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US health care system hangs in the balance of presidential election

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Six trends shaping the industries and sectors we cover in 2021

Six trends shaping the industries and sectors we cover in 2021

Capital Markets View – January 2021


US health care system hangs in the balance of presidential election

As theU.S. presidential race has gained momentum, so has a debate over the future of thecountry's health care system that has been fueled by proposals promising significantchanges in costs and coverage.

The candidates' policy platforms differ sharply, and independenthealth care experts warn that many of the ideas could dramatically boost insurancecosts or the national debt, force millions to lose coverage, or worsen care formany.

Republicancandidates Donald Trump, Ted Cruz and John Kasich want to repeal the AffordableCare Act. Cruz and Trump also favor the sale of health insurance plans across statelines, while Kasich proposes better primary care to control costs and moving fromthe current fee-for-service system to reduce health care expenses for individuals.

Democratic candidate Hillary Clinton advocates defending theACA and building upon it to curb the rise of out-of-pocket costs and expand Medicaid.Bernie Sanders, meanwhile, has proposed creating a federally administered single-payerhealth care program to ensure universal health care coverage.

Policy experts agree that some proposals put forth by candidatesfrom both sides are steps in the right direction but that a more complete strategyis needed by all to improve the health care system.The candidates' campaigns did not respond to requests for comment.

TheRepublican priority

Republican candidates argue that the health care lawcommonly known as Obamacare must be repealed, at least in part, to reduce federalspending and lower the rising costs of health insurance.

Undoing the ACA would be easier said than done. MarcGoldwein, senior vice president and senior policy director at the bipartisan Committeefor a Responsible Federal Budget, said in an interview that while there could bemany better solutions than the ACA, none of the remaining Republican candidateshas so far presented a comprehensive alternative.

Repealingthe law would "create chaos throughout the health care system" and beakin to scrapping the interstate highway system, said Timothy Jost, a professorat Washington and Lee University specializing in health care law and policy. "Itis inextricably interwoven into our entire health care system."

All healthinsurance providers in the U.S. modified their plans and regulators changed theirrules to comply with the ACA. Repealing it, Jost said, would cause Medicare providersand Medicare Advantage plans to cease being paid until the U.S. Department of Healthand Human Services implements new rules or finds a way to resurrect the old ones.

Replacinga law becomes harder the longer it remains in place, according to Douglas Hervey,a director with Leavitt Partners. "Once you give benefits to individuals, totake those away, it could be very politically challenging for representatives ofconstituents to do," he said.Leavitt Partners is a health care consulting firm founded by Mike Leavitt, who servedas secretary of Health and Human Services under President George W. Bush.

The requirement that insurers cover pre-existing health conditionswas a core part of the ACA. Healthinsurance costs would increase significantly if insurers stopped covering pre-existingconditions, said KennethThorpe, who chairs the Department of Health Policy and Management in the RollinsSchool of Public Health at Emory University and who served in the U.S. Departmentof Health and Human Services during Bill Clinton's presidency.Maintaining the mandate that pre-existing conditions be covered, without the requirementthat everyone buy insurance or pay a penalty, would have a very adverse effect on the cost ofhealth insurance, he explained.

Goldwein, however, thinks costs will increase and overall coveragewill decline if coverage is continued for pre-existing conditions, as individualswith such issues are more likely to buy insurance. "It is kind of a tough spotto be in where if you keep your pre-existing conditions, you are actually goingto increase the number of uninsured overall. But if you do not keep it, then youare going to make it so people who do have those conditions cannot be insured,"he said.

Cross-state sales conundrum

Trumpand Cruz say that enabling interstate insurance sales will reduce insurance costsand increase competition, but some industry observers disputed that this would significantlyimprove the U.S. health care system.

The ACAalready includes some provisions that encourage regional and national sales of insurance,but they have not proven popular with insurers, said Jost. For example, the ACAallows states to form health care choice interstate compacts to let insurers sellpolicies in participating states, accordingto the National Conference of State Legislators.

Jostalso does not think that allowing interstate insurance sales would dramaticallyreduce costs. "I do not know of any serious health care analyst who believesthat to be true," he said.

Herveyargued that enabling interstate insurance sales could create a venue for findingmore affordable insurance, but it might lead to coverage gaps and fewer coverageguarantees in plans bought across state lines, along with placing a financial burdenon insurers to set up shop in other states.

The NationalAssociation of Insurance Commissioners has saidallowing interstate sales of health insurance policies would "starta race to the bottom by allowing companies to choose their regulator." It arguesthat interstate insurance sales would allow some insurers to "cherry-pick"customers, leaving only individuals in good health able to find cheaper policies.It also believes the policy would eliminate insurance regulators' ability to assistconsumers as regulators of one state cannot enforce the laws of another.

Cross-statesales might be more beneficial for smaller states, according to Goldwein. He saidsuch a system might allow insurers to sell cheaper or more complete products instates with lesser regulatory burdens as "not all these regulations are good,"and could increase available options in smaller states.

Republican rumble

WhileTrump appearsto have the most detailed agenda, health care industry observers are not yet convinced.The CRFB estimatesthat Trump's plan would cause almost 21 million people to lose their insurance coverageand that repealing and replacingthe ACA could cost about $270 billion over 10 years.

"Mostcommentators believe that Donald Trump's health care plan looks like someone wenton Wikipedia for five minutes and put together several points," saidHervey of LeavittPartners.

Herveyadded that allowing tax deductions for health insurance premiums, which Trump advocates,does not offer any advantages to low-income individuals. He described an additionaldeduction as "pretty worthless" for the significant portion — almost half— of U.S. tax filers who have no income tax liability.

According to the CRFB's Goldwein, allowing tax deductions forpremiums might equalize tax treatment in some respects as employer-provided healthcare is not tax deductible, while self-employed individuals can deduct premiumsfor insurance bought on the private market.

The CRFB said the cost of making Medicaid a block-grant programwould depend on the size of the allotment given to each state. It said aggressivesavings generated from the measure could more than pay for repealing and replacingthe ACA, but this would mean a further reduction in coverage.

Policyexperts were critical of the lack of details in the health care plan suggestedby Ted Cruz in variousdebates.

"Hereally has almost nothing else other than 'I am going to repeal the ACA,'"said Jost.

Cruzdoes advocate the expansion of health savings accounts, something that Trump hasalso focused on. But Emory University's Thorpe said proposals related to HSAs cateronly to the healthy population and do not offer much benefit to chronically illpatients, who account for 86% of the country's health care spending.

Policyspecialists think Kasich's proposals,aside from the ACA repeal, are more sensible than the alternatives put forth byTrump and Cruz but still lack detail.

Simplymoving to episode-based payments or more primary care will not save money, and suchsavings will depend on how the plans are implemented, according to Goldwein.Thorpe pointed out thatthe Ohio governor's stance on payment reform is similar to the current administration'seffortsin Medicare to transition away from the fee-for-service model.

Jost appreciated Kasich's work in Ohiowith the private sector to implement value-based payment and better primary caremanagement. He noted, however, that Kasich has not addressed issues such as coverageafter an ACA repeal, high out-of-pocket costs or drug costs.

Build or Bern

Althoughobservers disagree with some of Hillary Clinton's plan, they generallyconsider her agenda — to make incremental changes to the current system — to beviable.

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Goldweinthinks health economists will disagree on whether reducing co-pays and deductiblesis good policy. "On one hand, it is going to help make health care more affordablefor people, which is a good thing; on the other hand, co-pays and deductibles areone of the ways that we have to control health care costs," he said.

One ofthe main reasons people are reluctant to purchase health care coverage is that thedeductibles are high for higher-income people, according to Jost. "The impactwould be that people who have very high medical costs would not have to go bankruptand would not have to incur large credit card debt or take second mortgages on theirhomes," he added.

AlthoughGoldwein does not consider the Medicaid expansion as suggested by Clinton to bea costly one, he believes encouraging more states to sign up could prove costlyfor the federal government as it "picks up most of the tab."

Herveysaid some states might be apprehensive about signing up as they feel like "theywill be on the hook for costs" when the federal government's share of the expansioncosts declines.

The CRFB estimatesthat Clinton's proposals for expanding the ACA and repealing the Cadillac Tax onhigh-cost health plans would cost about $300 billion and $100 billion, respectively,over 10 years, while reducing prescription drug costs and allowing for a publichealth care option would save about $250 billion.

Policyexperts are skeptical about the feasibility of Bernie Sanders' plan in the current political,fiscal and economic landscape.Sanders expects to finance a federally administered single-payer health caresystem through progressive income tax rates, income-based premiums paid by employersand households, and increased taxes on capital gains and high earners.

A Januaryanalysisby Gerald Friedman, professor of economics at the University of Massachusettsat Amherst, indicated that while the plan would mean $13.8 trillion in new publicspending over 10 years, it would actually pay for itself and even result in a $10billion average annual surplus.

However,in a February paperanalyzing Friedman's estimates, Thorpe said costs of the plan might havebeen significantly underestimated, and adequate financing for the plan "wouldrequire dramatically higher taxes than Sanders has provided for." He believesthe plan could mean $24.3 trillion in new federal costs from 2017 to 2026.

The planis "incredibly disruptive" and scrapping Medicare, Medicaid and privatehealth insurance and replacing them with a tax would result in about 71% of privatelyinsured households paying more in taxes than they get in savings from not payingpremiums, Thorpe said in an interview.

The CRFBestimatesthat proposed offsets to cover costs of the new system would fall short by$2.6 trillion to $2.8 trillion over 10 years. It also indicatedthat Sanders' plan could cause debt as a percentage of GDP to grow significantlyover the next decade.

Jostdoes not see a move to a single-payer health care system from the institutionalizedU.S. framework as pragmatic. "I just do not see us being able to finance asingle-payer system in the foreseeable future, and I think rather advocacy shouldgo into trying to make the current system work better for people who have high healthcare expenses and low income," he said.

The current system has multiple problems, and proposals by allthe candidates have elements that will help but fall short of what is required,in Goldwein's view. "We need a comprehensive approach that looks at the waywe deal with cost-sharing, that looks at the way we pay for providers, looks atthe way that we finance Medicaid, looks at the way we pay for drugs, and no candidatehas yet put forward the comprehensive solution or set of solutions that I thinkis going to get us on the best track," he said.

Thorpe believes the most practical approach is to build on thecurrent infrastructure in the least disruptive way to eliminate the remaining numberof uninsured. He thinks expanding federal tax credits is the best method to reducehealth insurance expenses and considers expanding Medicaid to more states to bethe fastest way to expand coverage.

"I think that if you look at all the options, the most realisticoption is to build on what has already been passed, that is, the ACA," Thorpesaid.