McCain vs. the Critics, Part II

Here are two radically different approaches to health reform:

  • The McCain health plan subsidizes, dollar-for-dollar, the core insurance everyone should have, forcing people to buy additional coverage (all the bells and whistles and items of questionable value) with their own funds.
  • By contrast, a Commonwealth-Fund-Center-for-American-Progress-and-maybe-also-Barack-Obama approach forces people to buy core insurance with their own funds, leaving them free to purchase the bells and whistles and items of questionable value with taxpayer money.

You might think this second idea was produced late at night after too many glasses of wine.  But no.  I found it at their Web sites here in the sober light of day.  It has even been in Health Affairs.  (Whatever happened to peer review?)For ease of exposition, let’s call the Commonwealth-Fund-Center-for-American-Progress-and-maybe-also-Barack-Obama approach the Axis of Goodness idea, in honor of Milton Friedman’s observation that most bad laws are the result of trying to do good with other people’s money.

Creating a Parallel Market.  For people who do not get insurance from an employer or Medicare or Medicaid, etc., the Axis would create a parallel market-organized like the federal employee health benefits program.  Private plans would compete, along with a Medicare look-a-like plan.  What concerns us here are not the plan specifics but the costs.

Limits on Spending.  The idea behind the Axis approach is to limit everyone’s out-of-pocket cost to 5% or 7½% or 10% of income, depending on the version-with 5% reserved for the poor and the higher numbers for everyone else.  Once these income thresholds are met, taxpayers will be responsible for the remainder.  I know what you’re thinking: Where did these numbers come from?  I second that question.

Just to remind, the nation as a whole is spending 16% of national income on health care.  The average family is spending 19% of its consumption dollars on health care.  That’s worth repeating: we are spending almost one out of every five consumption dollars on medical care.

Disguising Spending.  Of course, the average family doesn’t know it is spending one-fifth of its consumption on health care.  The reason: the bulk of that spending is hidden in non-ear-marked taxes, lower wages, and cost-shifted health insurance premiums.  But isn’t that the whole problem?  Of all the things that are not transparent in the health care system, the one thing that is the least transparent is how much each of us spends.

The McCain plan is transparency par excellence.  Every family will have to be aware of the first $5,000 of spending (in order to claim their tax credit) as well as all subsequent dollars (because that’s out-of-pocket).  By contrast, the Axis approach would make real costs less transparent than they are now-disguising as much as three-fourths of what people actually pay.

Subsidies for Everyone.  What exactly are we talking about here?  Since the average cost of employer family coverage is $12,000, income would have to be $160,000 before a family would have to pay full fare.  In other words, 95% of the population in the parallel market would have their premium payment capped!

Perverse Incentives.  The current system encourages people to wastefully overinsure.  The reason: employer-paid premiums escape income and payroll taxes.  Given a 25% federal income tax rate, a 15% payroll (FICA) tax and a 6% state and local tax, government is paying almost half the cost of the insurance.  Put differently, a dollar of insurance needs to be worth only 55 cents in order to be preferable to a dollar of taxable wages.

The McCain plan completely removes this perverse incentive, since marginal insurance dollars are not subsidized at all.  By contrast, the Axis would raise the subsidy to 100%.  An additional dollar of insurance could be almost worthless and still look attractive to the buyer.

Eroding Employer-Based Coverage.  The McCain approach creates a level playing field under the tax law for individual and group insurance.  Employers will offer insurance only if they can provide something people cannot get on their own (e.g. cheaper and better insurance, say, because of economies of group buying).  By contrast, the Axis would keep the current system in place for group insurance and create a parallel market where the income caps are operative.  Yet these caps amount to a 73% subsidy, say, for a $60,000-a-year family-far more generous than the current system’s tax subsidies at work.

Even with a pay-or-play mandate on employers (of the type advocated by  Commonwealth), I have calculated [here] that most people would be better off if their employers dropped their current coverage; paid cash wages instead; paid income and payroll taxes; and paid the pay-or-play fine!

Comments (12)

Trackback URL | Comments RSS Feed

  1. Joe S says:

    Good analysis. Too bad Sarah Palin can’t explain this. Or even John McCain.

  2. Vicki says:

    Doesn’t this mean that Obama would make the problem of rising health care costs even worse than it already is?

  3. Thomas says:

    Here is the Washington Post correcting Biden’s distortions of the McCain health plan last night:

    Ironically, the Post is much better at explaining the plan than Palin was.

  4. Uwe Reinhardt says:

    John: Imagine a family of four with an annual income of, say, $65,000. They have lost their employer-provied coverage, because one of them works for a small company that has never offerd employees health insurance is not working and the other has lost a job that did offer insurance but now also works for a company that does not offer insurance. The father has diabetes. The mother has had a bout with breast cancer.

    They are armed with a $5,000 refundable tax credit.

    Question (sincerely put): If such a family wanted to buy health insurance in the individual market, what would the premium be and what company would offer them coverage. Furthermore, what woluld the annual deductible and coinsurance be?

  5. Matt says:

    Neither the McCain or OBama plan address the real issue of healthcare, cost. offering healthcare coverage to all doesnt address this issue but only deepens the pockets of hospital and providers. Has anyone checked with to see what their local not for profit hospital profited last year? Our local non profit hospital profited $135,000,000 last year and just anounced a new $350,000,000 cancer building campaign. Yet they are the first in line to cry victim that the reimbursements from Medicare and private insurance are below their operating costs. Unless the hospitals and providers are willing to become transparent with their pricing, quality of care and compete for patients on that level then we will continue to watch healthcare costs increase.

    Offering people a choice to purchase their own healthcare? This will work for the small business owner or the self employed with health conditions. However, too often we see employees opt out of their employer sponsored health coverage because they will have to pay $50 per month in contribution. Yet these same employees have no problem paying for digital cable, mobile phones, suped up cars and nights out on the town. Do we really expect that they will take advantage of a tax break and purchase their own coverage?

  6. Lynne Kernaghan says:

    please explain things in more consumer-friendly ways! What you just tried to explain is not clear to me at all. Thank you very much.

  7. John Goodman says:

    Reply to Uwe Reinhardt:

    Depends on the state. This family is covered by HIPAA. Because they (and their employer) have been paying premiums into the system, they cannot be excluded from it because of a health condition. State governments enforce HIPAA.

    In some states (about five or six, I think), they will be able to buy coverage at community rated premiums — paying whatever other people pay. In most states they will probably have to turn to a risk pool (because of the preexisting condition). And because of HIPAA they will be given priority. The cost of the plan can vary from 25% to 100% more than the cost of comparable coverage in the marketplace.

    None of the outcomes are ideal and I can think of many improvements, the most important of which would be portable health insurance.

    However, the McCain health credit is a godsend relative to the current system. McCain would give them $5,000 a year. Under the current system they would get no tax relief.

  8. Ralph F. Weber says:

    Glad to see we are in agreement again.

  9. Bud Blate says:

    My wife and I are both uninsurable in the individual market in California due to ongoing health problems. We can only get insurance through a group policy. No insurer offering individual policies would touch us. MrMip (California Major Risk Medical Insurance plan) would be our only option under your plan.

    MrMip has a current maximum enrollment of 7100 (yes, hundred)slots. There are over 500,000 uninsurables in California. If you are lucky enough to finally get in (there are currently 750 people on the waiting list)your annual benefit is capped at $75,000 and lifetime benefit is $750,000. My current plan through my employer has no annual cap and a $6 million lifetime cap. For the privilege of waiting an estimated 180 days to enroll, I get to pay a monthly premium for my wife and I of $1956.25 which comes to $23,475 annually.

    Unless your/McCain’s plan can offer guaranteed access which requires mandatory enrollment to avoid “adverse selection” I have a hard time supporting it.

  10. Steve at says:

    In your informative commentary on McCain’s health plan (part II), you say it “subsidizes, dollar-for-dollar, the core insurance everyone should have.”
    I agree that “core insurance” or basic health benefits are something everyone should have. Does the plan specifically limit the benefits to citizens? That would help on the immigration issue as well.
    Another question: can we make the amount of the credit age-rated? Young people can already get good coverage for about half the amount McCain proposes; for older folks, the prices go way up.
    Thanks for your work,
    Steve at

  11. Jack says:

    I’m curious to find out what blog platform you have been using? I’m experiencing some small security problems with my latest blog and I would like to find something more safeguarded. Do you have any suggestions?
    My site eye exercises to improve vision

  12. Jade says:

    I was suggested this blog by my cousin. I am not sure whether this post is written
    by him as nobody else know such detailed about my problem.
    You are incredible! Thanks!
    Also visit my site: black dining table