McCain’s Health Care Plan Gets Better Reviews Than Obama’s

According to Robert Carroll’s editorial in the WSJ, Almost Everyone Would Do Better Under the McCain Health Plan:

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.

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:

[McCain] 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.

Further, the rather liberal Tax Policy Center stated the McCain proposals will result in a “net tax benefit” of more than $1,200 for an average tax payer. A recent Lewin Group study estimated savings upwards of $1,400 per family, almost three times the savings a family would get under the Obama plan.

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.

Consumer Reports also offers this description:

Senator McCain, would create a deregulated national insurance market, expand individual coverage, and rely on competition to drive costs down. People with serious health problems could join government-subsidized high-risk pools like those that many states run today.

Both candidates agree on a few issues: both want to speed up adoption of electronic record-keeping systems; they also agree on the need for safety and transparency, speeding up the introduction of generic drugs, making it easier to buy drugs from overseas and on coordination of care for those seeing a variety of specialists.

Otherwise, Senator McCain and Senator Obama have radically different health care proposals, which offer “dramatic reforms for people not on Medicare.” Consumer Reports also offered a review of both:

CR analyzed what could happen to five American households under McCain and under Obama. ‘The cases aren’t statistically representative but do highlight the stark contrasts between the plans.’ The review is pretty well balanced and McCain’s plan seems to closely edge out Obama’s in their scenarios.

Mr. Carroll’s article also includes a chart depicting a family of four which is ‘assumed to purchase a $14,000 health insurance policy.’ The picture is striking in that it contradicts Obama’s public comments about McCain’s proposal:

[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.

Some of the nation’s top economists in the Treasury Dept.’s Office of Analysis and The Lewin Group, a respected private health-care research outfit, estimated that the McCain credit would increase the number of new insureds by as much as 15 to 21 million people.

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.

Mr. Carroll also address the implications of this proposal on the future of entitlement programs and notes ‘this is perhaps the most important aspect of the proposal.’

There is an enormous unfunded liability associated with … 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.

Certainly, Social Security and Medicare are programs that need to be addressed (and protected) sooner rather than later. It is interesting to note that Mr. Carroll feels Senator McCain has a better inroad into solving that problem.