Wednesday, October 15, 2008

John McCain is getting creamed on health care because his plan is too good

If I were designing a comprehensive medical insurance system from the ground up, John McCain's proposal offers a good model. He ends most of bias in the tax code favoring employer-provided coverage over the individual market. Employers could continue to deduct medical costs from payroll taxes; otherwise, medical benefits provided by employers would not be exempt from income taxes.

By eliminating this distortion, the theory goes (and I buy this), individuals would pay more of the true costs of their medical benefits. This should encourage them to seek out policies that are tailored to their needs, reducing the overall medical costs. With a wide array of coverage options, it should be simple for people who now aren't insured because they can't afford coverage to buy a bare-bones policy.

As the ranks of the uninsured shrank, the cost-shifting that takes place when medical providers offer services to people who can't or won't pay would go down.

There are concerns about the plan, as it's not clear whether a robust individual insurance marketplace will develop bringing individual premiums more in line with the group market. I understand this problem, because I was married to a health insurance agent and during a brief spell of unemployment bought individual coverage. It cost a lot more (even compared with COBRA) than my old employer-provided plan and it covered a lot less.

The plan tries to address this in a couple of ways: 1) individuals could purchase insurance from any licensed provider in any state, so a market for low-priced basic coverage could emerge; and 2) organizations including unions, churches and AARP could market group health insurance policies directly to members, letting individuals sign up for group coverage from some entity other than their employers.

Should these solutions become viable, the phenomenon of "job lock" so often mentioned during the early '90s -- I won't change jobs because I would lose my health insurance -- could become a non-issue. And a dynamic market for health insurance might well result.

So why is McCain getting killed for this plan?

For one thing, it's too wonkish -- something I never thought I'd say about a McCain domestic policy proposal. The folks at Cato and Heritage like it, for obvious reasons. It ends the long-standing flaw in tax policy that pushes people to get health coverage from their employers rather than shopping for their own.

The problem with the plan is less rational than psychological. We have more than 60 years' history with the current, flawed system and generations of Americans are accustomed to it. They need a compelling reason to abandon it, and McCain hasn't provided it -- particularly when you compare his plan to Barack Obama's.

Obama's proposal, as I understand it, would not touch employer provided medical insurance at first. It would enroll all children whose parents don't have insurance in Medicaid or the State Children's Health Insurance Program. Uninsured middle-class adults could enroll in a PPO similar to the one members of Congress belong to; uninsured low-income people who have too much income to qualify for Medicaid could sign up for a new government program similar to Medicare. And some of the costs of this system will be assessed on employers that don't offer health insurance to employees (a "play or pay" mandate") or through other taxes.

As a small-government, freedom-loving guy, I see this plan as an avenue to government-run health care. The employer mandate will push more and more people into the government system over time. Unless there are draconian penalties for dropping employee coverage, companies will at some point just simply pay the penalty and stop providing health insurance. Startup companies and small businesses that thought about offering medical coverage wouldn't. It may take a decade or more, but this is a stealthy way to nudge the U.S. closer to a single-payer system -- which in my view would be the death knell for medical innovation over time, and lead to massive rationing of care. Maybe not before I qualify for Medicare, but eventually.

But that's 15, 20 years down the road. For now, what does the typical voter see? If I can keep my job, Obama won't take away my health care. McCain might. I don't want to figure out what health care plan is best for me; that's for the HR department. Mac might give me more choices, but right now I want security, and Obama offers that. Winning that debate is a piece of cake.

This analysis by Clive Crook is mostly right, though he favors some form of mandated universal coverage, and I don't. But Crook correctly concludes that the Dems are not giving employers an open invitation to reduce costs by dropping medical coverage during a recession. And for that reason alone, McCain's proposal is a political stinker.

McCain's plan faces the same political obstacles of pure flat-tax plans. If you take away the home mortgage deduction, even if you set up a system that would leave taxpayers better off without the deduction, people don't like it. They think it's a trick. The home mortgage deduction has become an entitlement. And folks don't give those up easily.

What advice would I have given McCain, had he sought it? I would have left the income tax subsidy for medical care in place, perhaps capping it at some level. I'd also provide a tax credit a la McCain to individuals who purchase health coverage on their own. (It might be less than McCain is offering; I don't know what the "right" amount should be.) Whether you got health insurance at work or on your own, you get the same tax benefit. I'd certainly let individuals buy coverage from out-of-state providers and let AARP sell health insurance, too.

But this proposal should neutralize the entitlement mentality. Employers would have no incentive to drop medical coverage, and independent contractors and small businesses could purchase insurance for about the same price big employers do.

Back in the day when the magazine ads and infomercials told us we'd all be working from home in our pajamas owning our own businesses making millions doing something (t was never clear what), McCain's plan might have been an easier sell. Those days are over, and it's too late for McCain to change course.