John McCain's 'Underwear Gnome' Health Care Plan Will Leave You Feeling Naked

There's an episode of the animated show "South Park" in which the young protagonists stumble upon a netherworld inhabited by gnome-like creatures whose sole purpose in life is stealing people's dirty underwear.

Curious, the boys investigate and uncover the underwear thieves' master plan, which goes like this:

Step 1: Collect Underwear
Step 2: ?
Step 3: Profit!
At first glance, John McCain's health care plan makes about as much sense. The policy -- typically light on details to avoid getting tripped up by those pesky factual analyses health care advocates are always waving around -- is focused on using the "miracle of the free market" to control costs by giving individuals more choices.

Step one: Increase Americans' "freedom" and "choice." Step three: Profit!

Missing is step two. There's a brief but vague mention of a greater emphasis on preventing chronic illness and an equally fuzzy paragraph on improving information technology, and McCain says he "will look" to re-importing pharmaceuticals, but there's very little meat to the section on controlling costs. McCain does slip in a proposal for "tort reform" to stop "endless, frivolous lawsuits" -- a favorite conservative myth that has been long debunked in academic literature (when one includes jury awards, legal fees and insurance costs, lawsuits account for less than one-half of 1 percent of U.S. health care spending -- a drop in the proverbial bucket).

But the problem is ultimately a matter of perception. Most of us think a health care policy should improve Americans' well-being, control spiraling costs and provide access to care for the close to 50 million citizens who lack coverage today. But McCain's plan is designed to improve the health of corporate America's bottom line at the expense of working individuals and families. The goal is to shift the burden of an incredibly overpriced and inefficient health care system from employers and the government onto the backs of working people themselves -- to have them carry the load while doing very little to lighten it.

It's a continuation of the kind of compassionate conservatism that political scientist Jacob Hacker has dubbed "The Great Risk Shift." Hacker defines it simply as "the growing transfer of economic risks and responsibilities from employers and governments onto workers and their families."

When one understands what the intent of the plan is, it's actually pretty well designed.

McCain would start by eliminating the 60-year-old tax exemption on health benefits provided by employers. Like most Republican "ownership society" proposals, there's a carrot: He'd give individuals $2,500 and families $5,000 in refundable tax credits -- basically paying them to go it alone.

The problem with this aspect of McCain's plan is not the ideology as much as the math. According to research by the Kaiser Foundation -- considered the premier source for data on health care costs -- the average cost of employer-based health care plans is around $4,500 for an individual and $12,000 for a family. Of that $12,000 to cover a family, employers in 2007 paid an average of around $9,000.

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As Don Pedro at Economists for Obama points out, middle-class families with health insurance from their employers -- say, for example, a married couple making between $63,000 and $128,000 -- would certainly have more choice. They could choose to pay an extra $2,250 each year in taxes to stay on their employer-sponsored plan (that's for couples in a 25 percent tax bracket, so it's a quarter of $9,000), or they could take their $5,000 tax credit and buy their own plan, at an average cost of around $9,000 for comparable coverage (that's the cost for comparable plans purchased on a non-group basis, according to AHIP's Center for Policy and Research, the insurance industry's research arm), which would effectively increase their out-of-pocket medical expenses by around $4,000. But Pedro only looked at marginal tax rates, ignoring the fact that those benefits would also be subject to payroll taxes. So add another $600 to that IRS bill.

But most people won't pay an extra four grand for comparable coverage; they'll move toward cheaper plans that offer fewer benefits and higher deductibles. That's the point: It's health care "rationing" -- a favorite bogeyman among conservative commentators -- by means of economic incentives, but it's rationing nonetheless. At one point (it's since been rewritten), McCain's Web site referred to this aspect of his plan as "reforming" the tax code "to eliminate the bias toward employer-sponsored health insurance."

An argument can be made that employers would add some of those savings onto people's paychecks over the long run, but it's a radical overhaul that would cause massive dislocation in the short term.

But it gets worse. McCain's carrot -- that tax credit of up to $5,000 -- will become smaller and smaller in real terms. It would increase at the rate of inflation, but, as I wrote recently, the formula used to calculate the official inflation rate has been rejiggered in recent years specifically in order to "contain" -- cut -- those government benefits that are indexed to the rate. As James Kvaal, the former policy director on John Edwards' campaign, noted (PDF), "health care premiums are expected to grow by 7 percent a year, (but) McCain's credit will increase by only about 2 percent a year (the rate of inflation). In contrast, current tax benefits keep up with rising premiums."

Of course, many healthier people, and people at the lower end of the income ladder, would choose -- or be forced -- to forego insurance altogether and pocket the tax credit. According to an analysis by the Kaiser Foundation (PDF), very few people who lack employer-provided insurance buy their own plans. Only 1 in 20 of those scraping by at the poverty level get insurance on their own, but even those taking in much more often go uninsured, for a variety of reasons, cost being the most obvious. Only a quarter of those earning four times the poverty rate buy their own coverage, and at 10 times the poverty rate -- people making pretty good scratch, close to $200 grand -- only half do.

But fear not: McCain would resuscitate George Bush's plan to greatly expand the use of "Health Savings Accounts" -- tax-free accounts that people could use to save for major health care costs down the road. HSAs are very good for younger, healthier workers who have modest medical needs. The problem is that they encourage those with the lowest health care costs to leave the insurance pool. That results -- can only result -- in higher premiums for everyone who remains. The whole concept of insurance is to spread risk around to a large group of people; HSAs do the opposite.

Another element of McCain's underwear gnome approach to health care is deregulation. He'd effectively do away with what's known as (modified) "community rating." That's a wonky term that means that insurers can charge people different premiums based on their age and sex, but are limited in how much they can charge based on pre-existing conditions.

Losing those regulations would create a massive shock to an already creaky health care system, effectively pricing people who are ill out of the market. Of course, McCain's conservatism is deeply compassionate and, according to his campaign's Web site, his "plan cares for the traditionally uninsurable." That means some sort of social safety net for the ill, elderly and otherwise costly to insure. But, according to the New York Times, "Mr. McCain was vague ... about just how his safety net would be structured, and did not specify how much it might cost."

McCain's chief domestic policy adviser, Douglas Holtz-Eakin, told the Times that "the federal share could cost between $7 billion and $10 billion." But, as Pedro pointed out, those numbers don't add up:
These figures are nonsense on their face. If the federal government is going to subsidize a high-risk pool of 5-7 million people with $7-10 billion a year, the proposed subsidy is $1,400 per year. There is no way to this is going to be anywhere close to covering the extra insurance costs for a group that consists of old and sick people.
Additionally, the 5-7 million is surely a vast underestimate of the number of people who would not be able to obtain health insurance in McCain-land. Anyone old, sick, or with a prior condition -- a number that would easily be in the several tens of millions -- would not be able to obtain insurance at anything other than obscene rates. Faced with no restrictions, insurers would cherry pick only the low-risk customers.
Ideology First, Country a Distant Second

John McCain's plan to revamp America's health care system is a triumph of ideology over common sense. On the stump, McCain speaks constantly about "choice" and "competition" as the drivers of cost savings. In the context of health care, though, these are little more than slogans.

The idea is that people will shop around for the best deals and decide to forgo unnecessary treatment. Then, when we become a nation of choosy health care consumers, costs will decrease. But go back to economic theory. A consumer has to have a high degree of information to make those kinds of decisions, but in the real world, far from the orbits of conservative think tanks, most people don't have enough medical knowledge to be "rational actors," selecting the least costly treatment from a long menu of options. Few of us read the New England Journal of Medicine; few of us have a grasp of what risk factors dictate which kinds of testing we should get and which are unnecessary. We trust our doctors to help inform our medical decisions, and the only "choice" most people would end up making is whether to seek care or not. Again, that's rationing by other means -- forcing people to skip health care that they can't afford.

It's also a solution in search of a problem. Jeanne Lambrew, a professor of public health at George Washington University, arguing that "choice" is "a powerful ideological tool," dug deeper into what kinds of choices Americans really want in terms of their health care. She found that "a large majority of Americans who have had experience with employer-based health insurance believe that employers do a good job of selecting quality plans," and "two of three preferred an employer-selected set of plans over an employer-funded account that they would use to find coverage on their own" -- a central tenet of the McCain plan in a nutshell.

More importantly, she found that people who bought insurance on the individual market felt they had less choice than those whose employers provided coverage for them.
The perceived extent of choice varied by type of health insurance: 81 percent of those with employer coverage said they had at least a fair amount of choice, compared with 70 percent of those with individual insurance. In fact, the proportion of individually insured people reporting "not too much" or "no choice" in where to go for care (27%) was considerably higher than among those with employer coverage (17%).
And while McCain decries Democratic proposals to insure everyone, Lambrew states what should be quite obvious: "Lacking insurance altogether, however, appears to be what matters most. The uninsured were the least likely to report they had choices about where to go for care."

In essence, McCain has been hemmed in by the ideology that's governed Republican policy makers for decades. Consider the intellectual contortions the campaign goes through to avoid acknowledging that McCain's plan would effectively raise taxes for most people with employer-sponsored health insurance -- a majority of Americans. Holtz-Eakin denied it was a tax increase, calling it instead "a transformation of the tradition of a tax subsidy to private insurance to make sure that subsidy is fair." That prompted Matthew Yglesias to write: "Clearly what's proposed here is a tax increase. Which in a sane world, conservatives would be prepared to admit. But since they've spent the past 30 years trying to convince people that any hint of tax increase for any purpose is the purest evil, they're now stuck in a rhetorical trap of their own devising."

Better still is one of McCain's proposals for dealing with those patients with pre-existing conditions. According to the campaign's Web site, McCain would consider "establish(ing) a nonprofit corporation that would contract with insurers to cover patients who have been denied insurance and could join with other state plans to enlarge pools and lower overhead costs. There would be reasonable limits on premiums, and assistance would be available for Americans below a certain income level."

Hmmm ... a nonprofit entity that would "contract with insurers to cover patients and join with other state plans to enlarge pools and lower overhead costs." Throw in limits on premiums and some assistance for the poor. What does that sound like?

In the land of Republican underwear gnomes, none dared call it "government."

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