Almost Everyone Would Do Better Under the McCain Health Plan

[Guest canynracer]

http://online.wsj.com/article/SB122506862956370705.html?mod=googlenews_wsj

The McCain health-care insurance tax credit may well be one of the most misunderstood proposals of this presidential election. Barack Obama has been ruthless in his attacks. But the tax credit is highly progressive and will provide a powerful incentive for people to purchase health insurance. These features under normal circumstances should endear Democrats to the proposal.

There has been a lot of rhetoric and misstatements, but what exactly does Sen. McCain have in mind? He would replace the current income tax exclusion for employer-sponsored health insurance with a refundable tax credit -- $5,000 for those who purchase family coverage and $2,500 for individual coverage. Mr. McCain would also reform insurance markets to stem the growth in health insurance premiums.

What many may not realize is that the federal government already "spends" roughly $300 billion to $400 billion through the tax code to encourage people to pay for their health care through employer-sponsored health insurance. This subsidy takes the form of the exclusion for employer-sponsored health insurance from both income and payroll taxes.

Still, some 45 million Americans are uninsured; and the growth in health-care spending continues to outpace the growth in incomes and the economy, which portends further increases in the number of uninsured. The employer-based system itself is eroding. Voters should be wondering whether there is a better approach than this subsidy.

Consider the current exclusion. Its value rises with how much someone spends on health care, and how much of this spending is funneled through employer-sponsored health-care coverage. This creates an incentive for people to purchase policies with low deductibles, or which cover routine spending. These policies look a lot less like insurance and more like prefunded spending accounts purchased through employers and managed by insurance companies. Consider homeowners and auto insurance policies. Do these cover routine spending on cleaning the gutters or tuning up a car?

The subsidy encourages people to buy bigger policies that cover more, and leads to greater health-care spending. Moreover, lower deductibles and coverage of routine spending dulls consumers' sensitivity to price. Reducing the tax bias should result in insurance that is more focused on catastrophic coverage and less on routine spending.

By replacing the income tax exclusion with a fixed, refundable credit, the McCain proposal reduces the tax bias for large insurance policies. Because the credit is for a fixed amount, regardless of how much you spend on health care, it helps break the link between the existing tax subsidy and how much is spent on health care. This improves incentives in the health-care market by reducing the bias that has contributed to such a high level of health-care spending.

Moreover, the credit provides a powerful incentive for people to purchase insurance. The two tax provisions -- the new credit and the repeal of the income tax exclusion -- on net provide a substantial tax cut of $1.4 trillion over 10 years. Not only do most Americans receive a tax cut under the McCain proposal, but the tax cut is directed toward low and moderate income taxpayers.

Consider the family of four shown in the chart nearby, assumed to purchase a $14,000 health insurance policy. The straight line reflects what the family would get under the $5,000 McCain tax credit. The lower line shows the value of the current income tax exclusion, which rises and falls with a taxpayer's tax rate.

What is striking about this picture -- and contradicts Mr. Obama's public comments -- is that the McCain tax credit for the purchase of health insurance exceeds the value of the current exclusion for all income levels shown. Indeed, it generally provides more resources to purchase health insurance than the existing exclusion. The total subsidy for health care would rise from about $3.6 trillion over 10 years today to roughly $5 trillion under his proposal.

How large an effect does this proposal have on the number of uninsured? Based on estimates by career economists in the Treasury Department's Office of Tax Analysis of similar proposals discussed in the Washington Beltway several years ago, the McCain health-care tax credit can be expected to increase the number of insured by 15 million and probably more. The Lewin Group, a respected private health-care research outfit, recently estimated that the McCain credit would increase the number of insured by as much as 21 million. It is true that many may no longer get their insurance through their employer, but they will be given the resources to purchase insurance on their own.

Will the insurance that is purchased be a generous plan with first dollar coverage or low deductibles? It is much more likely to be a plan with higher deductibles that is more focused on providing true insurance against catastrophic losses rather than a more generous plan that includes a lot of prepayment for routine and predictable medical expenses. But this is precisely one of the objectives of the policy: to reduce the current tax bias that encourages people to funnel routine health expenses through insurance policies.

Finally, the credit has important implications for the nation's finances down the road. This is perhaps the most important aspect of the proposal.

There is an enormous unfunded liability associated with the major entitlement programs of Social Security, Medicare and Medicaid. If left unchecked, the growth in these programs will nearly double the size of the federal government by 2040, consuming roughly 40% of the nation's output rather than the 20% today. While the growth in Social Security is largely the result of demographics, the growth in Medicare and Medicaid is also driven by the rapid growth in health-care spending. This is where a proposal like Sen. McCain's can be so important.

The elimination of the income-tax exclusion should reduce private health-care spending; to the extent this reduces the cost of health care, it should also put downward pressure on the growth of Medicare and Medicaid costs. Thus, by removing the tax bias for more generous health coverage, the McCain health credit also has the potential to provide important dividends to the entitlement problem down the road.

Mr. Carroll served as deputy assistant secretary for tax analysis at the U.S. Treasury. He is now vice president for economic policy at the Tax Foundation, and an executive-in-residence with American University's School of Public Affairs.

[greenego]

McCain's plan is much better, but it won't work. The reason, he is expecting people to buy health insurance and then give then the credit. Having tried to sale health insurance many, many years ago, I heard more then once, "I know I need it but I will not make the premium payments". With the employers providing the insurance, the person never has to write a check so the premium gets paid. This is also the way our tax system works, for those who get a W2. How many people would be able to pay their taxes without withholding?

[Guest canynracer]

but if the allowance goes straight towards your plan...it works. the only reason people pay the rpemiums is because its deducted from your paycheck...so, deduct it from the allowance...

[Oh Shoot]

What does NOT work is many folks who have an existing condition can NOT get health care for anything approaching 5K/yr.

I would like to change insurance myself, but can't because of a now newly existing condition. It's not a condition that seems to even threaten my lifestyle or longevity, but added in with my age and a couple of other relatively minor, but now "pre-exisiting" conditions, the premiums would be undoable.

Hell, I already pay $300/mo for just catastrophic insurance.

Don't see anything till I'm $5K out of pocket, and have $7.5K max out of pocket per year. No doctor copays or anthing. Reduced prescription costs, thats about it.

And I'm in pretty good health for my age. Walk 30-40 mi/week, only a little overweight, no diabetes or other chronic serious condition, etc.

But until I'm 65 at least, there ain't much chance of getting any cheaper or better health insurance unless something better than McCain's "plan" gets implemented.

- OS

[Guest canynracer]

well the title does say "Almost Everyone" LOL....

[Oh Shoot]

well the title does say "Almost Everyone" LOL....

Yeah.

Well, ya know, something like 40% of the US is 50+.

Most all folks of this age have similar issues to mine, if they are having to get insurance on their own.

That is NOT an insignificant number of folks who would same or worse off from McCain's health plans.

But he knows that.

- OS

[Guest db99wj]

Yeah.

Well, ya know, something like 40% of the US is 50+.

Most all folks of this age have similar issues to mine, if they are having to get insurance on their own.

That is NOT an insignificant number of folks who would same or worse off from McCain's health plans.

But he knows that.

- OS

How would Obama's help you? This is a serious question, I pay $670 per month for family coverage, my company pays 90% of mine. If you multiply that by 12 subtract total from $5000, divide by 12, I would get or save $417 per month. That for a guy with a wife and 4 kids is a significant amount. It appears under Obama's plan, since I like my coverage, I would save $2500 per year or $208/mo. That is a $209/month in savings. I might be off on the top number Mccains plan because of pretax/posttax issues.

At this point, I don't really care which plan they use or what they do, but they need to do something. I pay a house note for medical coverage that I barely use, but have to have.

[greenego]

Health insurance in this country is so distorted. No company is going to insurance folks and lose money. I also have a high deductible policy. We expect to pay $2000 a year and get $3000 in benefits. It doesn't work that way. Think about car insurance. You pay it and may never file a claim. The cost of health care is way out of control. I don't think Obama or McCain will change this.

[enfield]

I wish the government would stop helping me so much - I can't afford all the help. Health insurance is one of the biggest scams going.

I didn't have any health insurance until I got my first job at age 23. It's a miracle I survived 23 years without it.

[Oh Shoot]

....

I didn't have any health insurance until I got my first job at age 23. It's a miracle I survived 23 years without it.

Hey, odds of surviving the FIRST 20 or 30 without insurance are helluva lot better than doing the same toward the other end of things, iffen ya know whut I mean, Vern.

- OS

[Oh Shoot]

How would Obama's help you? This is a serious question, ...

Dunno for sure...lots of doublespeak. Wouldn't count on anything until I see it. Lots of noise about at least a universal pricing plan, with pre-conditions not bumping the rate.

Probably all just same ole Dem pie in the sky.

Honestly, I doubt seriously that current two-party system can save much of anything from spiraling on down now, regardless of who has majority where.

- OS

[enfield]

Hey, odds of surviving the FIRST 20 or 30 without insurance are helluva lot better than doing the same toward the other end of things, iffen ya know whut I mean, Vern.

- OS

The odds of survival for everyone is zero. Nobody's going to survive the last 30 years of their life.

[Oh Shoot]

The odds of survival for everyone is zero. Nobody's going to survive the last 30 years of their life.

Yep, you're right.

Life is a terminal condition.

- OS