06/25/2008 05:12 am ET Updated May 25, 2011

Dog Bites Man: The Obama Health Plan Beats McCain's for a Single Mom and Her Children

Tony Pugh of McClatchy Newspapers recently ran an article comparing the McCain and Obama health plans.

The flaws in Pugh's article are noted in a great posting by Publius in obsidianwings.

Despite these flaws, Pugh's article is valuable because it gives the problem a human face: in this case Susana Espinosa, a 45-year-old San Diego mother of two who earns $39,000. Right now, Ms. Espinosa covers herself through her employer. Her kids are uninsured with some predictable consequences. Pugh considers how Ms. Espinosa would fare under the McCain or Obama health plans.

Pugh's article highlights several problems in the campaign health policy debate. The article gives the McCain plan too much credit for its supposed "potential for containing health care spending" by imposing financial responsibilities and risk onto individual consumers.

The article also shows the difficulty of explaining complicated issues to everyday people -- McClatchy readers, and Susana Espinosa herself. She believes -- wrongly -- that she would benefit from the McCain plan. In fact, Ms. Espinosa would get large subsidies for her and for her children's health coverage under an Obama plan. In dollar terms, she would get larger subsidies and more comprehensive coverage under what Obama proposes.

I don't understand why Espinosa's children are not on California's SCHIP program, which covers kids up to 250% of the federal poverty line, or $43,400 in family income. Presumably, she is just above the line. So it is especially rich that McCain voted against a proposed SCHIP expansion that would have insured almost 4 million children, concentrating most of the benefit to families like hers with incomes below 300% of the poverty line.

In focusing on a one family, the article shows that it is even harder to explore the broader harms McCain's proposal would do to our entire health system. For example, McCain proposes to eliminate the tax-deductibility of employer health coverage. He rightly notes that most health economists dislike this unduly regressive and inefficient piece of tax policy. McCain would unravel key advantages of employer-based coverage. Yet he offers nothing in its place to accomplish the same tasks. For example, employers provide better risk-spreading for individuals with chronic conditions than is obtained within the market for individual coverage. Employers provide better quality control and monitoring than individuals can. Employers also offer economies of scale in administration through professional benefit managers. For these reasons and others, I would wager that 75% of health economists support Obama and oppose the McCain plan.

Unpacking Espinosa's dilemma highlights that McCain's proposals are not really a "plan" at all. We know that the McCain plan would provide the Espinosa family with a $5,000 tax credit to help buy private coverage. That seems pretty simple, but it is not.

When we consider what she could or would buy with this credit, we can't really know. McCain and his advisors have slapped something together to say that they have something. Yet they have left the hard stuff unspecified, or they provide implausible explanations of what he would actually do.

What would happen to her employer-based coverage under the McCain plan? What would happen if one of the Espinosas contracted liver cancer? Will she get financial help in paying the resulting higher insurance premiums and medical bills? Could she renew her policy, and if so at what rate?

Until six weeks ago, the McCain plan essentially ignored the problems faced by millions of cancer survivors and others whose efforts to buy insurance are complicated by preexisting conditions. Shamed by Elizabeth Edwards, who noted that neither she nor Senator McCain could buy coverage under his plan, McCain announced that he would support safety-net "Guaranteed Access Plans." How these work, who is eligible, how GAPs are financed -- no one knows. As the New York Times put it at the plan's unveiling:

Mr. McCain was vague Tuesday about just how his safety net would be structured, and did not specify how much it might cost... But his top domestic policy adviser, Douglas Holtz-Eakin, said in an interview that the federal share could cost between $7 billion and $10 billion -- money he said could be redirected from existing federal programs that pay for uncompensated medical care, mainly in hospitals.
Mr. Holtz-Eakin said that sum, when combined with contributions expected from the states and insurers, could provide coverage for the five million to seven million uninsured people that he estimates cannot obtain it because of their health or age.

Economist Richard Zeckhauser once stated that the best tool of policy analysis is long division. The resulting arithmetic is daunting. Using Holtz-Eakin's figures, the federal government would provide less than $2,000 per-person for the precise populations insurers don't want to serve due to costly health problems. By way of comparison, per-capita Medicaid expenditures for disabled persons are about $14,000. Either this program is more costly than McCain claims it is, or it will cover fewer people.

There is one more possibility. Senator McCain could leave others holding the bag for some very large bills. According to the April 30 Washington Post, McCain promised "not to create a new entitlement." I am confident that cancer patients won't get their entitlement, though I wish they would.

In the same interview, McCain promised not to "saddle states with another unfunded mandate." I am less confident about this one, at least for the states that actually help those Senator McCain's plan would leave behind. Indeed, McCain's proposal is even worse on states, localities, and safety-net providers than my back-of-the-envelope calculation suggests. Holtz-Eakin reassures us the $7-10 billion "could be redirected from existing federal programs that pay for uncompensated medical care." Run through the Washington budget-language decoder, Holtz-Eakin proposes to finance this new program by cutting the same programs that now keep safety-net providers afloat. Senator McCain would also require the states to develop risk-adjustment bonuses to help high-cost and low-income families. How states, already reeling under rising healthcare costs, would do this remains mysterious.

Finally, one must consider the coverage Ms. Espinosa and her family would buy if McCain's plan becomes law. His basic goal is to encourage the use of "catastrophic" plans that include limited coverage, high deductibles, and co-payments to constrain health services use. A $5,000 credit covers less than half the cost of a typical insurance plan for a family of three. So catastrophic coverage is probably what Ms. Espinosa would decide she can afford.

Now there is an interesting argument to be had about whether Harold Pollack should buy such a policy. Data from the RAND Health Insurance Experiment suggest that middle-class people who bear first-dollar responsibility for medical care use markedly fewer services with little apparent harm. There are lots of caveats here, not least being that the data are now a quarter-century old.

Yet the same RAND data suggest that Susana Espinosa and her family are precisely the wrong people to buy these plans. Low-income families in catastrophic plans were less likely to obtain important preventive services, including mental health care, optometry, and dental care. Perhaps most important, they were less likely to regular blood pressure checks and were therefore more likely to display uncontrolled hypertension. Requiring low-income people to pay marginal costs of care imposes large burdens and requires families to make difficult decisions to balance their financial security and their physical health. There is little evidence that people make these decisions well.

Ironically, if Ms. Espinosa or one of her sons does contract a serious illness, she is likely to discover that her no-frills plan doesn't actually prevent the financial catastrophe she hopes to avoid. The RAND catastrophic plans were actually quite comprehensive. The McCain plan lacks regulatory oversight required to ensure that current plans are, too. To keep plans affordable to $5,000 credit holders, insurers will surely shift many costs and risks onto policyholders.

If history is any guide, many people will not realize this until they or a loved one becomes ill. Recent studies indicate that three-quarters of Americans who fall into medical bankruptcy had health insurance when they became sick. Insured families who fall into medical bankruptcy often lose their coverage or have high out-of-pocket medical bills they cannot pay. We don't exactly know what will happen under Senator McCain's plan. We have little reason for optimism here.

Ms. Espinosa doesn't know it, but she should hope for an Obama victory. Senator Obama and his supporters must explain this to Susana Espinosa and millions of others like her before November.