McCain vs. the Critics, Part I

In my opinion, the McCain health plan would do two remarkable things.  First, it would virtually eliminate long-term uninsurance.  Almost no one would remain uninsured for more than a year, other than illegal aliens and people with unstable lifestyles.  Second, it would completely transform the type of insurance people are able to buy – as much as doubling the value of the typical insurance contract by encouraging smarter, more efficient ways of purchasing medical care.  And it would do all of this without any new taxes or any new spending programs.

However, these remarkable possibilities are nowhere on the radar screen of some traditional health economists – especially those who back Barack Obama.  Surprisingly, McCain supporters have not been much better.

The McCain plan would replace the current system of tax subsidies for private health insurance with a simple offer: a refundable tax credit for the purchase of health insurance of $2,500 (individual) and $5,000 (family).  This means that the first $5,000 a family spends on health insurance would be courtesy of Uncle Sam, and any additional coverage would be paid by the family with their own, after-tax dollars.

Now, $5,000 won't purchase all the bells and whistles found in a typical employer plan (cost: $12,000) and most people with employer coverage would probably remain there.  But all those who don't have employer coverage – even the poorest of the poor not on Medicaid – would be able to have at least $5,000 of private insurance at no cost to themselves!

If you limited yourself to the $5,000 credit, what could you buy for that sum?  If you have no assets to protect, a reasonable place to start is with a package of primary care and specialist services – allowing you access to virtually any doctor or group practice in the community in which you live. (A RAND study shows that the most important act people take is to enter the health care system; once there, they tend to get pretty much the same care, regardless of the type of insurance they have.)  On the other hand, if you do have assets to protect, you could buy catastrophic insurance – covering everything from cancer care to heart surgery.

So who could possibly turn this offer down?  Read what it's like for both the uninsured and Medicaid patients to get "free care" at a Dallas ER (here) in order to see why almost everyone would grab at the chance in a heartbeat.  But according to one set of critics (Buchmueller, Glied, et. al.,) roughly 40 million people would turn it down and choose to be completely uninsured instead….40 million?….Yes, 40 million….And why, you may ask, is that?  The answer so defies common sense it is not worth pursuing.  But gluttons for punishment can read my critique of it here.

People in McCain's world are not likely to be satisfied with bare bones catastrophic insurance, however.  They will tend to spend additional money for additional coverage, just as they do today.  Moreover, they will likely have access to new insurance products which will offer more value for money than they do today.  Here's why.

Under the current system, the type of insurance we have is shaped and molded by the tax law.  Each additional dollar of premium paid by an employer escapes income and payroll taxes.  So for a middle-income employee, government is effectively paying for up to half the cost of the insurance.  That means that (through their employers) people tend to obtain insurance until it is worth only 50¢ on the dollar at the margin.

[This is why private group insurance tends to pay for care in the same wasteful ways that Medicare pays for care.  And the individual market is so small, that insurers there are not in a position to challenge the payment schemes that dominate everywhere else.]

In a McCain world, however, each additional dollar of premium would be paid after-tax.  So people would not buy an extra dollar of insurance unless they got a dollar's worth of value (in contrast to 50 cents today).  This means that insurers would have to (a) find entirely new and more efficient ways of paying for midrange health care – which is often chronic care – or (b) lose premium dollars to health savings accounts (HSAs) and other direct-pay systems.

One way in which third-party insurance could be transformed is along the lines Mark McClelland and I proposed for Medicare, described here.  Providers would be given enormous freedom to repackage and reprice their services, provided overall costs do not rise and quality does not fall.

But another possibility is that new direct-pay markets would emerge, similar to the markets for cosmetic and Lasik surgery or like walk-in clinics in shopping malls.  To fund these purchases, people could make deposits to HSAs rather than pay additional premiums to insurers. [And, as Mark Pauly and I explained some time ago (here), the HSAs should be Roth HSAs, with after-tax deposits and tax-free withdrawals.]

Electronic medical records, price and quality transparency, telephone and e-mail consultations – all of the things Congress and the Administration are unsuccessfully trying to force on providers today would emerge naturally – without coercion, without new laws and without bureaucratic harassment.

Bottom line: expect the market for insurance and the market for care to change in radical ways once we fundamentally change the economic incentives of all the participants in those markets.

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