Response to a Critique of the McCain Health Care Plan

An article in Health Affairs is a full-throated attack on the McCain health care plan.  A companion article attacked the Obama plan.  Strangely, no one was invited to defend either plan.

Written by Thomas Buchmueller, Sherry Glied, Anne Royalty and Katherine Swartz, the attack on McCain’s plan was called a “study” by Obama supporters [here] and by Bob Herbert [here] and other journalists – all of whom claimed that 20 million people would lose their health insurance.  In fact, there is no “study.”  The authors have produced no new empirical research.  And their conclusion was that the McCain plan would be a wash – the number newly acquiring insurance would roughly equal the number losing coverage.  This conclusion, in my opinion is absurd, but not nearly as absurd as what the journalists reported.

Fair disclosure: I was a reviewer of the original submission.  Unfortunately, the printed version is not much better than the original.  Here is my critique:

1. Somewhat unusual for an article in Health Affairs, this piece is incredibly biased. Among other things, the paper ignores the reasons why economists tend to like proposals such as the McCain plan. [See my description (here).] That is, it ignores the expected benefits:

First, the current system of $250 billion in annual health insurance tax subsidies is regressive – giving families in the top fifth of the income distribution four times as much tax relief as families in the bottom fifth.  Replacing this system with a same-subsidy-for-all arrangement (as McCain advocates) seems desirable on equity grounds.

Second, the current system encourages wasteful overinsurance (because taxpayers subsidize up to half the costs of marginal purchases).  By contrast, a fixed-sum tax credit (as McCain advocates) subsidizes the core insurance that we want everyone to have, leaving people free to purchase additional insurance with after-tax dollars.  This type of reform seems desirable on efficiency grounds.

Third, the current system’s failure to subsidize all insurance uniformly, regardless of how acquired, contributes to job lock and discourages labor market mobility.  By contrast, McCain would subsidize all insurance the same.

There is a fourth consideration, often overlooked.  Embedded in a McCain-type proposal is a pay-or-play choice for individuals.  Middle-income families who choose to be uninsured would face up to $5,000 in additional taxes.  So there would be no free ride.  Relative to the current system, the “tax price” of uninsurance would be transparent and large.

The authors of the attack piece apparently concluded that equity, efficiency (cost control), factor mobility and political transparency are not very valuable goals – not even worth discussing!

2. The paper’s claim that the McCain plan would have no effect on the uninsured is not credible. The authors are claiming that 40 million people will turn down the opportunity to have at least $5,000 worth of private insurance at no cost to themselves! Even if a $5,000 plan is less generous than what is normal in the group market, the claim that 40 million people would choose to be uninsured instead is prima facie not plausible.

3. The paper’s estimates of the number of people who would lose employer-provided coverage are completely inconsistent with its description of the individual market. Economic theory teaches that employers provide health insurance because the untaxed value of the insurance is worth more to their employees than taxable wages. If the tax playing field were level between individual and group coverage, employers would not continue to offer coverage unless they could through group buying obtain insurance that is cheaper and better than what workers can obtain on their own.

The authors imply (A) the employers of 20 million people have nothing substantial to offer and therefore would likely pay higher wages rather than provide insurance benefits.  But they also go to great lengths to argue that (non A) the 20 million will face individual insurance that is more costly and less valuable.  The problem is Aristotle’s excluded middle: You can have A or non A, but not both.

4. The authors claim that health insurance mandates are “consumer protections” and that, if people are able to buy insurance across state lines (as McCain advocates), they will choose to buy insurance without such protections.

The current system consists of 50 different regulatory regimes (or separating the individual and small group markets, there are 100).  At the same time, most people have almost completely mandate-free insurance, obtained through a self-insured employer.  We do not see people in the unregulated self-insured market buying only the skimpiest coverage.  They seem to do quite well choosing their benefits without being “protected” by state governments.

On the other hand, the inability to make choices among benefit packages is very harmful.  Studies suggest that up to one-in-four uninsured persons has been priced out of the market by the cost-increasing effects of mandated insurance benefits.   That is more than 10 million people.  A more recent study finds that the ability to buy insurance across state lines would reduce the number of uninsured by one-fourth.

5. Finally, the McCain plan is repeatedly mischaracterized. For example, this sentence is simply untrue:

“At its heart, the system [Sen. McCain] envisions is one in which many more-perhaps most-insured Americans would buy health insurance and health services in a national, relatively unregulated, competitive market, either on their own or as members of fluid, voluntary associations, such as churches or clubs.”

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