McCain's Health Care Plan: Gut Employer-Based Insurance

This is the first entry in a series examining John McCain's health proposals and how they have been covered in the press.

A few years back, I attended a meeting at the Rayburn Building on Capitol Hill to hear conservative think tanks, including the Galen Institute and the Heritage Foundation, argue that employer-provided health insurance ought to be eliminated. The audience -- mostly Hill staffers, industry reps, lobbyists, and journalists -- asked a lot of questions as health care specialists made economic and political arguments about why the tax exclusion for the value of employer-paid health insurance had to go. It would be the first step in ending employer-sponsored coverage. I remember two things from the meeting -- the free chicken sandwiches everyone devoured, and how unthinkable such an idea would be. Were they crazy?

Like so many once-unthinkable ideas which have come from conservative think tanks over the last two decades, like privatizing Medicare or creating health savings accounts, this one began to worm its way into Beltway consciousness. Oregon Sen. Ron Wyden and Rep. Bob Bennett of Utah even took the bold steps of writing bills that would wipe out employer-provided coverage in favor of a system where individuals buy their own policies through state-run pools.

Given this history, it was hardly surprising when John McCain made the attack on employer-provided insurance his health-care centerpiece. He would eliminate the tax exclusion workers get for health benefits their employers provide; in other words, he would require workers to pay income taxes on the value of their health insurance, while companies would still get to deduct the costs for providing that coverage. In its place, McCain would offer families a tax credit of $5000 -- and individuals a credit of $2500 -- to buy their own insurance. (They'd get the credit even if they didn't pay taxes.) So far, the press has failed to examine what's at stake here for workers and their bosses -- that, in the long run, employer coverage could disappear, and that, in the short run, they may have to pay taxes on some portion of their health benefits, no matter who wins in November. In effect, it's an unspoken tax increase which has yet to surface in campaign conversation.

Too many stories have, in one or two lines, described the tax exclusion proposal as a "radical" notion peddled by some policy research shops, and let it go at that. But there are a lot of angles to explore here: the political angle, the economic angle, the business angle, and the people angle. For example, instead of just mentioning the tax credit, reporters could explain why a $2,500 credit might buy more insurance in the individual market for a young, healthy 26-year-old than for a 56-year-old with a couple of chronic conditions. Premiums in the individual market, where McCain hopes to send refugees from employer group plans, are based on age. Older people pay more, so a flat credit might not buy as much for them. And just how far will the credit go, anyway, considering that family policies now cost upwards of $12,000 a year?

Earlier last month, an Associated Press story moved beyond the standard treatment, and, in seventeen paragraphs, attempted to explain McCain's central thesis. The story, a workmanlike effort, nibbled around the edges of the economic and the business issues. But the AP and others need to do more. The AP posed one of the relevant questions, asking just how many employers would drop coverage for their workers. It answered the question by quoting Washington experts, who explained how young, healthy workers might be tempted to leave the employer group and buy their insurance in the individual market. If that happens, those left in the employer group would be older (and, likely, sicker), causing premiums to skyrocket even more than they do now. To use insurance jargon, "a death spiral" results.

Paul Fronstin, a senior research associate at the Employee Benefit Research Institute, put it this way: "You'll start to get a cycle where people at the margin start to leave employer coverage for individual coverage. At some point employers will start to ask: Why am I doing this if my workers don't value it anymore? If I don't need to be competitive in the labor market, why should I do it?"

Business voices might have given the story more oomph. There are plenty around. Instead of talking to business owners, the AP quoted a rep from the conservative American Enterprise Institute, who predicted that employers would not drop coverage "en masse" because health insurance remains an important tool for attracting and retaining good employees. Frank McArdle, who manages the Washington research office for Hewitt Associates, a benefits consulting firm, told me that "fundamental change is something that scares a lot of employers. Some small employers say they wouldn't survive the transition." The business community has weighed in, and it isn't keen on the idea of destroying the bedrock of American health care -- just yet. U.S. Chamber of Commerce President Thomas Donohue has said that, "if you've got 177 million people covered today, I wouldn't give that away too soon."

Last month, the National Coalition on Benefits, a blue chip business group that helped kill the Clinton plan fifteen years ago, re-emerged. The group, whose members include Donohue's organization, General Motors, the Business Roundtable, and the Blue Cross and Blue Shield Association, wrote a letter to Sen. Wyden and Rep. Bennett blasting their plan, which allows employers to continue offering coverage but lets employees buy private coverage through the state-run pools. The Coalition wrote that, even though business could still offer insurance, "we expect that the source for most health coverage would soon be under the new system of state-sponsored health insurance choices, not through employers." Because the Coalition was so influential last time around, their words (and the meaning behind those words) are worth media scrutiny.

Wyden's plan may not go anywhere, but McCain's tax exclusion might. Here's where the political story comes in. As McArdle told me, "there's quiet interest in Congress for capping the exclusion. If you talk to individual members, you will hear them say privately there should be a limit on the exclusion." Although making the total value of the benefit taxable is probably not in the cards, politicians on both sides of the aisle are considering making some portion taxable. Currently, the exclusion costs the federal treasury some $160 billion in foregone revenue. For a Congress on the pay-as-you-go plan -- that is, for every new program, an old one must be cut -- the tax exclusion is a juicy revenue source that could be used to shore up Medicare or finance the tax subsidies for the poor that candidates have been promising. There are a lot of equity issues here to examine.

So journalists, go for it and tell your audiences about the far-reaching consequences of all this. With taxes high on the agenda for the new Congress, the public deserves to know whether a tax increase will be in their future.


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