A pre-speech memo on healthcare

Barack Obama's promise to reform the US healthcare system played a big part in his campaign for the presidency. Voters responded warmly to the idea, and in principle still do: most continue to say they want the system changed. Yet barely half way through Mr Obama's first year in office, his effort to keep his promise threatens to derail his administration.

The previous attempt at comprehensive reform failed spectacularly in 1994. Bill Clinton's Democratic party then paid an awful price. The Republicans triumphed in that year's mid-term elections. The setback transformed Mr Clinton's presidency.

It was a memorable lesson, and suggests what might be at stake this time-yet few accused Mr Obama of innocence or recklessness when he vowed to revisit the issue. The climate of opinion had changed. Healthcare reform seemed more popular than ever. Interest groups once opposed to it recognised the new mood. Even before the debate began in earnest, they signalled willingness to surrender, as long as the terms were moderate.

Now, just months later, opposition to the administration's approach is building inside Mr Obama's own party. The Republicans, sensing a chance to force a crippling defeat on the new president, are ever more trenchantly opposed. Above all, independent voters are turning against the Democrats' proposals. What has gone wrong? How, if at all, can Mr Obama revive his initiative?

The new administration started with two main goals, each eminently worthy. The first was to widen access to health insurance. The second was to curb inflation in healthcare costs. For reasons of political feasibility, it then accepted two constraints. The first was to say that existing arrangements will be undisturbed for people-the majority, as it happens-who are content with them. The second was to promise no increase in general taxation.

On the face of it, accepting those constraints was clever politics. The trouble is, it made the goals impossible to achieve. Costs cannot be controlled without fundamentally restructuring the system, which is bound to disturb existing arrangements. Without large savings from that source, taxes must rise to meet the cost of universal or close-to-universal coverage. Something has to give.

In that sense, the substance of the policy is confused. The selling of the policy has also been poor-remarkably so, given the abilities Mr Obama demonstrated last year.

The White House let Congress take charge and, so far as the public is concerned, the president has cast himself as chief cheerleader for reform-not a partner, let alone the leader, in designing the right kind of reform. Nobody appears to be in charge. Contradictions in the platform and the vacuum of leadership have made Americans increasingly nervous about the healthcare initiative. They may be losing trust in the administration more generally, as well.

Mr Obama is right that the system needs comprehensive reform. It is a global anomaly. For years it has been both outrageously harsh and outrageously expensive. The United States spends vastly more per head on healthcare than any other country, yet gets middling outcomes, and leaves 45m of its people uninsured. The system breeds insecurity. Many more than the currently uninsured fear they might lose their insurance, or that a medical catastrophe could wipe them out financially even if they have it.

However, guaranteeing coverage and controlling costs are goals to be approached on different timescales. The idea that lower costs will simultaneously pay for wider access is the fundamental flaw in Mr Obama's method: it is incorrect, and almost nobody believes it.

The price of wider access reveals itself immediately. Structural cost control, as the administration admits, is a long-term and somewhat speculative project. In the interim, which might be years, new revenues must therefore be found.

The administration, reluctant to raise taxes, has tried to address this by promising to cut spending on Medicare, the government-run programme for the elderly. It has proposed some sensible economies. But these cannot raise anything like enough-and the prospect that their programme will be raided to pay for universal coverage has alarmed many Medicare beneficiaries. A big constituency with no reason at the outset to oppose the initiative has been turned against it.

Coverage and cost control are best decoupled. Some argue that the cost question should have been addressed first: the savings, if and when they arrived, could have paid for gradually wider coverage. If Mr Obama is right that universal coverage cannot wait, and if fiscal stress rules out further public borrowing, taxes will have to rise to pay for it.

The Democrats' bills would widen coverage through mandates on individuals to have insurance and on most employers to provide it or pay up; with new regulations forbidding insurers to deny coverage because of medical history; subsidies to help the less well-off buy a policy (if they are not already covered by Medicaid, the programme for the very poor); and a regulated insurance exchange. An earlier reform in Massachusetts (see sidebar) suggests that changes of this sort would greatly expand coverage, albeit not enough to make it universal.

The cost might run to $100bn to $150bn a year, according to the Congressional Budget Office. Nearly all healthcare analysts agree that the best way to raise this money would be to limit the tax exemption for employer-provided health insurance.

This exemption forgoes so much revenue that there would be no need to eliminate it. Capping it would do. This would be a broad-based, moderately progressive tax reform, with the further benefit of reducing an ill-conceived subsidy. That, in turn, would encourage economy, helping the cause of cost control as well. Some Republicans would go along. The unions are opposed. Mr Obama has spoken out against the idea, but he would not be the first politician to change his mind.

The administration could and should seek savings in Medicare in any event. But a tax increase would free reformers from the short-term need to squeeze hundreds of billions of dollars from that programme, and would allay the fear of Medicare beneficiaries that they will be the residual source of funding for whatever this reform turns out to cost. This fear, in its most hysterical form, underlies the charge that the administration sees euthanasia as a promising cost-control device. Absurd as that may be, the administration needs to assuage the broader concerns, or they might yet sink the whole endeavour.

Mr Obama and most Democrats are keen also to introduce a "public option"-a government-run scheme, available to all as an alternative to private insurance. This has become a key point of disagreement with Republicans and with the health insurance companies. The industry fears that a subsidised public plan might put them out of business, something many Democrats would be thrilled to see. Advocates say it is needed to force down premiums and excessive profits. Otherwise, mandates would give the industry a guaranteed larger market, and no new reason to curb costs.

It is a difficult controversy to assess without knowing exactly how the public option would work. At the moment the proposal is all things to all men. If forced to operate without subsidy as an ordinary competitor, it might have little effect and would largely fail to deliver the benefits Democrats hope for. If, at the other extreme, it set out to seize market share at taxpayers' expense, it would surely transform the US healthcare market-but not necessarily in a way most Americans, happy with their employer-provided private insurance, would wish.

Some moderate Democrats want to drop the idea. Retaining it would make passing healthcare reform more difficult, and attracting even a nominal show of Republican support would be impossible. So long as the other Democratic proposals are taken up, you do not need a public option to widen coverage, so it might seem wise to set the public option aside.

Many Democrats are determined on the point, however. They accuse Mr Obama of preparing to sell out, and are pledging to oppose any  healthcare bill that lacks the public plan. For some, punishing the insurance companies-which Nancy Pelosi, leader of the Democrats in the House of Representatives, has called "villains"-is evidently more important than covering the uninsured.

Once universal or close-to-universal coverage has been bought and paid for, with or without a public option, attention could turn to longer-term cost control. The key here is widely acknowledged to be moving away from the present fee-for-service approach-in which individual doctors are paid piece-rate, treatment by treatment-to one where teams of doctors and other staff receive a bundled sum to attend to all the patient's needs. Here and there the US has local systems which operate on this principle. They appear to work well.

Mr Obama continues to emphasise cost-control as the cornerstone of the Democratic proposals, yet the bills before Congress propose nothing more than further limited experimentation along these lines. Despite local instances of success, the reticence is understandable. Applying the idea on a much larger scale will be difficult and could take years. All the more reason, in the meantime, to pay for wider coverage with a tax increase.

Lessons from Massachusetts

The plans for healthcare reform that Democrats have put before Congress owe a lot to the scheme  adopted in Massachusetts in 2006. The first law of its kind in the United States, it required everyone to have health insurance. It said all but the smallest firms had to cover their workers or pay a tax to help cover the scheme's costs. It created a regulated insurance exchange, the Connector, where individuals could buy a policy at more competitive rates. It provided subsidised policies for people on low incomes. And it told insurers they had to accept everybody, regardless of "pre-existing conditions". All these elements are in the national plans being debated on Capitol Hill.

How well has it worked? The record is mixed.

The goal of the Massachusetts reform was wider coverage, plain and simple. There were no ambitions to introduce cost controls of the type advocated by the Obama administration. Reformers expressed the hope of saving money when the previously uninsured started turning up at doctors' offices rather than hospital emergency rooms, and when healthy young people who had hitherto chosen not to buy insurance were forced into the pool, improving its risk profile. But the plan did not concern itself with reimbursement regimes and reform of incentive structures.

Coverage has indeed improved, but it is still less than universal. The number of uninsured-comparatively small in Massachusetts to begin with-has roughly halved, to 2.5 per cent of residents. That is welcome progress, at any rate. But costs have been higher than expected, and increased demand for services is straining the system. Doctors are in short supply.

In a way, the failure to achieve fully universal coverage was intended. The plan's individual mandate is incomplete: low-income workers are exempt if the cheapest policy they can get exceeds 10 per cent of income. The penalty on employers which fail to cover their workers was also set at a deliberately modest $295 per worker. This was a political calculation. It meant that the plan was warmly welcomed for its subsidised insurance plans, and not much opposed for its punitive aspects. As a result, things got off to a good start. The reforms were popular.

However, any savings from fewer emergency room visits and the injection of good risks into the pool were too little to contain costs. Health care spending per head was high in Massachusetts before the reform and still is. The cost of the subsidy programmes is rising, and premiums on the exchange are going up much faster than inflation. At a time of budget stringency, with the recession forcing more people out of work and off their employer-provided schemes, the state is curbing eligibility for subsidised healthcare and looking again at the range of services offered.

In one way, Massachusetts shows that the Obama administration is right. Wider coverage does not pay for itself. Either costs must be forced down, or additional revenue raised.  Neither is easy to do.