Published October 20, 2008
Over the past few weeks, in a series of television ads, in stump speeches, and in the presidential and vice presidential debates, the Obama campaign has sought mightily to attack John McCain's proposal for health care reform. It's vehemence and tenacity have been striking, especially given how little McCain himself has actually had to say about his plan. Ironically, their misleading critiques actually hint at the strengths of McCain's proposal, and point to the serious vulnerabilities in Obama's own approach to health care politics.
At the core of the McCain health care agenda is the most important conservative policy innovation since welfare reform: the transformation of the benefit now given to employer-provided health coverage into a health insurance tax credit made available to all. For almost 70 years now, the federal government has given a significant tax preference to employer-provided health insurance. When your employer takes money out of your wages to purchase coverage on your behalf, the money is not counted as part of your gross income, so you don't pay any taxes on it. But if you purchase insurance yourself, not through an employer, the money you use to do so gets taxed.
This makes employer-provided insurance vastly more appealing and places a serious burden on those to whom it is not available or who prefer coverage other than what their company offers. It has prevented the development of a genuine market in individually purchased health insurance and therefore artificially keeps insurance costs high. It has kept consumers from having a clear sense of what their health care costs, and so has inflated the price of care itself as well as the price of coverage. It has severely reduced the options available to families, making it more difficult to find insurance that meets their particular needs. It has tied health insurance to employment, leaving people uncertain about career moves and insecure about the future of their coverage. And it has vastly increased the number of Americans without health insurance, since not every business can afford to provide coverage, and those whose employers don't offer it cannot readily find affordable options on their own.
And yet, for all its troubles, the employer-based system is quite popular with the people it serves. Nearly 90 percent of them, in a recent Kaiser Foundation poll, rated their insurance as good or excellent. They would certainly like to see costs go down and to feel more secure about their coverage, but they do not want their existing coverage taken away from them. This obviously poses an enormous challenge for reformers: How can the problems of the current system be addressed without displacing the millions of Americans who are satisfied with it?
The McCain solution is to change the incentives for consumers, but not for employers, so that people find themselves with more options, but are not forced out of their current insurance arrangement. Rather than exempt from taxation all the money used by employers to buy insurance, he would treat it as income but then provide individual taxpayers (regardless of how they obtain their coverage) with a credit that more than covers the taxes. The effect of this, from the point of view of individuals and families, would be to make employer-provided coverage just one option among many.
All American taxpayers, regardless of whether they now have health insurance or where they get it, would receive a $2,500 health care tax credit ($5,000 per family) under McCain's plan. If you now have health insurance through your employer and would like to keep it, you can do that and the economics of the arrangements would change only slightly, and (for all but the top 5 percent of taxpayers) for the better. The money your employer takes out of your wages for your insurance would be taxed, but the new credit would more than cover the additional taxes, leaving you with the insurance you have now, and with a little more money in your pocket at tax time (between $700 and $1,600, according to the estimates of the Tax Policy Center). Things don't change for your employer, and they get a little better for you.
In last week's town hall debate, Barack Obama attacked this feature of the plan as an example of “one hand giveth and the other hand taketh away.” But the giving and the taking occurs only on your income tax form, and in the end you're left with the insurance you want to keep and more of the money you've earned. The point of all the giving and taking, meanwhile, is to make options available for those not satisfied with the current system, or not served by it.
If you now receive insurance coverage from your employer but are unhappy with it or would rather find coverage that stays with you through different jobs or better suits your family's needs on your own, the McCain plan would give you the same tax benefit for insurance you choose as you now get only for insurance your employer chooses. If you decline your employer's insurance, the portion of your wages spent on coverage becomes regular take-home pay, which you can use to buy insurance. The additional wages are taxed, but again the new credit would cover those taxes and even leave you with a little extra. You would have just as much money to spend on insurance as your employer did. In addition, the McCain plan would vastly increase the scope of competition in the individual insurance market by permitting insurers to sell policies across state lines. It would thus create both new buyers and new sellers and start to build a genuine individual insurance market, which would bring down costs.
Finally, if you don't have insurance at all now, the new tax credit would put your family $5,000 closer to affording it. Most of the uninsured are not poor (or else they would qualify for Medicaid), and for many families without coverage an extra $5,000 and a real market to buy in would make the difference and allow them to obtain health insurance. A recent analysis of the McCain plan by noted health care economist Roger Feldman and a team at Health Systems Innovation (HSI) found that it would reduce the number of uninsured Americans by 27 million–well over half of the present total–and all without forcing anyone who now likes their coverage to lose it.
The McCain approach essentially puts employer-purchased and individually purchased health insurance on a level playing field, giving people more options and a better chance to find and afford the coverage they need.
The Obama campaign's attacks on the plan have mostly sought to confuse the public about its benefits by speaking about the parts without acknowledging the whole. Senators Obama and Biden both mentioned the taxation of health benefits in recent debates, and their campaign has run ads pointing to it as well, but all have failed to note the tax credit that more than makes up for it. The net tax burden on middle class families declines under the McCain plan, while insurance options improve. If they do mention the tax credit, they suggest it is all that families would have if they left their employer coverage–as Joe Biden put it in his debate with Sarah Palin, you would have to “replace a $12,000 plan with a $5,000 check you just give to the insurance company.” But that ignores the simple fact that employer-purchased health care is purchased with employee wages. Right now, employers pay workers less in cash wages because they pay so much in premiums. With McCain's reform, workers who opt out of coverage will get more take home pay and a tax credit to more than make up for lost employer contributions to health care.
But perhaps the most dishonest charge concerns the prospects for the employer-based system itself. The Obama campaign has implied that McCain's plan would unravel the system and cause workers to be dropped from their employers' health plans. “Twenty million of you will be dropped,” Joe Biden said in the vice presidential debate. In fact, the McCain plan does not alt
er the basic financial incentives facing employers. Workers might choose to leave employer coverage, but the McCain plan would not force them out.
Indeed, it is Barack Obama's health care plan that raises the prospect of masses being dropped from the employer-based insurance system, and his vulnerability on this crucial front may explain some of his intense defensiveness on health care. In the second presidential debate, Obama sought to address this concern through a brazenly misleading depiction of his own plan. “If you've got a health care plan that you like, you can keep it,” he said. “All I'm going to do is help you to lower the premiums on it.” But you can only keep your plan if your employer doesn't eliminate it, and Obama's health care proposal, unlike John McCain's, gives your employer a powerful incentive to do just that.
Where McCain seeks to address the problems of our health insurance system by building a market for private individuals, Obama seeks to do so by building a public-insurance system. His plan would force all but the very smallest businesses to either provide insurance coverage that meets the plan's requirements (which the Obama campaign has not specified, but would surely involve extensive particular coverage mandates like those in the federal employee health plan, which exceed what most popular employee plans provide today), or pay a tax to the government. Many employers would thus face the choice of increasing their insurance costs to comply with the new coverage requirements or dropping their workers' coverage. Obama, meanwhile, would create a new government-run insurance program (funded by the new tax on employers who don't offer coverage) that would compete with private companies to cover people who are not insured by employers.
In effect, the Obama plan creates an incentive to drop employees from existing plans, and then takes private insurers out of the race to cover them by using price controls to make the public option cheaper. The plan's goal is to drive Americans into a public Medicare-like insurance system by default.
The effect would be dramatic. An analysis by the Lewin Group suggests this approach would result in between 32 million and 52 million people moving from employer-provided coverage to the public system (depending on the rate of the “pay or play” tax on employers, which the Obama campaign has yet to specify). A recent analysis by HSI argues that “The offering of a public health plan will practically eliminate the group market medium PPO plan design that has been the most popular [employer-based] plan to date.”
The Obama plan would also cost more than $400 billion a year, would impose a new burdensome tax on employment through the pay or play provision at a time of already rising unemployment, and, according to the Tax Policy Center, would increase the health care costs of taxpayers in the top 40 percent of the income range. All of this, HSI estimates, will reduce the number of uninsured Americans by about 25.5 million people, while McCain's plan would reduce it by more than 27 million.
Simply put, Barack Obama's criticisms of the McCain health care plan–that it would raise taxes and decimate employer-based coverage–apply far better to his own proposal.
The case for McCain's plan can be made very plainly: If you like your coverage as it is, the plan will let you keep it and you will pocket a little more money at tax time. If you don't like your coverage now, the plan will give you a lot more options to choose from and let you use the same money your employer now uses to pay for them. And, if you don't have insurance today, the McCain plan will offer you more options, reduce costs in the market for individual insurance, and put you $5,000 closer to having health insurance. Obama's plan would push tens of millions of people out of private insurance they like and into a vast government program. It would, moreover, raise taxes on hiring in hard economic times and break the federal budget.
It is John McCain, not Barack Obama, who should be pushing hard on health care in the next debate.
— Yuval Levin is the Hertog fellow at the Ethics and Public Policy Center and senior editor at the New Atlantis magazine. His new book, Imagining the Future: Science and American Democracy, will be published this month by Encounter Books.