sixty-five, regardless of health status or income level. This has created at least some sense of social solidarity and given older Americans (across the board) a stake in defending a generous health care system for the elderly. Medicaid, the means-tested health care program for low-income Americans, has had a strikingly different trajectory. It has been far easier to starve Medicaid for funding because lower-income Americans do not enjoy the political clout of the elderly. Also, Medicaid is a mixed state-federal program, while Medicare is primarily a federal program with benefits not varying significantly from state to state.

The public plan that reformers envisioned differed from Medicare in key ways that reinforced the current pathologies of the U.S. health care system. First, supporters talked about the need for competition and choice. Yet employees (and their dependents) who receive health insurance through their workplaces (nearly 160 million Americans) would likely not be free to choose the public plan. These captive consumers might only have the option to go public if their employers decided to switch over to the public system or gave up providing benefits altogether and paid the penalty tax. If that penalty tax is set too low, employers might stop providing health insurance, forcing more of the health care coverage costs onto the government and, ultimately, taxpayers.

Even if the public plan turned out to be cheaper and better than private insurance plans, employers who continue to provide health care coverage would not necessarily offer their employees the public option. For some employers, this would be like drinking the Kool-Aid. In the history of the development of U.S. social policy, business leaders have repeatedly allowed their visceral ideological opposition to governmental programs to trump their immediate bottom-line calculations. The fear is that permitting an expansion of the public sector in one area opens the door to more governmental expansion in other areas. A number of large employers, most notably General Electric (GE), walked away from Clinton’s Health Security Act for precisely this reason.

Another crucial factor is that many large employers are, not surprisingly, large manufacturers of medical devices and other medical products. Is GE ready to funnel its employees into a government-sponsored plan with potentially enormous power to, say, reduce the costs and utilization of MRI machines, a multi-billion a year business for the company? Furthermore, as much as employers begrudge the cost of employees’ health care coverage, many of them do not want to relinquish the paternalistic control that employer-based benefits give them over their workers.

In theory, the public plan should be able to provide better benefits and services at lower costs because it presumably would not be saddled with high administrative costs and pressure to turn a profit for shareholders. But the public program, with its superior benefits and initially lower costs, could end up becoming a magnet for sicker patients in need of costlier care. This would drive up the costs of the public plan, prompting healthier people to flock to less expensive private insurance options.

It is not obvious that the public plan could compete with private plans in terms of costs, quality, and services alone if U.S. insurance companies (unlike those in Europe) remain free to market and advertise their products with few restrictions. One can imagine driving down the highway and seeing massive billboards paid for by private insurers with slogans like: “Should Uncle Sam’s plan tell your doctor what to do?” This could erode public confidence in the government’s ability to solve pressing problems.

The public plan option could undermine public support for governmental intervention in other realms of social policy. It might end up pitting the captive consumers of employerbased private insurance against people enrolled in the public plan. It would be politically explosive if employees covered by private health insurance came to believe that they were providing huge subsidies to a superior public plan in which they were not permitted to enroll. Private insurers would presumably frame their marketing and political strategies around allegations of unfair cost-shifting, putting the public plan further on the defensive.

In short, public plans are not necessarily innately superior when it comes to developing cost-saving innovations. The real question is: under what conditions do the political stars line up to the point where both the government and the public are willing to use their considerable powers as the prime purchasers of health care to rein in providers and insurers? The new public plan could look like the largely unregulated Medicare program in 1965, or the semi-regulated Medicare program in 2009, or today’s underfunded Medicaid program, or the health care equivalent of Fannie Mae and Freddie Mac (the quasi-public mortgage companies that were leading culprits in the recent subprime fiasco and foreclosure crisis).

The Single-Payer Alternative

The public plan option has split organized labor and other key groups. Just like fifteen years ago during the debacle over the Clinton proposal, supporters of a single-payer plan are some of today’s fiercest opponents of a minimalist approach to health care reform. They essentially advocate vaporizing the U.S. health insurance industry and replacing it with a government-run program modeled after Canada’s system. The government would pay most medical bills directly; doctors, hospitals, and other providers would operate within global budgets but remain in the private sector; and everyone would be entitled to a basic package of health benefits. The single-payer message has not changed much from the early 1990s, although supporters invested more effort this time around in mobilizing organized labor and other groups to endorse their position. Hundreds of union locals and dozens of central labor councils and state labor federations passed symbolic resolutions in favor of single-payer legislation, as did the international chapters of many major unions.

A single-payer system has a lot going for it. Single-payer advocates have drawn public attention to the extraordinary pathologies of the U.S. health care system, notably the enormous costs amidst gross lapses in care and coverage and the billions squandered on administrative costs. They also have offered the most progressive tax proposals to finance universal health care. When the Congressional Budget Office (CBO) analyzed all the major health care reform proposals then under consideration in 1993-1994, it concluded that a single-payer plan was the only one likely to achieve universal coverage while saving money. This time around, single-payer advocates have been pushing legislators to conduct hearings on the latest single-payer legislation and to have the CBO cost it out.

Earlier in his political career, Obama spoke strongly in favor of a single-payer system. Today he acknowledges that if he were starting from scratch, single-payer would be preferable but that the best option now is to build on the current system. In the opening months of the health care reform debate, the president, Senator Max Baucus (D-MT)—the chairman of the pivotal Senate Finance Committee—and other leading political players consciously sought to exile or delegitimize single-payer advocates. Meanwhile, they surrounded themselves at the March 2009 health care summit and other leading forums with the “men and women who made their careers killing health care reform,” in the words of the Washington Post. 4

Some key labor leaders publicly made polite noises about a single-payer system, while disparaging it behind the scenes. Most labor leaders focused their energy and resources on backing whatever Obama favored, even though the president was stunningly vague on key issues. Some rallied around the public plan after convincing themselves that it really is a Trojan horse that will ultimately unleash a single-payer plan after enfeebling the private insurance industry. Others signed up because they consider themselves political realists and view the single-payer option as politically dead on arrival.

The Insurance Industry

President Obama and other would-be reformers attempted to skirt an axiom of medical economics that is at the heart of health care politics: “A dollar spent on medical care is a dollar of income for someone.”5 Obama attempted to finesse the politically explosive cost-containment issue by focusing on what one critic called “faith-based savings,” like expanding the use of electronic health care records, and prevention and disease management programs.6 But most experts doubt that these measures will yield sizable savings any time soon.

Health care reform that achieves universal, high-quality, affordable care is fundamentally a redistributive issue with high political and economic stakes. Meaningful cost control will require strong governmental leadership that sets targets or caps on medical spending. This can be done directly, as Canada does with a single-payer system operating within global budgets and that accords private insurers a relatively minor role, or as Britain does with its government-run National Health Service. The alternative is to retain a large private insurance sector, as many European countries do, but keep it (and the medical industry) tightly regulated.

Competition is a weak, indirect way to contain costs in the absence of strong regulatory institutions. Historically, the United States has been shockingly unwilling to seriously regulate its private insurance industry. U.S. health insurance companies are not just underregulated compared to private insurers overseas, but also compared to many other major industries in the United States. A hodgepodge of loose regulations at the state level, enforced by ineffectual and sometimes corrupt state insurance departments, governs the health insurance industry.

Today’s insurance industry is gung-ho on serving as the stick that prods doctors and hospitals to adopt pay-for-performance standards and other cost-cutting and quality control measures. Insurers are outspoken advocates of greater transparency for physicians and hospitals, so that the public is better able to scrutinize their performance and costs. But insurance companies stridently defend their right to keep key information about their own operations confidential. As long as the private insurance industry is allowed to hide behind the cloak of business trade secrets, informed consumer choice—an important ingredient of successful market competition to contain costs—is a myth.7

Beginning in late 2008, U.S. health care insurers made what many commentators have billed as sweeping regulatory concessions. They signaled their willingness to accept all individual applicants, regardless of pre-existing health conditions. They also expressed their willingness to discontinue setting premium rates that are based on health status or gender, but only if Congress mandated that all Americans carry health insurance—i.e., if all Americans were forced to buy their products. These only look like major concessions in the American context, because U.S. insurers have included some whopping caveats. First, they would retain the option of setting rates based on age, geography, and family size in the individual market. This means that premium rates would continue to vary enormously, pricing many people out of the market. Insurers would also retain subtler means to attract healthier subscribers and discourage sicker people from seeking coverage, notably via their extensive marketing budgets and ingenious tactics—like locating their information offices on the upper floors of buildings without elevators. Insurers also made no promises to forego considering health status and other key factors in setting rates for small employers, one of the most profitable segments of the health insurance market.8

Reformers who bemoan the state of the U.S. health care system often bemoan the billions wasted each year on administrative costs, especially medical underwriting which separates the sick from the healthy so as to deny less healthy people insurance policies or charge them exorbitant rates for coverage. But other countries that depend on private insurers to deliver health care benefits—notably Germany, the Netherlands, and Switzerland—engage in medical underwriting to determine which subscribers present the greatest health risks. The difference is that this is a joint endeavor that requires insurers to make their operations far more transparent to governmental regulators who manage elaborate risk adjustment systems. For example, Germany’s hundreds of sickness funds, or private insurers, are required to participate in a risk adjustment mechanism that helps equalize premiums by taking into account dozens of risk factors, not just health status and gender, so that insurers do not cherry-pick people who will use the health care system the least.

The public plan was supposed to force private insurers to become more aggressive with providers in order to hold down costs and prices, or else risk losing customers to the public plan. But why should private insurers be accorded such a preeminent role in defining the public interest in the allocation of health care resources and imposing it on physicians and other providers? Other countries have created formal institutional mechanisms that provide the public and a broad range of stakeholders with a meaningful voice in how to divide up the limited health care pie and monitor health care quality. These formal institutions have real clout and are a long way from the vague and largely unenforceable voluntary promises to cut costs that the U.S. insurance industry and medical providers announced in May 2009, and that President Obama hailed as a watershed moment in health care reform.

Supporters of the public plan solution conceded that the insurance industry needs to be regulated more tightly, but this was not their main focus. Their emphasis on competition reinforced the idea that health care should be treated primarily as a private consumer good distributed by market principles. This undermined the idea of health care as a social good that needs to be organized around underlying principles of social solidarity, not market competition.

Advocates of the public plan jeopardized enormous political capital to get so little. They bent over backwards to convince the public and critics in the insurance industry that they will create a level playing field. This fostered the impression that the insurance industry has been playing fair and square all along. The terms of the debate shifted to the imaginary injustices that a mammoth public plan will inflict on a Lilliputian insurance industry that has historically been too weak and fragmented (or too disinterested) to put the cost-containment screws on providers. This revisionist portrait was at odds with the insurance industry’s real role in the U.S. health care crisis, past and present.

The U.S. insurance industry has been a shrewd behind-the-scenes political operator for well over a century. Each time health care reform has moved to center stage, outcries for more federal action have repeatedly ended up further entrenching the private insurance industry.9 This time may be no different.

Harry and Louise

The public plan solution emerged from the doldrums of the defeated Clinton proposal and out of a very particular reading of what went wrong fifteen years ago. In the revisionist account, Harry and Louise killed health care reform. Harry and Louise starred in a series of infamous commercials funded by the insurance industry. The fictional Harry and Louise sat around their kitchen table fretting that the Clinton plan would force them to change their current health care benefits and maybe even switch doctors.

The ghosts of Harry and Louise have had a striking hold on the current health care debate. The mantra from President Obama, Senator Baucus, Service Employees International Union (SEIU) President Andrew Stern, and other would-be reformers is that most Americans are basically content with their health care coverage and seek a uniquely American solution that keeps the current system of employer-sponsored benefits largely untouched. The biggest impact of the ad campaign (then and now) appears to have been on elite policy and opinion makers, who have persistently overestimated just how much Harry and Louise represented popular sentiment and how satisfied Americans are with their health care coverage. 10

Evidence continues to mount that Americans are profoundly dissatisfied with their health care system and are ready for major changes. The United States is nearly last in public satisfaction compared with other developed countries (and dead last among polled public health experts), and it’s no wonder why. Since the demise of the Clinton plan, the wheels have come off job-based benefits. Some employers have eliminated health benefits altogether while others are doggedly whittling them away.

It is no longer possible for most Americans to have six degrees of separation from the uninsured. With the official unemployment rate surpassing 8 percent in February 2009, a Kaiser Family Foundation survey found that 52 percent of people with employer-sponsored coverage were worried about losing it. Nearly eighty-seven million Americans were uninsured at some point in the last two years. The foreclosure crisis has riveted public attention on the enormous number of Americans who go bankrupt and risk losing their homes because of medical debts.

The minimalist approach to health care reform did not tap into this smoldering public anger over the health care system, or into the explosive public outrage at the financial industry, the business sector, and their congressional patrons in the wake of the economic meltdown. The political futures of several Democratic barons in Congress—including Senators Christopher Dodd and Charles Schumer, and Representative Charles Rangel—are clouded because of their close, see-no-evil ties to the banking and insurance industries nourished over the years by enormous campaign donations from these sectors. The time was ripe for an ambitious health care reform agenda that fundamentally challenged these special interests because the economic meltdown has made legislators on both sides of the congressional aisle particularly vulnerable to charges of shilling for the business sector. Obama’s decision to seed his administration with many free market protégés of Citigroup’s Robert Rubin also made him vulnerable on this score. So did the choice of Nancy-Ann DeParle, who has served as a director of many large health care companies, to be his health care czar.

We are in the midst of an economic meltdown widely understood to be the result of breathtaking malfeasance by the financial sector and its political patrons. Yet Obama and key advisers repeatedly singled out health care expenditures as the leading threat to the country’s long-term economic health. Characterizing health care as primarily an economic issue is costly. It fosters an exaggerated faith in the possibilities of forging productive coalitions with the business and insurance sectors, and diminishes interest in cultivating a wider social movement on behalf of universal health care. This is exactly what happened in 1993-1994.11 It also distracts political and public attention away from arguably more dire threats to the economy, including the opaque bailout of the financial sector, the gargantuan military budget, and the grossly inequitable tax system. It also stokes public hysteria over the costs of Medicare and Social Security, paving the way for major retrenchments in these two central pillars of the U.S. welfare state.

The Obama administration and most other Democratic Party leaders have responded to the health care crisis in the same way that they have responded to the financial crisis. They have taken extreme care not to upset the basic interests of the powerful insurance industry and segments of the medical industry, and not to raise fundamental questions about the political and economic interests that have perpetuated such a dysfunctional health care system. The biggest surprise is how the leadership of organized labor and many supposedly progressive groups has unquestionably followed Obama and congressional Democrats on health care reform. As a consequence, they may be squandering an exceptional political moment. If the U.S. government can essentially seize control of its automobile sector and contemplate the nationalization of some banks, the beginning of the end of the for-profit health insurance industry seems less far-fetched than it once did.

If the Obama administration and leading Democrats calculated that the current political conditions were not fortuitous enough to secure a single-payer plan, they should at least have pushed for a seriously regulated insurance system of the kind that has predominated in Western Europe (and is now under siege by a push for more privatization there). Failure to attempt even that is perilous for the cause of universal health care and for their political futures. The president and the Democrats risk looking (in a couple of years) like Herbert Hoover and the Republicans on the eve of their historic 1932 defeat, rather than FDR and the Democrats on their march to a triumphant re-election in 1936.

There are not many times in American history when the previous administration and ruling party have been so thoroughly discredited, as have former President George W. Bush and the Republican Party; or when the princes of the financial sector have been “stripped naked as leaders and strategists,” in the words of Simon Johnson, former chief economist at the International Monetary Fund.12 Would-be reformers who recently fought so doggedly to essentially create a nonprofit health insurance company did not recognize the potential of this political moment. Under the spell of the Stockholm Syndrome, they identified too closely with their captors—the insurers, the medical industry, and the lure of market-led solutions. Identifying too closely with one’s captors is risky. When the window opens, you don’t make a run for it; indeed, you may not even notice the opening.

Notes

 

1. Robert Pear, “Schumer Offers Middle Ground on Health Care,” New York Times, May 5, 2009; Len M. Nichols and John M. Bertko, “A Modest Proposal for a Competing Public Health Plan” (Washington, D.C.: New America Foundation, March 2009).

2. Jacob S. Hacker, “The Case for Public Plan Choice in National Health Reform: Key to Cost Control and Quality Coverage” (Washington, D.C.: Institute for America’s Future, 2008).

3. Instead of reimbursing hospitals for their itemized costs after the fact, under the prospective payment system hospitals receive a predetermined payment based on fee schedules for the specific diagnoses (the so-called diagnosis related groups, or DRGs).

4. Ceci Connolly, “Ex-Foes of Health-Care Reform Emerge as Supporters,” Washington Post, March 6, 2009.

5. Theodore Marmor, Jonathan Oberlander, and Joseph White, “The Obama Administration’s Options for Health Care Cost Control,” Annals of Internal Medicine 150 (April 7, 2009): 485.

6. Jonathan Oberlander, “Miracle or Mirage? Health Care Reform and the 2008 Election” (lecture, Leonard Davis Institute, University of Pennsylvania, October 10, 2008).

7. Diane Archer, “Making Health Care Work for American Families: Saving Money, Saving Lives,” statement before the U.S. House Committee on Energy and Commerce, Subcommittee on Health, April 2, 2009.

8. Reed Abelson, “Health Insurers Balk at Some Changes,” New York Times, June 3, 2009.

9. Jill Quadagno, One Nation Uninsured: Why the U.S. Has No National Health Insurance (New York: Oxford University Press, 2005), 75; and Jennifer Klein, For All These Rights: Business, Labor, and the Shaping of America’s Public-Private Welfare State (Princeton: Princeton University Press, 2003).

10. Mollyann Brodie, “Impact of Issue Advertisements and the Legacy of Harry and Louise,” Journal of Health Politics, Policy, and Law 26, no. 6 (December 2001): 1353-60.

11. For more on the 1993-1994 debate, see Marie Gottschalk, The Shadow Welfare State: Labor, Business, and the Politics of Health Care in the United States (Ithaca: Cornell University Press, 2000).

12. Simon Johnson, “The Quiet Coup,” Atlantic Online, May 2009, http://www.theatlantic.com/doc/ print/200905/imf-advice (accessed April 4, 2009).