Obama Health Advisors Over the Top

Here is what David Cutler, chief policy advisor to Barack Obama, told the Wall Street Journal:

The heart of the McCain health plan is to take people who have secure, employer-based coverage (160 million of them) and throw them into the market where they buy on their own….

In the individual market, many of those will get turned down; others will get quoted unaffordable rates; still others will have pre-existing conditions excluded.

Full text here.  All of which shows that even really good economists are capable of forgetting everything they know in the heat of a political campaign.

In a more recent Wall Street Journal op. ed. piece, Cutler and his colleagues cited a study claiming that 20 million people would lose their employer-based coverage under McCain – a figure repeated in Bob Herbert’s New York Times column and in other news reports.  Neither article mentioned the study’s second prediction: an offsetting 21 million people would obtain insurance.  Nor did they mention a newer University of Minnesota study, which finds that the entire McCain health plan will cut the number of uninsured in half, without any new spending program or any new taxes.

The McCain health plan (summarized by me here) provides a uniform tax subsidy to all insurance regardless of how it is purchased.  And that is all that it does.  It neither encourages nor discourages a role for the employer.

However, economic theory teaches that on a level tax playing field employers will provide insurance rather than pay more in wages if through group purchase they can obtain insurance that is cheaper and better than what employees can obtain on their own.  If Cutler’s description of how bad things will be for individuals on their own is even close to correct, then most employers will continue to provide group coverage as they do today.

The big beneficiaries of the McCain plan are people who do not currently get coverage from an employer and who must pay with after-tax dollars if they buy their own insurance.  These people will get a new tax credit of $2,500 (individual) or $5,000 (family).

Interestingly, it is far more likely that people will lose their employer coverage under the Obama plan (summarized by me here).  Unlike McCain, Obama would have two completely separate and unintegrated subsidy schemes.  He would keep the current system of excluding employer-paid premiums from income and payroll taxes.  At the same time, he would create a parallel (individual market) system in which people would get income-related tax subsidies.

It is not clear whether we should take this seriously.  Obama has never had a clear proposal to fund more than one-third of his promise to create universal coverage.  And with his economic advisors now in full retreat on the threat to tax the rich, there arguably is no Obama health plan.

Taking the Obama proposal at face value, however, the biggest problem is that it is potentially very unstable.  To succeed in keeping individual premiums to no more than 5% to 10% of income, Obama would need three times the amount he will get by taxing dividend and capital gains income of the rich.  But if he does succeed in making individual purchase “affordable,” employers would have very strong incentives to drop their group plans, pay higher wages instead, and let employees fend for themselves in Obama’s parallel system.

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