Will John McCain's health plan extend care or take it away?

The Associated Press

John McCain's health plan? Personally find a cure for all diseases in his secret White House laboratory.

Featured Topic | Posted 15 weeks 4 days ago

Will John McCain's health plan extend care or take it away?

While Hillary Clinton and Barack Obama have been duking it out over which government-sponsored health plan will help more Americans, John McCain this week quietly unveiled his own, more market-driven plan. His proposal: Include health benefits in taxable income -- but provide tax credits of $2,500 to single people and of $5,000 to families to let them choose and buy their own insurance instead of relying on employers.

Supporters say such a plan would make individuals more responsible for their own health care. Critics say it might damage an already-frayed safety net. Will McCain's plan extend health care or take it away?

Ben likes: John McCain's plan to keep employer-provided health insurance while moving away from it

Jacob Sullum/Reason

Although you might not guess it from McCain's gloss, the "tax benefit" in question goes to employees, not employers. Companies can deduct money spent on employee compensation as a business expense whether it takes the form of wages or health benefits. But since the government does not treat employer-provided health insurance as taxable income, there's an artificial incentive for employees to prefer compensation in that form, rather than the cash equivalent. If both kinds of compensation were treated the same, most employees presumably would prefer the money; employers would respond by ditching health benefits and offering higher wages instead. Equal tax treatment could be accomplished either by taxing the health benefits as income or, as McCain seems to be proposing, making the money an employee independently spends on health insurance tax-free as well.

McCain himself says "employer-provided health plans would be largely untouched and unchanged" for the "many workers" who "are perfectly content" with the status quo. Maybe this is just his way of reassuring people that changes in the compensation mix would be driven by employee preferences. But the main economic rationale for eliminating the health-benefit tax preference is to make employer-provided medical coverage the exception rather than the rule; otherwise we would still have a system in which medical coverage is both artificially expensive, since patients have little opportunity or incentive to economize, and insecure, since losing a job often means losing health insurance.

Joel likes: Why John McCain wants you to give up your health insurance

Ezra Klein/The American Prospect

Government health insurance, like large employer health insurance, is based on a simple concept: Risk pooling. The more of us in this together, the more our health risks will average out among the population. When I'm sick, many more will be well, and so the group will be able to bear the costs of my illness. Moreover, the greater the size of the pool, the greater our ability to negotiate better deals, demand fairer treatment, and generally find market strength in numbers. In contrast, McCain would like to take the health-care system in the opposite direction, toward an individual market where individuals seek coverage without the protection of large insurers or the government. Thus, the core of McCain's health-care proposal is a tax credit designed to ease people out of employer insurance and help employers pull away from offering coverage. McCain would give individuals a $2,500 tax credit and families a $5,000 tax credit meant to help them seek cheaper coverage options, such as health savings accounts, in the private market.

If you're young and unlikely to get sick, these accounts are a good deal, as you'll pay lower premiums. If you're not as demographically and genetically blessed, they're a bad deal, as you'll pay much more out of pocket for your care. They are, in other words, the logical extension of the modern health coverage marketplace: They're health insurance for people who don't need health care.