Personal Health

McCain's Health Plan: You're on Your Own

An estimated 20 million people would lose employer coverage under McCain's plan.
With less than 40 days to go until the presidential election, let's assess where things stand.

Obama appears to be building an edge in the polls and has some upward "mo." That said, the election appears to be a lot closer than it should be given this fact: on two of the issues that concern voters the most -- the economy and the war -- the policies of the Bush administration are widely viewed as dismal failures. Yet McCain's plans are clearly an extension, if not an "amping up," of precisely those policies.

There's a third issue of great concern -- health care -- which should also favor Obama, but it hasn't been discussed much, something I'll try to rectify in a moment.

Another reason the election feels closer than it should be is the strange, erratic, even histrionic campaign being run by McCain. Most recently, it's the "economy's fundamentals are sound," the whole "will-he, won't-he" on the first debate, the distracting, self-aggrandizing way he placed himself in the bailout debate, the politics-first choice of Palin. It all points to the kind of unpredictable, seat-of-your-pants, gut (vs. reality)-driven leadership style of the last eight years.

And, as noted above, his policies seem to derive from a meeting where he and his advisors took a close look at the last eight years and said, "Damn, that's good. Let's double down."

You might think that voters who haven't already made up their minds would look at these bad policy choices along with all this recent flailing about, and feel more than a little squeamish about handing the reins to this team.

Yet, it's close. There are lots of reasons for that and I won't try to sort them out. One factor that has perhaps been underappreciated is that even now that folks are starting to pay attention, they often don't believe that the candidates will do what they say they're going to do. If that's the case, why bother listening to their differences (negative campaigning is effective here as well)? Better to make the call based on gut reactions.

That's a mistake. Both candidates will put great effort into implementing their plans. When John McCain says he's out to cut corporate taxes by a third and pursue "victory" in Iraq, I believe him (a Democratic majority in Congress would try to block him, but I don't want to bank on their success).

So, with no disrespect to gut reactions, and to complement the beginning of the debating season, I recommend we head for the weeds to take a closer look at the other big issue of voters' minds: health care.

The current system is unraveling...that much is known. And the two candidates have very different plans to fix it. Here are some things voters should know about them.

McCain: A $3.6 Trillion Tax Increase and a Shove Into the Open Market

In the first presidential debate, McCain argued that he wants every family "to have a $5,000 refundable tax credit so they can go out and purchase their own health care." To which Obama later responded: "... you may end up getting a $5,000 tax credit. Here's the only problem: Your employer now has to pay taxes on the health care that you're getting from your employer. And if you end up losing your health care from your employer, you've got to go out on the open market and try to buy it."

You see, the 140 million of us who get health care for ourselves and our families through our jobs do not pay taxes, either income or payroll, on this part of our compensation. The McCain plan ends that exclusion, and thus becomes a $3.6 trillion tax increase over 10 years on workers. What was a tax-free part of your compensation is now taxable income. You'll pay income tax on it and you'll pay payroll taxes on it.

Once that happens, your employer's incentive to offer coverage is diminished, and expertsestimate that around 20 million people will lose employer coverage.

So, you're thinking: Wait a minute. McCain's health care plan makes part of people's income newly taxable and that leads to millions losing health coverage. That can't be all there is to it.

Of course not. As he said in the debate, he'll take that revenue from the tax increase, and give it back to you as a tax credit, so you can go buy health care on the open market, or as the health care wonks call it: the non-group market (the group market is where your employer shopped for coverage for the group formed by you and your co-workers). In fact, the McCain team claims that the plan is revenue neutral: they taketh by subjecting more of your compensation to the income and the payroll tax, and giveth back through the subsidy.

But there are two very big wrinkles here. First, when it comes to brokering a deal with insurance companies, there's strength in numbers. Shopping for health care in the non-group market is not most people's idea of a good time. They have no obligation to cover you -- you as much as cough in there, and they're likely to have you escorted out. As my EPI colleagues Bivens and Gould wrote in a new paper, "the individual market is characterized by poor information about policies, discriminatory pricing, coverage exclusions, refusal to cover preexisting conditions, and denials of policy renewal. Even worse, other planks of the McCain plan actually call for removing many of the (already insufficient) consumer protections that currently exist." (BTW, see their paper to be the first on your block with an estimate of the number of folks who might lose coverage in your state.)

Second, the McCain subsidy grows at the rate of overall inflation, a rate that is far below that of health coverage on the open market. The average family premium is already around $12,000, so the $5,000 per family subsidy is already judged by many experts as too low to cover the cost of a decent plan in the private market. And since premium costs have consistently risen more than three times faster than overall prices, the McCain subsidy will quickly become more inadequate over time, driving up the number of uninsured.

Obama's Plan: What He (and others) Learned in the 1990s

The health care debate/debacle of Bill Clinton's first term taught health-care reformers a critical lesson: though people are frustrated with the status-quo, we're nervous about the impact of big changes in it. To be able to say to folks, "You can keep what you have" is a big political selling point.

This was a feature of all the D's plans -- Edwards, Hillary Clinton, and Obama. Under Obama's plan, if you're okay with your employer's plan, you keep it. Employers who don't now provide health care have to contribute ("pay or play") to a new public plan, a kind of Medicare for All (small businesses get a tax credit to help them offset the cost). Those without employer coverage can join this plan through a "health insurance exchange" which works as a large pooling mechanism to give this disparate group the bargaining power they lack as individuals.

Insurers in the plan are regulated such that they can't do all that nasty stuff that goes on in the non-group market. The pooling and the insurance regs create some cost-saving efficiencies, and Obama goes after a significant waste of money in the current Medicare plan: the subsidies to private HMOs through Medicare introduced by the Bush prescription drug program -- that saves $150 billion over ten years.

But these cost savings don't pay for the plan and there are no free lunches in health care reform. The Obama plan will involve some serious resources, estimated by the campaign to be in the $70 billion annual range. He pays for it through the war dividend, allowing the high-end Bush tax cuts to sunset, and the Medicare savings just noted.

The punchline: check out the graph on page 3 of this analysis. Compared to the current situation ("baseline"), Obama's plan is expected to cover a lot more of the uninsured, while McCain leaves that share unaffected.

These are but thumbnail sketches of major reforms, but the most important difference here is really philosophical: McCain stresses a market solution to health care. It's a YOYO (you're on your own) move, based on the belief that a bunch of subsidized -- albeit inadequately subsidized -- individuals scurrying around the nongroup market will create cost competition. That might work with normal goods. It won't work with health care.

In fact, McCain recently wrote this very unfortunate sentence: "Opening up the health insurance market to more vigorous nationwide competition, as we have done over the last decade in banking, would provide more choices of innovative products less burdened by the worst excesses of state-based regulation."


I realize that not every voter wants to hear about "insurance exchanges" and "risk pooling" at this stage of the game. But they should know that McCain's plan threatens a very large change in the treatment of heretofore untaxed benefits, a large decline in employer coverage, and a subsidy that starts out too low and grows at about a third the rate it needs to in order to keep up with the costs families face today.

Okay. Let us surface from the weeds and rejoin the rest of the world. But as we do so, let's get the guts working with the brains. If that happens, this election may not be nearly as close as it appears to be today.
Jared Bernstein is a senior economist and director of the Living Standards Program at the Economic Policy Institute in Washington D.C.
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