The McCain-Palin Health Care Plan: Half-Baked Alaska

It must be disconcerting to health care economists to see one of their pet peeves about the inequities of the employer-based insurance system so poorly used by the Republicans, who would repeal it. I'm referring, of course, to the tax deductibility of health insurance premiums.

Gov. Sarah Palin repeated Sen. John McCain's promise to give every American household a $5,000 check to buy health insurance. They would raise the money to fund the program by repealing the deductibility of employer-based coverage. I can't recall if she gave one of her trademark winks when she said it, but she certainly gave an enthusiastic nod. Health care will become just like Alaska! The government will be sending you money every year so you can go out and buy your own insurance.

There is an argument that can be made in favor of repealing tax deductibility. Like the home mortgage deduction, the higher your tax bracket, the more valuable the tax deduction. So if your employer buys you a gold-plated health care plan that costs $15,000 and you're in the highest tax bracket (around 30 percent), you get the equivalent of a $4,500 tax break from the government. But if your employer buys you a plan that only covers hospitalization and serious illnesses for $7,000 a year and you're in the 10 percent income tax bracket, the tax deduction is only worth $700. Repealing all tax deductibility and distributing the revenue equally to buy individual insurance policies seems simpler and more equitable -- both appealing traits.

But, as Sen. Joe Biden pointed out, the average family plan today costs about $12,500 a year (about 80 percent of that picked up by employers, the rest coming out of workers' paychecks). Plans sold to single people or families in the individual market usually cost far more than employer-based group plans. $5,000 won't begin to cover that cost.

And where does that leave the 20 million families that analysts estimate would lose their employer-provided insurance under the McCain plan? They would be losing their coverage because their employers would find it more profitable to simply pay taxes on the $10,000 they used to pay for an employee's health insurance than to continue providing coverage. Employees would face a big gap where their coverage used to be.

Wouldn't some of that $10,000 go to the employees in the form of higher wages that they could use to defray the cost of individual plans? Some. But, given the power relationships in today's workplaces, I think it is fair to say, not all of it, and probably not even much of it.

And what would the $5,000 do for families whose employers don't currently provide insurance? Bare bones doesn't begin to describe the policies available at that price. Setting up a system that encourages millions of Americans to buy these bare bones plans would be the death knell of preventive care and a further deterioration in America's general health status, which already lags behind most other industrialized nations.

A year ago, when many people believed health care would be one of the central issues of this year's campaign, the rival Democratic candidates clashed over the specifics of their detailed health care reform plans. Now, all Democratic nominee Barack Obama has to do on the stump, or, as his vice presidential pick did last night in the debate, is go negative on a poorly thought out Republican plan.

It is interesting to note that Sen. Ron Wyden (D-OR) has been pushing a plan that sounds vaguely similar to the McCain plan. S. 334, the Healthy Americans Act, has 17 co-sponsors in the Senate, half of them Republicans. Significantly, John McCain is not one of them.

Does it have anything to do with the fact that Wyden's plan would lead to a lot of new regulations of the insurance industry and a mandate that would force everyone go out into the individual market and buy insurance? As a recent analysis by the Center for Budget and Policy Priorities points out, it's not even clear that the Wyden plan would adequately protect against adverse selection -- where insurance companies cherry pick the healthier people and force sicker people into high-risk pools where the policy premiums would be sky high.

I wish Biden would have turned to Palin (after pointing out the negative household budget consequences of the McCain plan) and asked: "Would you be willing to have national regulation of the insurance industry to make sure they didn't discriminate against people with pre-existing health conditions or against people who are older and approaching retirement age, which are the higher health care cost years?" Alas, he didn't. And neither did moderator Gwen Ifill, who failed to follow-up on any question of significance.

If they had, maybe she would have given the same answer John McCain recently gave to the magazine of the American Academy of Actuaries, where he called for less regulation of the insurance industry, "as we have done over the last decade in banking."

Comments

[cardtosser]

While neither candidate supports single payer (read: nationalized) healthcare, there are precedents that would indicate that this is the way to go. Most industrialized countries have some sort of governmental healthcare or national mandate for health insurance. Either system could be adapted to the United States.

While many oppose the idea that the federal government could effectively administer such a system, it already runs systems for the retired, the permanentally disabled, veterans, government workers and to some degree plans for young children.

It seems to me that the most vociferous opposition to national healthcare are those who already are so privaliged that they are not affected by healthcare costs, or like the four candidates running for pres/vp are already covered at taxpayer expense.

[HealthcareAdvocate]

An independent analysis and evaluation of the McCain-Palin Health Care Plan:
http://www.healthcare-consulting.com/McCain-Palin-HealthcareDebacle.html

[JNail]

Tax increases would NOT be just for the IRS but FICA and the state income taxes. Eliminating the tax deductibility of health benefits for employers would then also force them to pay FICA (6.85%) on these costs as well if they upped your compensation to pay for the plan.

Here is a simple example assuming an employer would increase a worker's salary by the cost of the healthplan they no longer provide. Larger employers will likely do this but many smaller employers would not do this or only give a partial salary increase.

Example - Avg Family Healthplan cost - $12,000
Income pre McCain plan- 100,000 Income
post McCain plan - 112,000
Fica Increase Employee - $822
Fica Increase Employer - $822
Income Tax - Federal - 20% - $2400 Income Tax - State - 3% - $336
Total Tax Increase - $3558

For lower income folks that pay little or no income tax the deduction is marginal to useless and you and your employer are paying more FICA and you are paying a higher tax to your state.

The other issues of taking regulation away from the states with this new "federal charter" frees the health insurers to be even more of a pain in the ass than they are now in terms of claims, exclusions, pre-existing conditions and price. It is an open ticket for people to get screwed.

The cost of selling and administering individual plans vs. group plans is much higher so costs to the buyer

[JNail]

Tax increases would NOT be just for the IRS but FICA and the state income taxes. Eliminating the tax deductibility of health benefits for employers would then also force them to pay FICA (6.85%) on these costs as well if they upped your compensation to p

[JamesInDenver]

I agree with the other posts. Now that this subject has been brought front and center by Biden in the VP debates, why isn't this article more prominently featured?

McCain's position on health care reform is a joke.

[JamesInDenver]

Only employers with group plans, have the leverage to negotiate favorable health insurance premiums. If these plans go away, insurance premiums will go up. When premiums go up, insurance executives become rich.

Let's break this down:

1) If employers can no longer deduct their insurance premiums, many will have to stop providing health insurance. And over time, those that continue to provide coverage will dramatically decline.

2.a) Employees who loose their employer coverage, will have to buy insurance on their own in the private market, at a much higher rate. Unlike their employers, they just don't have the negotiating power to command low premiums.

2.b) Older employees, and those with preexisting medical conditions, who loose their employer coverage, will be placed in high risk pools. They will pay much, much higher premiums.

3) Employees in companies that continue to provide health care, will see their taxes go up, because they will no longer be allowed to deduct the premiums that they pay into their employers plan.

4) The $5,000 check every one will receive from the government, will not be enough to buy private insurance, so many people will go uninsured.

5) Public hospitals will continue to be overburdened by uninsured patients. And families will continue to go broke.

I guess we know who the winners are. Imagine when McCain privatizes Social Security.

[clearthinker2008]

And what about people who have lost their jobs or are homeless? aahhh...who cares

[lincheryl]

McCain has always been under a health care plan he didn't have to pay for--military from his dad, military from himself, veteran from himself, Senate from himself, and megabucks from Cindy. He doesn't have a clue what it is like to need surgery and not be able to afford it.

I have insurance that comes through my employer, but it is not sufficient and would still cost me thousands after the deductible and the part not covered. I can't afford the surgery even with insurance; I can't imagine what it is like not to have any at all.

I know people who have tried to buy their own and it is prohibitively expensive.

[StMTraveler]

In contrast to many very highly qualified Republican ladies, such as Dr. Rice, Sarah Palin has equivalent high school knowledge in some fields, and not at all in the others. Palin spent her first college semester at Hawaii Pacific College, transferring in 1983 to North Idaho College and then to the University of Idaho. She attended Matanuska-Susitna College in Alaska for one term, returning to the University of Idaho to complete her BA, 1987, in communications-journalism.

Did he think that American women would vote for him because he selected a female rather than a male for the ticket? Senator McCain, please stop insulting the American women?

As McCain had stated, he voted 95% of the times in the Senate along the President Bush's policies. The issues during this election are: job, economy, medical insurance, infrastructure, education, and failed policy of the President Bush.

Should I vote for Bush-McCain policies that took money from my pocket to give tax break to the very rich? The policies exported the jobs away from my sons and daughters; the policies added future financial burden to my grand children.

[ProudLiberalDemocrat]

I am a smart fellow, but I still do not understand this analysis of McCain's plan.

If I receive employer-based healthcare of $12,000, I will be taxed on this benefit, less the decuction of $5,000. So, I'll be taxed on $7,000 (whatever my tax rate).

Under John McCain's plan, I will be paying taxes on my healthcare if I receive a typical employer-based program.


Therefore, it will cost me money to keep what I receive for free from my employer.


Please, anyone, am I misssing something??

[BuckeyeMike]

Sounds about right.

Palin said that the McCain plan is "budget neutral." That may be true for the government, but not for the average family.

[tonycoyle]

you got it.

$5000 seems like a lot when you look at your 'employee' premium -- which might be $500 or $600 a month for a family at the high end. That still looks reasonable, then, for most people. But the actual premium includes the employer portion - for a family that might be closer to $20k (8 to 10k is a median per person rate)

There is not a single person, nor a single indistry, that will want to continue with healthcare in this regard. If you are young and healthy you'll defer healthcare - preferring to save and 'pay as you go'. And as these lower risk people leave insurance - adjusters will know that the pool of insured that remains are higher risk, so your group rates will shoot through the roof.

All in all The McCain plan is deeply flawed - unless your aim is to enrich insurance companies and the healthcare industry.

[PaulL2]

You are absolutely correct. Under McCain's plan, many people will wind up paying more, whether they have group or individual insurance. This is, as Biden implied, but did not really say, (and should have slammed Palin over the head with it) a huge stealth tax increase on the working and middle class, on top of an equally huge profit grab for the insurance industry. McCain would, as the article states, put "high risk" people (that's anyone who ever took a prescription in the last five years) into "high risk pools." These would be run on a state by state basis, and would cost both the patients and the states huge amounts of money. (This is another Reagan-Bush-Bush trick of not really reducing taxes, but simply transferring the tax problem to the states.) Meanwhile, the insurance companies would be creaming the system. Why am I so sure? Because I have 30 years in the health care administration world. I've read McCain's web page and plan, and I am familiar with the economic arguments in the article. McCain's plan would seal the destruction of the middle class. Its only benefit, in the long run, is that what would follow without a doubt would be tax-financed national health insurance, because the health care payment system would fail.

[StMTraveler]

In contrast to many very highly qualified Republican ladies, such as Dr. Rice, Sarah Palin has equivalent high school knowledge in some fields, and not at all in the others. Palin spent her first college semester at Hawaii Pacific College, transferring in 1983 to North Idaho College and then to the University of Idaho. She attended Matanuska-Susitna College in Alaska for one term, returning to the University of Idaho to complete her BA, 1987, in communications-journalism.

Did he think that American women would vote for him because he selected a female rather than a male for the ticket? Senator McCain, please stop insulting the American women?

As McCain had stated, he voted 95% of the times in the Senate along the President Bush's policies. The issues during this election are: job, economy, medical insurance, infrastructure, education, and failed policy of the President Bush.

Should I vote for Bush-McCain policies took money from my pocket and placed it in the bank for the very rich. The policies exported the jobs away from my sons and daughters; the policies added future financial burden to my grand children.

[usna73]

Isn't it pathetic that close to half the voting American populus doesn't have either the desire nor intellectual curiosity to obtain even the minor details of that which impacts their very health?

McCain and Palin are a shameful example fo how utterly devoid of conscience some will behave to guaranteee thay the least fortunate among us are not exploited, as will surely be a result of the dumb-downed "tax credit" hoax.

Captain McCain has forgotten all of his leadership lessons from Annapolis.

[fourcer]

Isn't it pathetic that close to half the voting American populus doesn't have either the desire nor the intelectual cursiousity to obtain even the minor details of that which impacts their very health?

You and this blogger fail to mention that the same study that concluded 20 million Americans would lose their health insurance from this plan would also result in 21 million previously uninsured Americans would immediately join the ranks of the insured, resulting in a net gain of insured. Also, this study does not take into account employers who would share some or all of their net monetary gain in this scenario with their valued employees, thereby keeping them whole and insured (I know my company would).

Please save your elitist, partially researched, overwhelmingly biased opinions to yourself if you're not going willing to discuss the whole picture.

[jeg]

Yes, but as someone who receives insurance from my employer, John McCain is raising my taxes. Period.

[Javalation]

Individual health insurance is individually underwritten. Unlike group policies, individuals can be rejected or have specific conditions waved. A family applying for coverage can be accepted, except for the family member with problems. If an insured person has coverage with a company that gets out of the business, or even terminates a policy series, new underwriting is required and newly developed problems are subject to waiver or the person is not insurable.

Without a change in law, individual policies won't solve the problem. In reality, the insurance industry can't solve the problems that are built into their system.

[za2008]

I can't imagine anyone who has actually applied for individual health insurance and looked at the cost vs. benefits offered has any desire to do it again (if you have a few hours, go to one of individual health insurance companies and try to work through pages 1-6 of the 15 page application). And, not only does the application require a huge time commitment, more often than not, they'll disqualify you for any small issue that occurred in the past 10 years (unless you've somehow managed to avoid any medical care for 10 years--this is what is meant by pre-existing conditions).

I'm relatively young and healthy and I've had significant problems with trying to get basic individual health care. However, my efforts would be nowhere near what people with more significant concerns would have.

[GoozNews]

You misrepresented what I wrote. I said 20 million would lose their employer-provided health insurance, not that 20 million would become uninsured. That will force them into the individual market. And, yes, it is estimated that 21 million would buy plans, thus increasing the total number of insured by one million (out of the 47 milliion uninqured). But what will be the quality of those plans? And how much more than $5,000 out of pocket will those people be spending to get those plans? That is what the rest of my post addressed, and you ignored in your comment that relied on ad hominem attacks like "elitist" and "biased."

[sociocanuck]

Brilliant. If you're in group A who lose out completely, aren't you going to be happy that Group B would be marginally better than before? I know I would - life-threatening congenital medical condition be damned.

Sounds like a Republican trying to justify a change that would totally contradict the "me first/I got mine" mentality of most fiscal conservatives.