McCain's Health Plan

A note to readers:This post has been retained in the blog for purely historical reasons. McCain's Health Plan: The Short Version is really much easier to read and contains all of the information to be found in this post. If the reader wants to read a critique of the Democrat's health policy see this post. Also relevant to health policy is the discussion of catastrophic health plans favored by our free market reformers.

Reading Wonks Anonymous and the liberal press you might have thought that only Democrats and the radical fringe cared about your health. We are happy to inform you that a recent article in The New York Times shows that free market wonks and the Republican presidential candidate are also thinking about you.

They propose the most radical transformation of the health care marketplace since the initial creation of Medicare. Their command of free market economic theory has shown them the problem with health care - us. We are getting a free ride from our employers when it comes to medical care. As a result we don't take care of ourselves and we indulge ourselves with unneeded treatments and visits to the doctor. This drives up health care costs. They propose to change our behavior: prodding us out of our old ways with a rather large stick while tempting us to better ourselves with a somewhat smaller carrot.

First the stick. McCain's brain trust wants to tax employer sponsored health insurance, both employer and employee contributions. Average spending on these plans in 2007 was about $4,500 for individuals and about $12,000 for families according to the Kaiser Family Foundation study of health insurance costs. The 69% or so of the employed population who have employer sponsored health insurance would find their taxable income rising by the total cost of their health insurance.

This would "eliminate the bias against those who buy insurance individually." It would also increase the tax base. Wonks Anonymous did very crude calculations for 2007. Of 146 million employed about 100 million had insurance. Valuing that insurance at the low individual cost of $4,500, the total spending on employer sponsored insurance would come to about $452 billion dollars. This is the increase in taxable income.

Actual taxes collected will be a percentage of this, say 25%, if the income is subject to payroll taxes as well as income taxes. This is about $100 billion in extra revenue. It won't pay for the next 100 years in Iraq but it is still a substantial tax increase. As an added benefit all the tax increase would fall on working people, avoiding the "supply side" problems caused by increased taxes on investors.

(This is the best that I can do while taking care of a two year old on my day off. Anyone who wants to refine or correct the calculation can contact me,, or submit a comment.)

Now the carrot. McCain does not really want to increase your taxes. He would much prefer to see you leave employer sponsored health insurance behind and strike out on your own. To help you do this he will give you a tax credit, $2,500 for individuals and $5,000 per family. 

Suppose that, as an individual, you take the carrot. If you can buy health insurance at the employer sponsored group rate of $4,500 per year and your employer raises your take home pay by that amount then your losses are small. You will pay taxes on an additional $2,000 income. This assumes that dollars spent on the individual health insurance market bought you the same coverage as dollars spent on group health insurance.

They do not. Health insurance providers work very hard to evaluate and, wherever possible, to avoid risk. Individual insurance applications require detailed medical history and individual policies are priced to reflect expected health spending. Health insurance companies also assume that anyone who tries to buy individual health insurance is more likely to have significant health care expenditures than someone who does not.

Some of us will be able to present health insurers with proof of our good health and all round virtue and get insurance for about the $2,500 provided by the tax credit. Others will find that they need to pay more than $4,500 to obtain insurance that may not be equivalent to their previous coverage.

You will probably be able to get somewhat lower rates if you opt for a high deductible plan. This might entitle you to a tax break for a Health Savings Account. In this type of plan you would pay for the first $1,000 to $5,000 of medical services that you use, thus giving you further incentives to avoid medical care. 

In his travels through the blogsphere Wonks Anonymous has encountered a number of healthy individuals who seem to believe that their good health and low medical costs are a result of their own superior character. These people will be rewarded by McCain's plan and they are its most vocal proponents.

Wonks Anonymous is under the impression that the free market wonks who are advising McCain also believe that the new incentives offered by the plan will encourage the rest of us, unhealthy slackers and spendthrifts all, to follow the example of the more virtuous. It is expected that this moral transformation will make us all healthier, leading to lower health care costs. He expects that this is supposed to work the same way that cutting taxes for the rich was supposed to unleash unheard of economic growth and prosperity for all.


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