Published October 7, 2008
In recent days, Barack Obama and Joe Biden have been throwing stones at the health care plan of Republican presidential candidate John McCain. Coinciding with new TV ads being aired in battleground states, the Democratic ticket is trying to alarm voters with claims that the McCain plan would force higher costs onto some households and unravel job-based insurance.
Both of these criticisms are demonstrably not true of the McCain plan. But they are true of Obama's own plan. Independent estimates show an Obama-like scheme would push tens of millions of workers and their families out of employer-sponsored insurance — and the workers would be powerless to stop it.
Senator McCain's health care plan is built around giving households more control over health care coverage decisions. He would convert today's income-tax preference for employer-paid insurance into a refundable tax credit that workers and their families could direct to the insurance plan of their choice.
Obama and Biden are trying to scare voters by suggesting, first of all, that McCain's reform would leave some households worse off than they are today. In fact, most Americans would come out well ahead under the McCain plan, as independent estimates — and common sense — indicate. A middle-class household in the 25-percent tax bracket — that's married couples with incomes between $65,100 and $131,450 in 2008 — would have to get more than $20,000 a year in employer-paid premiums to be better off today than under the McCain plan. (The average employer contribution to family coverage was $9,325 in 2008, according to this annual survey.) A distributional analysis of the McCain plan by the Tax Policy Center shows all income groups, including the poorest fifth, better off with the McCain tax credit than under current law in 2009.
Senators Obama and Biden have also tried to claim that millions of Americans would be pushed out of employer-based plans under the McCain reform. But this claim is also false. McCain's proposal would give workers the option to take their credit and apply it to insurance outside of their workplace. In some cases, this would be a rational decision, as it would give a worker portable insurance they could keep even as their employment and life circumstances change.
But there is no reason to believe large numbers of employers would suddenly drop coverage altogether. Job-based insurance would still be very desirable for most workers, as the premiums paid by firms would remain exempt from payroll taxes. For this reason, employers looking to attract and retain the best workers offer attractive health-insurance plans.
As Senator Obama has criticized the McCain plan in recent weeks, one has to wonder whether he even understands his own plan. Indeed, it is Obama's plan, not McCain's, that represents the real threat to employer-sponsored insurance.
The Obama plan is built on a “pay or play” employer mandate. This would require all but the smallest employers either to offer a one-size-fits-all insurance plan to their workers, and pay a portion of the premium (“play”); or to pay a tax to the federal government to offset the costs of a new government-run insurance exchange and plan (“pay”).
Obama has not specified what the tax rate would be for those employers wishing to “pay” instead of “play.” It's not hard to see why he wants to duck the issue. If he says the rate would be high, he could keep government costs down and argue that most employers would “play” not “pay,” thus preserving job-based plans. But such a high tax rate would also be burdensome and destroy jobs for those low-wage workers who don't have coverage today because they cannot afford it. If, on the other hand, Obama set the employer tax rate low, it would provide a ready excuse for employers to dump burdensome insurance arrangements by paying a relatively inexpensive tax instead.
Senator Obama, of course, has no interest in making it easy for outside analysts to tell voters what his plan would mean for them. Fortunately, Americans don't have to rely on the spin from the Obama campaign — there are other sources of information about his plan and what it would mean for American health care.
Earlier this year, a trio of executives from the Commonwealth Fund put together an Obama-like reform plan in which they set the “pay or play” tax at 7 percent of payroll — probably right in the middle of the possible range of tax rate options. The Lewin Group consulting firm found that this proposal would push more than 32 million Americans out of job-based coverage and into a new, government-run insurance exchange. In other words, employers previously organizing insurance for these workers and their families would choose to “pay” not “play” — and the workers would have no say in the decision.
Senator Obama has repeatedly claimed his plan would reduce health care costs for all households with existing coverage. This is not true, according to the Tax Policy Center. In 2009, households in the top 40 percent of the income range would, on average, pay close to $300 more per year for health care because of the government's one-size-fits-all insurance and the new burdens imposed on their employers.
Senator Obama and the Commonwealth team like to emphasize that the national exchange would be like the federal employees health benefit program, with competing private insurance offerings. But the Lewin Group's estimates show that two out of three people in the exchange would enroll in the public-insurance option, not private insurance, because the public plan would use price controls to keep premiums artificially low. Over time, this price-controlled insurance product would inevitably become a magnet for even more enrollees and an excuse for other employers to “pay” rather than “play,” too.
In the end, the choice in health care is between building an effective marketplace and imposing artificial government cost controls. Plenty of countries have imposed cost controls, with predictable deterioration in the quality of care and access restrictions. Senator McCain has rejected that approach and made it clear to voters what he would do to foster strong price and quality competition in health care. Senator Obama is telling voters his plan would bolster employer-based, private insurance — when, in fact, he would destabilize it. The McCain campaign needs to make sure voters see Senator Obama is living in a glass house.
— James C. Capretta is a Fellow at the Ethics and Public Policy Center and author of the health care policy blog Diagnosis.