Studies Rebuff McCain’s Critics

The LewinGroup released a study of the McCain and Obama health plans last week. At the same time, University of Minnesota professor Roger Feldman and his colleagues released their study of the McCain plan, which complements their previous study of the Obama plan.

These are the only academic studies of the two health plans that exist.

Although they differ in important respects, there is one thing that the Lewin and Feldman studies have in common. Both show that McCain’s critics have been way off base.

httpv://www.youtube.com/watch?v=C5icxIdAWPg

A Big Whopper with Cheese!

Would either plan cause people to lose their employer-based coverage? In what was largely an editorial in Health Affairs, Sherry Glied and her colleagues claimed the McCain plan would cause 20 million people to lose their employer-based insurance. Calling the editorial a “study,” Obama advisor David Cutler repeated the charge in a Wall Street Journal editorial, and it was repeated again by New York Times columnists Paul Krugman here and Bob Herbert here and in the rest of the print and Internet media by the usual leftwing echo chamber. Meanwhile, Senator Obama continues to assert in campaign speeches that “if you like your employer plan, you can keep it.”

Here’s what the studies found: Lewin estimates that 9.4 million people would lose their employer-based coverage under McCain, but the number would be 13.9 million under Obama. In other words, for every three people who lose employer coverage under McCain, four people would lose coverage under Obama! These results are sensitive to assumptions, and the loss under Obama could be much higher. A Lewin study of a similar health plan (John Edward’s) estimated a 52 million drop in employer coverage.

Feldman estimates that employer-based coverage would actually increase under McCain, while a whopping 60 million would lose their employer plans under Obama. (I think Feldman is closer to the truth — at least for McCain — for reasons I’ll discuss in a subsequent Alert.)

Would either plan successfully insure the uninsured? Another charge by Glied and colleagues, repeated again and again by pro-Obama editorial writers, is that the McCain plan would have no overall impact on the number of uninsured. In fact, Lewin estimates that the number of uninsured would drop by 21.1 million under McCain and 26.6 million under Obama. Feldman estimates a 27.5 million drop under McCain, compared to a 25.5 million drop under Obama.

Again, both studies are sensitive to assumptions, but it’s probably fair to say that either plan would cut the number of uninsured in half.

Would either plan lead to universal coverage over time? They don’t even come close. In fact, Lewin concludes that the impact of both plans maxes out between 2011 and 2012; and beyond that, the number of uninsured will continuously rise. The reason: neither plan has a realistic method of controlling costs.

Would either plan cause people to give up “good” insurance for “inferior” insurance? Another frequently repeated charge by Obama supporters: people who lose their employer-based coverage under the McCain plan will have to turn to the individual market, where insurance will be more costly and less generous. In fact, the reason why some people move away from employer plans in the Lewin model is because they find attractive insurance for a lower price outside their place of work.

Ironically, it is the Obama plan which is more likely to cause a shift to less desirable insurance. Obama has promised that people buying insurance on their own will have access to the same plans available to members of Congress. Yet, although the on-paper benefits will be the same, the Lewin study assumes the plan will be a government-sponsored plan (the “national plan”), paying providers 25% less than what private plans pay. In one simulation, Lewin has the plan paying Medicare rates   —  40% below what private plans pay. (It is inconceivable that Lewin would be making these assumptions without hints from the Obama campaign that this is what they are considering.)

Medicare patients in some parts of the country are already having trouble seeing physicians, and they face waiting times longer than other patients because Medicare’s reimbursement rates are so low. By putting millions of additional people in plans that pay low provider fees, Obama would make rationing-by-waiting problems much worse.

Would either plan significantly increase access to care? Medicaid pays providers even less than Medicare, and for that reason Medicaid patients often face the same access problems as the uninsured. One study found that it was easier for the uninsured to get appointments with doctors than Medicaid patients. An American Cancer Society study [gated, but with summary] reported on here found that being in Medicaid was only marginally better than being uninsured with respect to delays in the detection and treatment of cancer.

According to Lewin, Obama would add 16.6 million people to the Medicaid rolls, including people who drop their private coverage. By contrast, McCain would go in the opposite direction   —  moving 12 million Medicaid enrollees into private plans, allowing access to a broad range of providers.

Overall, 21.6 million would leave private insurance under Obama and 48.3 million would newly enroll in a public plan paying providers below-market rates. Not only would this create access problems for the new enrollees, it would hugely exacerbate the access problems faced by current Medicare and Medicaid patients.

Would either candidate raise taxes to pay for his health plan? Neither plan is paid for. In fact, they don’t even come close. Lewin estimates the ten-year cost at $2.1 trillion for McCain and $1.1 trillion for Obama. But this doesn’t count Obama’s pay-or-play tax (see below) as a cost to the federal government, even though it is a cost to taxpayers. Feldman puts the cost in excess of $2 trillion for McCain and $6 trillion for Obama.

In his campaign speeches, Obama says no one making less than $250,000 would see a tax increase. He needs to re-read his health plan. Everyone who is working and who is currently uninsured would face a pay-or-play tax of 6% (Lewin) or 7% (Feldman) of wages. This is equal to $3,000 a year (or more) for a $50,000 employee, or $6,000 for an average-income, two-earner couple.

Employers would either have to pay the tax or provide health insurance. But although employers would be writing the checks and making the premium payments, the burden would be on the employees. Economic theory is clear on this point. Payroll taxes and employee benefits are paid at the expense of cash wages.

At one point, Obama promised to rescind the Bush “tax cuts for the rich,” producing an estimated $60 to $65 billion a year to partly finance his health plan. He has since almost completely caved on this idea, as reported here. However, Feldman estimates the pay-or-play tax will be $179 billion a year. This tax on low- and middle-income families is three times the size of the tax increase Obama once proposed for the rich.

Obama commercials accuse McCain of planning to “tax your health insurance.” Originally, the McCain plan was to be a revenue neutral change in the way we subsidize private health insurance. Instead of excluding employer-paid premiums from income and payroll taxes, McCain proposed a fixed sum tax credit of $5,000 (family) or $2,500 (individual). This would have resulted in a huge redistribution of tax benefits from high- to low- and middle-income families. However, both studies reflect McCain’s more recent decision to keep the payroll tax exclusion in place (at a ten-year cost of more than $1 trillion!). As a result, almost no one will see an increase in taxes under the McCain plan — as is reflected in the sample illustrations at the McCain Web site.

But to repeat, neither candidate has a realistic proposal to pay for all these promises.

How would the Obama plan work? The following is an illustration of how it might work for a $50,000-a-year, currently uninsured employee. (For simplicity, I am ignoring employee premium cost-sharing and income and payroll tax implications.):

Note: No matter what the employer does, the employee’s wages will eventually be at least $3,000 less than otherwise because of the pay-or-play tax.

Option A: If the employer decides to “play” and provides health insurance, the $3,000 tax is avoided and the $6,000 credit can be claimed from the government. However, the additional $6,000 needed to purchase the insurance will be funded by paying $6,000 less in wages over time.

Option B: The employer can also “play” by buying the employee into the government-sponsored plan for $9,000  — using the $6,000 tax credit and the $3,000 that would otherwise be paid as a tax to the government. On paper, the benefits are the same as the private plan. But since provider fees are lower, patients will face rationing problems. In this case, the employee’s wages will eventually be only $3,000 lower than otherwise.

Option C: The employer can also choose the “pay” option, remitting the $3,000 tax to the government. The employee would then be eligible to enroll as an individual in the government-sponsored plan, receiving a $4,500 subsidy. As a result, the employee’s wages will eventually be $3,000 less per year and he will have to pay $4,500 per year in premiums.

Clearly, Option B is better than Option C for the employee. And since the cost to the employer in both cases is the same, employers would almost certainly choose B over C. For an employer of lower-income employees, however, Option C may be more attractive than Option B. Also, most employers do not get the $6,000 small business tax credit. That is one reason why so many people would gravitate to the government-sponsored plan under Obama.

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