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Senator Hillary Clinton unveiled her health care reform plan, called the American Health Choices Plan. Clinton’s health care plan promises to bring health insurance to every American. Clinton promises lower insurance premiums for every American, improved delivery of health care, health insurance for all, and a “net tax cut for American taxpayers.” She also promises to end insurance “discrimination,” which we’ll return to at the end of this post. Her plan raises significant questions in part because the costs are astronomical and the plan’s cost assumptions are suspect. Before I get to the cost of the plan, though, here are the elements of her proposal and some important links so you can check it out for yourself.

Key Provisions of Clinton’s American Health Choices Plan

You can download a pdf version of the plan by clicking on the image to the right or by clicking here. The plan has 5 key provisons:

• Universal Coverage: The plan covers everybody. There are about 47 million Americans without health insurance, and Hillary Clinton’s proposal would provide coverage for all of them. The coverage would come from one of a number of sources she calls the new “Health Choices Menu.” The menu would include a Medicare type option and an option similar to the Federal Employee Health Benefit Program (FEHBP).
• Coverage is Mandatory: Although she calls here plan the American Health Choices Plan, you don’t have a choice. Everybody must be covered by health insurance.
• Eliminate Insurance “Discrimination”: Hillary Clinton wants to prevent an insurance company from setting rates based on the health of the insured, a common and sensible practice in the insurance industry (e.g., bad drivers pay more for car insurance) that she labels as “discrimination.”
• Modernize Health Care to Produce Cost Savings: Clinton believes her plan can deliver health care to you more efficiently than the health care industry, and that her plan will result in annual savings of $56 billion.
• “Net Tax Cut for American Taxpayers”: The plan includes refundable tax credits to help pay for health insurance. In conjunction with the cost savings, Clinton plans on paying for these credits by raising taxes on high income earners to the tune of $54 billion. Apparently, the credits are more than the increased taxes, abracadabra, a net tax cut.

How Much Will Clinton’s Health Care Reform Plan Cost the American People?

Clinton’s plan will cost $110 billion annually. Unfortunatley, she doesn’t tell us how she arrived at that number. We don’t know, for example, how many individuals will receive government assistance to pay for insurance or how much the insurance will cost. We don’t know what assumptions or estimates went into her calculations or if it was based on sound projections. But we do know how she plans to fund her proposal.

Of the $110 billion annual tab, $56 billion will be covered by various cost savings and $54 billion from increased taxes. Cost Savings: The Clinton plan claims to save $56 billion annually through the phase-out of excessive Medicare overpayments ($10 billion), savings from unnecessary Medicare and Medicaid spending ($7 billion), constraining prescription drug costs ($4 billion), and modernizing the health system with Health Information Technology (HIT) ($35 billion). Tax Increases: The tax increases will come from raising the top two income tax rates and reducing deductions for health insurance on those making $250,000 a year or more. For everybody else, she claims no new taxes and lower health insurance premiums. This is where things start to get slippery, so let’s proceed with caution as we take a closer look.

Clinton’s Projected Health Care Savings Are Suspect

Let me make sure I’ve got this right–The U.S. government under Hillary Clinton’s plan will teach the health care industry how to improve quality and lower costs. I don’t see anything that can go wrong here, do you? Now to be fair, there are aspects of her plan that would reduce costs. For example, she proposes a phase-out of excessive Medicare overpayments to HMOs and other managed care plans ($10 billion annual savings). These overpayments are nothing new, and in fact there is at least one bill already introduced in Congress that relies on these cost savings for funding. The biggest cost savings in her plan, however, is to modernize the health care system ($35 billion annual savings). This is where the trouble begins.

Clinton relies on a consulting report by the Rand Corporation. The report, entitled, Can Electronic Medical Record Systems Transform Health Care? Potential Health Benefits, Savings, And Costs, is not unlike other IT consulting presentations I’ve read. You can download the report (pdf format) by clicking here. What Hillary Clinton’s plan won’t tell you about this report are it’s many uncertainties. Here are some examples taken directly from the report:

Barriers to adoption [of the proposal] include high costs, lack of certification and standardization, concerns about privacy, and a disconnect between who pays for EMR systems and who profits from them.

The efficiencies [resulting from technology improvements] could be used to improve health care quality rather than to reduce costs.

In general, the currently useful evidence [about cost savings] is not robust enough to make strong predictions, and we describe our results only as “potential.”

Clinton’s plan also doesn’t mention that the estimated cost savings don’t fully accrue for 15 years! In fact, five years after full implementation of the technology, according to the report, annual estimated savings total just $21.3 billion, so it remains a mystery how the Clinton team included the $35 billion cost savings figure in the plan.

Finally, the Clinton plan failed to mention that much of the cost savings will come from what the RAND Report describes as “resource reduction.” In other words, people losing their jobs. The RAND Report doesn’t quantify the amount of job loss, although $35 billion a year can pay a lot of people. Furthermore, the loss of the jobs will only increase the number of individuals who lack health insurance. The point here is not that improved technology should be avoided because of potential job loss. The point is that Clinton should have made the American people aware of this ramification of her proposal.

Everybody Will Pay Plenty Under Clinton’s Plan, Not Just The “Rich”

Clinton proposes to fund the program by discontinuing the “Bush tax cuts for [the] top two income tax brackets and [the] Bush increases in tax exemptions (PEP/Pease) for households over $250,000.” She also proposes eliminating the tax deduction for health insurance premiums for those making over $250,000. Total savings–$54 billion annually. There’s nothing new about taxing the “rich.” It has broad appeal and is a politically safe approach. It’s also misleading. The fact is everybody will pay for this plan, not just the unfortunate few who make more than $250,000 per year.

The top 20% of wage earnings currently earn 61% of the income and pay 73% of the income tax:

Should this category of wage earners pay even more taxes? I think a reasonable argument can be made that they already pay enough. But here is the important point that gets lost by the careful wording of Clinton’s plan–the cost will be born by everybody, not just the “rich.”

The money generated from increasing taxes on the rich could go to address the coming crisis in Social Security or Medicare. According to the Tax Policy Center, a fiscal crisis with both programs is just a few years away:

Both the administration and the CBO have projected that, under specific assumptions, current budget deficits will diminish and then disappear altogether over the next decade. In the longer run, however, retirement of the baby boom generation will cause spending on Medicare and Social Security to soar far above the payroll taxes that support it. Under current projections, Medicare spending will exceed revenues from its dedicated tax by 2010, and its trust fund will be exhausted by 2018. Social Security is in better financial shape but will reach the same landmarks in 2017 and 2040, respectively.

You can read the full report from the Tax Policy Center here. Given the crisis we face with Social Security and Medicare, it would be fiscally irresponsible to undertake yet another health care program costing (under very rosy assumptions and projections) in excess of $100 billion annually. The $54 billion raised under Clinton’s proposal could go to address, in part, the coming crisis with Social Security and Medicare. The point is, the middle class shouldn’t get too comfortable with Clinton’s plan–all will pay for it one way or another.

Will Clinton’s Plan Provide Health Insurance to Undocumented Immigrants?

One would expect this question to be an easy one, or at least one Clinton could answer. She can’t. In an interview after unveiling her plan, Clinton’s senior policy advisers stated that the plan doesn’t include any details on whether illegal immigrants will be covered. Senior policy adviser Laurie Rubiner said, “That’s one we’re going to have to think through a little bit.” Given that there are an estimated 12 million undocumented immigrants in the United States, Clinton’s policy advisers had better think real hard. Assuming that most of this group are uninsured and assuming that many lack the means to pay for insurance, this issue has the potential to dwarf Clinton’s current $110 billion annual cost guesstimate.

Clinton’s Plan to End Insurance “Discrimination”

When you buy health insurance through your employer, you generally pay the same as your co-workers. And you pay the same regardless of your health condition. So, for example, a 70 year old smoker would pay the same premium as a 20 year old in great physical health. Insurance companies accomplish this through pooling the risk of a large number of insureds. What’s really happening here is that the 70 year old is paying less than if he or she bought health insurance on their own, and the 20 year old is paying more. Is that fair? No, but it works. Now, if you go to buy health insurance on your own, you are no longer part of a large pool of insureds. As a result, your premiums will be based on your health condition, not unlike when you go to buy life insurance on your own. And if you’re in really bad shape, you may not find an insurance company to issue you a policy. According to Hillary Clinton, that’s discrimination.

The problem is, it ain’t. At least it’s not discrimination in any meaningful sense of the word. I guess I “discriminate” when I choose one store over another because of lower prices or better quality. Or insurance companies discriminate when they charge dangerous drivers more for insurance than they charge safe drivers. The point is that if Clinton wants to propose insurance pooling, she should just say so. It means that in all cases the healthy will pay more for insurance than they otherwise would, and the not so healthy will pay less. But of course, describing it that way doesn’t sound so appealing, thus, we get her plan to “eliminate discrimination.”

So now it’s your turn. What do you think of Clinton’s plan?