McCain's Enormous Health Care Assumptions

While asserting that (but not explaining why) Obama's plan is superior to McCain's, Ruth Marcus provides a rose-colored view of the McCain health care plan that illuminates how McCain expects - or probably more accurately, expect us to believe - that the plan would work.

So what does John McCain's plan do? It has just such a refundable credit: $2,500 for an individual, $5,000 for a family. The Obama campaign tries to scare voters into believing that this is a terrible deal, noting that the average family policy costs about $12,000.

True, but if you get $12,000 in health insurance from your employer and are in the 25 percent tax bracket, you would owe another $3,000 in taxes. The credit would let you take $5,000 off your overall tax bill. You come out ahead -- unless your insurance is hugely generous, in which case it's serving to drive up everyone's health-care costs.

In other words, if you currently have a $12,000 plan for your family and your employer picks up 75% of the cost, the McCain plan envisions your getting a $9,000 raise when your employer stops paying that 75% contribution to the cost of your health insurance. She assumes you would pay 25% in taxes, thus paying $3,000 in federal taxes on the cost of your health plan. She then assures you that the McCain tax credit more than makes up for the difference, as $5,000 is greater than $3,000.

What's wrong with these assumptions?

• People at the lower end of the job market are not getting $9,000 per year subsidies of their insurance. We can argue that they are also covered by cheaper policies - man of them are underinsured - but let's not pretend that the McCain plan will enable them to afford $12,000 per year health insurance.

• Employees won't get raises equivalent to the employer's contribution to their health plan, let alone to a family plan. The assumption that the market will compel employers to give raises equivalent to a family-sized contribution is absurd. If raises are offered they will at most be at the level of the benefit to a single employee, or the average cost to all employees, resulting perhaps in a boon to single employees but a net loss to people on family plans.

  • Employers are not going to increase their payroll by giving oversized raises to employees who don't participate in family health plans - those who are single, or opt out because they have insurance through their spouse or domestic partner.
  • Employers have an incentive to shave their costs by giving raises smaller than their current contributions.
  • Employers may not give raises at all. John McCain may not understand this, having married rich and found himself a sinecure in the Senate, but a lot of employees right now will have a hard time making a lateral move at equivalent pay. For employees who have been on the job for twenty or thirty years, earning significantly higher wages than their peers due to annual raises, the employer may see a golden opportunity to both cut their effective pay and shift their increasing insurance costs off of its books.

• Health insurance costs are increasing much faster than the rate of inflation, and wages are not. Even if we assume a raise that covers this year's cost, with each passing year the employee will bear more and more of the cost. Not just an increased copay on a 25% contribution, but an increase of the full cost. With health care inflation at about 6% per year, if we assume inflation of 3%, that translates into a $360+ pay decrease every year a worker maintains that (presently) $12,000 plan. Marcus indicates that McCain will index the tax credit to inflation, but not to health care inflation.

• If a raise is offered that, in fact, makes it a "better deal" to drop employer-sponsored coverage, at least in terms of take-home pay, younger, healthier employees are likely to go uninsured or to opt for minimal coverage. That will raise the costs of health insurance for older and sicker employees, while increasing the likelihood that the increased population of uninsured and underinsured people will end up passing the costs of catastrophic injury or illness on to the taxpayer or other patients.

• Employers are apt to drop their health plans quickly, not "eventually" as Ruth Marcus suggests. Doing so when the job market is bad makes sense, as employees are less able to seek jobs with more generous health plans. Smaller businesses are likely to quickly drop employee health plans. Once a few major employers successfully make the shift, you'll see a cascade. Let's not forget, that's the design of the plan, and is what Ruth Marcus assures us makes it attractive.

• Oops - no mention of payroll taxes. Employers aren't going to transform their tax-deductible insurance contributions into a raise of equivalent size. They're going to reduce it by their share of payroll taxes. Your $9,000 raise drops to about $8,200. After your own share of payroll taxes and state income taxes, your tax bill is probably $4,000. Under McCain's rosy assumptions you come out slightly ahead this year, but the benefit disappears next year or the year after due to health care inflation - it's just delaying by a year the amount of time it takes for you to go in the hole. But even that one- or two-year benefit is abstract - as we previously discussed, if your job is at all typical, you won't be getting that $9,000 raise McCain and Marcus assume.

• Your "free market" plan, even at the same cost, will be vastly inferior to your employer-sponsored plan. You will be denied coverage over pre-existing conditions, or perhaps simply because of your age. (Marcus concedes that insurers will "cherry-pick the healthiest enrollees" under McCain's plan.)

• Your immediate costs - copays, deductibles, the cost of care excluded from the plan, etc. - will go up the second you sign up for an equivalently priced plan as as individual. A few years ago when I was about to reach the end of COBRA coverage on a really nice employer-sponsored plan, I priced private plans - I found many at comparable cost, but none which offered anything even close to the same level of coverage. Some of the plans were then in the range of $16,000 - $20,000 per year for a family of three, but they didn't offer the same benefits of the $12,000 plan, available to federal employees, that McCain likes to ballyhoo as the type of insurance you are likely to be able to afford under his plan. Not even close. And that's assuming you don't try to "save money" by purchasing a less expensive plan that shifts an even greater portion of the cost of your care and prescriptions onto you.

Marcus asserts that we should assume that McCain's on the right track, because one of Obama's economic advisors endorses the idea of replacing employer-sponsored care with a tax credit. But if Marcus were to read past the McCain memo she seemingly cribbed when writing her column, she should be identifying the elements that the advisor asserts would be part of any effective plan - progressive tax credits, mandatory coverage "or other institutional mechanisms to increase participation", new pooling mechanisms, and reducing adverse selection in existing pooling mechanisms. She should also acknowledge that plan is intended to "eliminate the incentive to go from some insurance to more insurance," while "increasing the incentive to go from no insurance to some insurance" - but without clear concepts of what that means, it's literally an experiment with people's health and lives.

A huge hole in this type of plan is that, even if we assume that everything else goes as promised and disregard the many reasons to believe that won't happen, the distortion of tying insurance to employment isn't eliminated. It's reduced - once you're buying your own plan you can keep it even as you move from job to job - but if you lose your income you can't pay your premiums, and thus lose your coverage. As with employer-sponsored care, that could still result in your loss of coverage if you become disabled from working due to illness or injury - and if you recover, you will almost certainly face increased costs for an equivalent private plan or may even find that you cannot get health insurance, rather that being able to get coverage at a group rate through an employer-sponsored plan that doesn't consider your pre-existing conditions. Obama's plan is better in this regard only because it maintains employer-sponsored plans, such that if you return to work you can again get insurance at a group rate, but neither plan actually addresses the problem of paying for insurance when you're between jobs.

The aforementioned McCain memo accuses Obama and Biden of "lying" about the plan, and purports that their claims have "failed every fact-check". Unfortunately no links to those fact-checks are provided, and that claim itself seems dubious. But let's check out the truthiness of McCain's claims about Obama's plan:

Barack Obama's Plan Continues The Push Toward Government-Run Healthcare: The Obama plan will create a brand new government-run health plan at the cost of $243 billion a year – a financial burden of more than $3,000 a year on American families.

McCain doesn't explain how he came up with that figure. I did find this:

Researchers at the Urban Institute-Brookings Institution Tax Policy Center project McCain's plan would reduce the number of uninsured by 1.3 million in the first year at a cost $185 million. About 20 million people would lose their employer-sponsored coverage under McCain's plan, but 21 million would gain coverage on the individual market.

Obama's plan in its first year would reduce the number of uninsured by 18.4 million at a cost of $86 billion. Over 10 years, McCain's plan would cost $1.3 trillion and Obama's would cost $1.6 trillion, according to the report.

So McCain wants to spin a fiction that his plan is free, whereas in fact its projected cost is only marginally less than that of Obama's plan, and he neglects to mention that in the first year alone Obama's plan is projected to provides coverage to more than 17 million people who McCain would leave out in the cold.

Barack Obama's Plan Will Harm Employer Coverage: The Obama plan includes a $179 billion a year employer mandate. The mandate requires employers to either provide "meaningful" coverage or pay a tax towards the government plan. Faced with tough economic conditions and rising health costs this creates a clear incentive for employers to drop coverage and move families into the new government plan.

So we're supposed to accept that the biggest benefit of McCain's plan is that it will end employer-sponsored health care, but simultaneously pretend that Obama's plan will do more to bring about that end?

Barack Obama's Plan Will Damage Private Coverage: The government-run plan will have a clear advantage over private insurance since it will be subsidized by American taxpayers. A recent analysis of both plans by the nonpartisan CATO Institute concluded that the Obama government-run plan will be able to "keep its premiums artificially low…since it can turn to the U.S. Treasury to cover any shortfalls" resulting in "undercutting the private market."

Obviously, fears of a subsidy can be addressed in the legislation that authorizes any government-run plan, so McCain's claim amounts at best to overblown rhetoric and at worst to fear mongering. McCain aparently regards the words "could" and "will" as interchangable - let's not confuse what could happen with what will happen.

We should also consider what happened, for example, when we allowed private insurers to compete with Medicare through "Medicare Advantage". We ended up subsidizing the private insurers because Medicare was able to offer the same (or better) coverage for less money. The real fear here is probably not that the premiums will be artificially low, but that they will be naturally low, particularly as compared to plans offered to individuals by private insurers.
__________
1. Marcus writes,

No one designing a health-care system from scratch would set things up this way. Tying insurance to employment makes little sense in a world where workers hop from job to job. Excluding the value of insurance from taxable income leads to overconsumption of health care, driving up costs. It favors better-off employees who, because they pay higher marginal rates, derive a greater benefit from not being taxed on their health insurance.

Eliminating this distortion - if done the right way, and that's a big if - could help more Americans obtain insurance, push down costs and reduce the drain of health-care costs on the federal budget.

Even if we assume that there's a free market solution to this issue, Marcus does not explain what it would be and, abetted by columns like this, McCain is simply hoping that nobody is paying attention to the glaring flaws of his own plan. By all appearances, McCain is trying to dress up what amounts to a Gingrich-style plan to kill off affordable health insurance and shift costs onto consumers.