In the closing weeks of the U.S. presidential campaign, the candidates are focused largely on the global financial meltdown, which is formidable enough. But looming behind this front-burner concern are the very difficult long-term economic challenges of restoring Social Security and Medicare to solid footing, and providing health care coverage to the millions of Americans who are uninsured or inadequately insured.

Wharton faculty say the candidates have done a better job of clarifying their positions on these difficult issues than their predecessors in prior elections. Still, they add, Senators Barack Obama of Illinois and John McCain of Arizona fall short of laying out richly detailed plans to solve the deep, structural problems with these programs, mainly because there are no easy solutions and speaking hard truths is likely to alienate voters.

“We were so concerned about the $700 billion in the bailout bill, but nobody is talking seriously about the $12 trillion we need to make Social Security whole and the $65 trillion we need to make Medicare whole,” says Wharton professor of insurance and risk management Olivia Mitchell. She worries that that when it comes to Social Security and Medicare, both candidates are more focused on the revenue side of the equation than on addressing the rampant growth of benefit obligations which would require cuts for beneficiaries.

Wharton professor Mark Pauly discusses the candidates’ proposals to provide health insurance for more Americans

Obama’s plan for Social Security, she notes, focuses largely on a proposal to raise taxes on the nation’s top earners. Obama would maintain the current cap on Social Security and Medicare taxes at income levels of $102,000. However, he would begin taxing again at $250,000, excluding only a so-called “donut hole” between $102,000 and $250,000. Mitchell says McCain’s most noteworthy position on Social Security is his belief that younger workers should be able to invest at least a portion of their savings themselves in the stock market. McCain’s plan also focuses on revenue, she notes, adding that the recent stock market slump has probably made that idea less palatable.

Obama seized on the current meltdown to criticize McCain’s plan. At a September speech in Florida, he said, “If my opponent had his way, the millions of Floridians who rely on it would have had their Social Security tied up in the stock market this week.” called Obama’s statement a “whopper” because the plan endorsed by McCain would not have allowed anyone born before 1950 to invest in private accounts. Mitchell says the real problem is that the current benefits kick in too soon, and are overly generous, to match incoming revenue and longer life spans.

According to Wharton insurance and risk management professor Kent Smetters, a former Congressional Budget Office economist, the Obama proposal would place a high percentage of the tax burden on one, small segment of the population and would only generate about 20% to 30% of the revenue needed. “There’s not much talk about how to control growth on spending — that’s the real issue,” says Smetters. “If you get more revenue, it doesn’t solve the problem until you can control spending.”

The current financial turmoil, Mitchell suggests, may actually help to reduce Social Security outlays as older people whose 401(k)s and home equity have shrunk will need to continue to work longer before tapping into their retirement accounts. “My sense is there will be a fair amount of interest in working longer and delaying retirement and postponing the end of the paycheck,” says Mitchell. “But the issue is, if we do end up in a severe recession, does anybody want to hire these boomers who want to defer retirement?”

Mitchell cites current projections that suggest the government retirement system will remain solvent for the next eight years, so the current presidential candidates may not have to face its collapse on their watch. “They don’t want to tread too much into the thickets of Social Security because they don’t have to and it’s just going to be painful. The details have been slow to come out and I think that’s partly because Social Security is still believed to be the third rail of politics — touch it and you die.”

Smetters says that while Social Security is shaky, Medicare is even more troubling — with a shortfall six times larger than the government retirement program. Beyond the magnitude of the gap, Smetters points out that Medicare is a tougher problem politically because it does not involve a simple cash benefit, but in effect puts a price-tag on beneficiaries’ health, perhaps even their lives. “No one wants to talk about rationing medicine. No one wants to say this person’s life expectancy is only so many years so this procedure is not worth the cost. It conjures up scary images. But we’re going to have to have this discussion soon.”

Smetters suggests that the next president appoint a genuinely bi-partisan commission to wrestle down these tough issues. He says a commission formed by President Bill Clinton fell apart because it was too free-wheeling and chaotic. George Bush established another more orderly commission, but, according to Smetters, the Democrats on the panel were hand-picked so as not to put up too much resistance. As a result, that commission had little credibility and came out with three fractured plans that led nowhere. Meanwhile, McCain has pledged to ask Democratic House Speaker Nancy Pelosi for a list of commission members and to “lock them in a room and withhold water and food until they come up with a reasonable plan.” For any commission to succeed, Smetters argues, it would have to prohibit “demagoguery” and “fallacious” budget accounting. “This has nothing to do with liberal or conservative. It has to do with honesty.”

The Broader Health Care Challenge

The problems with Medicare echo through the nation’s broader health care system, where questions about funding and rapidly escalating costs indicate it is not sustainable in its current form. The candidates’ plans to address that challenge represent a fundamental difference in philosophy, according to Scott Harrington, a professor of health care systems and insurance and risk management at Wharton. 

Obama’s plan would substantially expand the federal government’s role in the funding, design and provision of health care coverage, yet preserve the current employment-based model. But it would impose penalties on employers with earnings above $250,000 that do not offer health coverage to employees. McCain’s plan, Harrington says, relies on market and tax incentives to stimulate markets for individual health insurance coverage as an alternative to the traditional employment-based model. McCain would create tax credits for coverage to provide a relatively greater subsidy to lower-paid workers than under the current system. His plan would also treat employer-paid health benefits as taxable income for workers.

“The winner should focus on how to pay for any new programs in view of the current economic mess and, looming on the horizon, projected long-term funding short-falls for Medicare and Medicaid,” says Harrington.

The candidates have sparred over the impact of McCain’s proposal to eliminate tax breaks for employees who receive employment-based insurance and tax the value of those benefits as individuals’ income. With the new revenues, McCain proposes to provide a flat tax credit — $2,500 for individuals and $5,000 for families to purchase health care.

Wharton health care management professor Patricia Danzon says she and many other economists support the idea of taxing employer contributions because the current system is inequitable and inefficient. Today’s tax structure results in a tax subsidy which grows as income and the generosity of benefits increases, according to Danzon. However, she adds, McCain’s plan falls short on addressing problems in markets for individual insurance coverage and provides no mechanism to assure that individuals get insurance. Obama, she says, builds out more ways for people to get insurance, including expansions of federal health programs such as SCHIP, the federal State Children’s Health Insurance Plan and the creation of a new insurance pool for people without employer coverage.

Getting to Universal Coverage

Both plans, she emphasizes, fall short of creating a mandate that people carry some form of coverage. “The only way to get to universal coverage is to have an individual mandate, together with subsidies to assure affordability and mechanisms to assure insurance availability,” says Danzon. “The idea that you can get there by offering carrots, like tax credits, or the stick of pay or play, is going to leave some people falling through the cracks and [will] be inefficient.”

Arnold Rosoff, Wharton professor of health care management, points to major administrative and mechanical questions about how McCain’s tax credit would work. “The devil is in the details,” he says, questioning, for example, McCain’s plan to allow people to buy health care across state lines. States currently regulate coverage levels and other aspects of health insurance, such as treatment of pre-existing conditions. As a result, premiums vary widely. In states with fewer mandates and less regulation, insurers can charge lower premiums. Under McCain’s plan, healthier people could buy cheaper plans in low-cost states. As a result, residents in higher-cost states needing more health care services would face higher premiums than if all residents of the state were in the same pool, and the healthier insurance buyers implicitly subsidized those needing more coverage.

McCain’s idea may appeal to his less-government political base, but it erodes the essence of social insurance by allowing people to select their own risk pool, Rosoff argues. “I think we should be moving toward a regime with more social insurance, not less,” he says. “But as the economy continues to decline, the ‘haves’ will want to be unsaddled and not carry the ‘have nots’ as much. That increasing segmentation of the insurance market is one of the things McCain’s plan will enable.”

Obama does not push the goal of universal coverage to the extent that his rival for the Democratic nomination, Hillary Clinton, did, says Rosoff, probably because he fears the inevitable financial and potential political costs it would entail. Obama accepts the current private-sector health insurance structure with some tighter regulation which Rosoff described as “band-aid fixes” — necessary but not sufficient to create the health care system “this nation should have.”

Rosoff points out that during the last major run at health care reform, in the early 1990s, corporate America was unwilling to cede management of the system to the government, and was hopeful that managed care, which was just starting to take off, would contain costs. Now, he says, many companies are willing to make health care the government’s responsibility. Executives may not be certain that government will do a better job, but if it doesn’t, at least they won’t have to shoulder the blame.

“For the past 15 years, corporations have been beaten up by costs and dissatisfaction by employees,” he says. “They might be really happy to have the government take it over.”

Moving to the Center

Wharton health care management professor Mark Pauly notes major similarities in the two candidates’ plans, particularly the emphasis on giving people choices among a wide variety of competing insurance plans. “That’s a switch at least for the left wing of the Democratic party, which is more in love with a single-payer government plan,” says Pauly. “On the Republican side, McCain has made a major concession by saying competition alone won’t solve the problem, and we’ll have to have substantial subsidies to help people afford insurance.”

Pauly notes that the candidates also agree on some reform measures that will only amount to tweaks in the current system, such as health information technology, disease management programs, evidence-based medicine and the idea of a “Medical Home” in which a doctor or other health professional coordinates individual patient care to reduce excessive costs and improve outcomes. “All these things sound good and insurers ought to try them,” says Pauly, “but there’s not enough there yet to put it in the bank — and these ideas are diverting attention from the structural issues.”

The current debate, he notes, does not recognize that most of the uninsured in the United States are not sick or poor. “They are just taking a chance,” says Pauly, who points out the motivation behind mandated health coverage in Massachusetts was to “prevent the grasshoppers of health insurance from being irresponsible.” When tragedy befalls them they make for a sad vignette, but “You can’t buy insurance in the ambulance on the way to the hospital and cancel it when you get out. It’s worth noting that not everybody who fails to buy insurance is miserable.”

Meanwhile, both candidates do very little to address rising costs in their plans and present overly optimistic views of how easy it will be to raise money to fund their initiatives, Pauly states. The main driver of health care spending is new technology that is beneficial to patients, but increasingly expensive. “The most serious fiscal problem is the result of a good thing. We live longer and better than before, but we haven’t saved enough to finance it.”

Wharton professor of health care management David Asch, who is also a professor of medicine at the University of Pennsylvania, says he is concerned about an over-emphasis on market forces and consumer-driven health care. McCain’s plan to erode the role of employers in providing health care, by changing the tax structure, might be a major set-back in the process of health care reform, he suggests.

“Though it is not a perfect system, it is what we have right now, and I worry that getting rid of it in one fell swoop would be extremely dangerous,” Asch says. He acknowledges that making consumers more responsible for health care spending might work to reduce costs and target medical resources more effectively. But the system is not yet equipped to give consumers the information about health care quality or pricing they would need to make the right decisions. “It’s not like when you go into a store to buy a TV and you know what the TV will cost,” he says. “Allowing patients to have skin in the game only works if they have the information [with] which a reasonable person could make a decision.”

The faculty agreed that the future of health care will be based in economics and medical advances, but also politics.

According to Asch, the two candidates have more detailed plans for health care change than in earlier campaigns, but he warns that the plans are bound to alter dramatically as they work through the legislative process and into the economic and health care environment.

It is more important to pay attention to the basic partisan, ideological divides between the two candidates, he adds. McCain, the Republican, is more market-oriented, while Obama, the Democrat, is more inclined to provide government solutions. “Ideology is more important than any detail,” says Asch, noting that neither candidate will have complete control over the shape of health care in the future. “The president isn’t king and there’s a political process that will change any plan that gets put forth before an election. No plan survives the battle.”

Pauly recently served on a panel on which another speaker told him that politicians will never accept the need to curtail benefits “‘unless they are literally against the wall.’ Well, we’re heading to the wall at 90 miles-per-hour. Wouldn’t it be better to turn the wheel and experience a giant yank, rather than a head-on crash?” Pauly asks. “The system is melting down, but things may have to get worse before they get better because that’s what it takes for political action.”