How to Make Bush's Health "Plan" Work

The NYT mentions how President Bush's plan would add to the "dysfunctional individual policy market, where administrative costs are high and insurers strive to avoid covering people who are apt to become sick." This is dead on and may imply they finally started reading Krugman's columns on their op-ed page.

So, how should Democrats respond to his proposal with a more progressive policy proposal of their own?

First, they could replace the "standard deduction" with a credit for all health care or insurance expenditures. If the credit were refundable, it would be worth the same to all families, as opposed to the standard deduction, which is worth over $5,000 to families in the top bracket and nothing to the more than 50 million wage earners who don't otherwise owe federal income taxes.

The credit change isn't enough though, because it still undermines the risk pooling of the employer-based solution without providing a replacement. This is likely to increase costs for everyone as insurers ramp up administrative costs and invest more money in avoiding the individuals who are most likely to get sick and require expensive care. It will also dramatically raise costs for those with preexisting conditions, who may not be able to get insurance at all.

Along with converting the health insurance deduction to a credit, Congress should copy the best features of Governor Schwarzenegger's recent proposal.

First, they should require that at least 85% of premiums pay for direct health services, effectively capping administrative costs at 15%. This limit forces insurers to focus on improving efficiency (rather than just weeding out applicants and denying care) to remain profitable.

Second, they should enact a "community rating" law requiring insurers to charge everyone the same, regardless of age or preexisting conditions.

Along with the tax credit proposal, these two simple changes could make health insurance dramatically more affordable without adding to the federal deficit or violating Pay As You Go rules. Insurance companies will still tinker with their policies to try to be unattractive or annoying to those who tend to use their insurance, but that's difficult to get rid of in a private system.

Insurers will probably complain that they can't reduce their bloated administrative costs below 15%. When they do, Democrats can point out that maybe it's time to let younger people buy into a system where administrative costs total only 2%, like say, Medicare.