John McCain's Plan to Keep Employer-Provided Health Insurance While Moving Away From It

Severing the government-supported, market-distorting connection between health insurance and employment would promote choice, allowing people to select the medical plans that best suit their circumstances, and security, addressing one of the main anxieties about health care by making coverage portable. This is one of the few areas where the Bush administration was on the right track, and I'm glad to see John McCain picking up the idea. But I wish his talk were a little straighter on this subject. Here is how he describes the current system, in which most Americans with health insurance get it through their employers, and the change he'd make:

Under current law, the federal government gives a tax benefit when employers provide health-insurance coverage to American workers and their families. This benefit doesn't cover the total cost of the health plan, and in reality each worker and family absorbs the rest of the cost in lower wages and diminished benefits. But it provides essential support for insurance coverage. Many workers are perfectly content with this arrangement, and under my reform plan they would be able to keep that coverage. Their employer-provided health plans would be largely untouched and unchanged.

But for every American who wanted it, another option would be available: Every year, they would receive a tax credit directly, with the same cash value of the credits for employees in big companies, in a small business, or self-employed. You simply choose the insurance provider that suits you best. By mail or online, you would then inform the government of your selection. And the money to help pay for your health care would be sent straight to that insurance provider. The health plan you chose would be as good as any that an employer could choose for you. It would be yours and your family's health-care plan, and yours to keep.

The value of that credit—$2,500 for individuals, $5,000 for families—would also be enhanced by the greater competition this reform would help create among insurance companies. Millions of Americans would be making their own health-care choices again. Insurance companies could no longer take your business for granted, offering narrow plans with escalating costs. It would help change the whole dynamic of the current system, putting individuals and families back in charge, and forcing companies to respond with better service at lower cost.

Although you might not guess it from McCain's gloss, the "tax benefit" in question goes to employees, not employers. Companies can deduct money spent on employee compensation as a business expense whether it takes the form of wages or health benefits. But since the government does not treat employer-provided health insurance as taxable income, there's an artificial incentive for employees to prefer compensation in that form, rather than the cash equivalent. If both kinds of compensation were treated the same, most employees presumably would prefer the money; employers would respond by ditching health benefits and offering higher wages instead. Equal tax treatment could be accomplished either by taxing the health benefits as income or, as McCain seems to be proposing, making the money an employee independently spends on health insurance tax-free as well.

Although the policy change has to do with taxes paid by employees, The New York Times has McCain "eliminating the tax breaks that currently encourage employers to provide health insurance for their workers," which makes it sound as if employers are the ones getting the breaks. And the McCain campaign seems to be downplaying the impact that equalizing the tax treatment of health benefits and wages would have on the prevalence of employer-provided medical coverage. According to the Times, McCain's domestic policy adviser "said he believed that many employers would still offer health insurance to try to attract the best workers." McCain himself says "employer-provided health plans would be largely untouched and unchanged" for the "many workers" who "are perfectly content" with the status quo. Maybe this is just his way of reassuring people that changes in the compensation mix would be driven by employee preferences. But the main economic rationale for eliminating the health-benefit tax preference is to make employer-provided medical coverage the exception rather than the rule; otherwise we would still have a system in which medical coverage is both artificially expensive, since patients have little opportunity or incentive to economize, and insecure, since losing a job often means losing health insurance.

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  • MK2||

    Our American health care system is fine. Nature eventually culls out the losers who can't afford health care, and we all benefit. We should encourage them--the losers--to smoke more and eat more and get less exercise to speed up the process. Same thing goes for gas prices. If you can't afford them, get a fucking bicycle and quit whining.

  • ||

    medical coverage is both artificially expensive, since patients have little opportunity or incentive to economize, and insecure, since losing a job often means losing health insurance.

    The only way to fix this to make it illegal to fire anyone and price controls on health care.

    Any debate on this means you hate unions and hate people without insurance.

  • Naga Sadow||

    Another politician dreaming of having his cake and eating it too.

  • Fluffy||

    Wouldn't suddenly taxing peoples' health benefits as income constitute a massive tax increase?

    New McCain slogan: I want to raise your taxes! Unless you get your employer to cut your health insurance, and pay for it yourself!

    A family policy in MA can run 8000-12000 dollars a year. McCain would basically be offering people a choice between allowing their employer to continue to get insurance for them [in which case they get hit with a 3-4000 tax bill] or pay for their own insurance [which would cost them 12 grand minus the tax credit].

    So no matter which one they choose, they get hit with a bill. This benefits them how?

    If the theory is that the people who tell their employer to cut their health care will immediately get huge raises, that doesn't really seem logical to me. It also doesn't seem to make the plan more attractive. "My new plan has you either pay more in taxes, or pay to get your own insurance. But don't worry, you can just negotiate a raise from your boss and pay for all that!"

  • SIV||

    Well there is always the "SIV plan".
    End State medical licensure , open immigration for those with experience and training in medical services, legalize all drugs, tort reform, end all tax incentives for anything other than catastrophic insurance.......

    Have I left anything out?

  • ||

    Fluffy,

    You're working under a common misperception that the employer's cost is the money that ends up in the employee's pocket. In reality, employers consider everything they shell out for an employee regardless of what makes it into the employee's pocket. That means 7.5% "employers contributions" for social security, workers comp, health benefits etc.

    Medical benefits are not free. People who work with full benefits actually get a salary 1/4 to 1/3 higher than their nominal gross take home pay. Someone who makes $50,000 a year actually makes $65,000 plus. It's just that the company spends the $15,000 plus for them. Changing the current incentive structure would simply put the control of the spending under the individual employee's control.

    The most destructive idea we have in this country about medical care is the idea that employee provided health care (or government health care) is "free" to the individual. It never is. The only question is do you get to make medical decisions yourself or do you an institution do it for you.

  • Fluffy||

    Shannon:

    I understand that.

    The problem is McCain's solution.

    If McCain wants to drive people off of employer-paid health care by creating massive tax disincentives to keeping that particular benefit, that part of his plan has to be broadcast a little bit louder than it has been so far.

    It is absurd to think that it will be automatic for employees to be able to jump off their employer paid health plans and immediately secure the cash value of those plans as wage increases with no effort or negotiation on their part. So my characterization of the plan is correct: You can either get a huge tax increase, or get hit with a bill for your own insurance. But don't worry, you can address these problems by negotiating a wage increase from your employer, using the "total compensation" argument you just made. Sorry, that just doesn't sound that great to me.

    Bottom line is that McCain has identified a policy problem and his solution is to attack people with taxes until they do what he wants. Thanks, John.

  • LarryA||

    Wouldn't suddenly taxing peoples' health benefits as income constitute a massive tax increase?

    Where was that mentioned? McCain said the present employer plans would remain largely unchanged.

    Personally it's worth trying if only I wouldn't have to keep switching plans. Actually, there's a benefit that went unmentioned.

    Under employer plans, given the volitility of the job market, insurance companies have little incentive for preventive care. Anything they spend today will only benefit whichever other insurance company the client has switched to when the difference is felt. If companies started to look at their clients as persistent, they could take a longer view.

  • Invisible Finger||

    I agree with Fluffy, but I also agree with Shannnon.

    So let's compromise. Let's first start by taxing the medical benefits of public employees. If they all contimnue to live, then we'll have to reconsider whether it was a good idea or not.

  • BakedPenguin||

    The one benefit to employee sponsored health plans is that they allow for group coverage. This means that individuals who would otherwise be refused coverage can get it, because they are grouped together with people with average and above average health.

    With individual plans, adverse selection means that more and more people are going to be refused coverage.

  • Nephilium||

    Personally, I think the biggest thing that needs to be changed in the Health Insurance industry is to (as I'm a geek) compare it to the Auto Insurance industry. Basically, standard doctor visits are no longer covered. And the only thing that would be covered is catastrophic injury/illness and accidental injury.

    But, that's just my opinion.

    Nephilium

  • Morat20||

    Hi! This is reality calling, with a message for you.

    "As long as we tell hospitals they have to treat sick people regardless of ability to pay, we have universal health care. The only question is how efficient or inefficient do you want it to be?"

    If you're serious about ending "universal health care", stop dicking around with employee coverage and start convincing America to allow doctors to turf the sick out to get better or die on their own, because they can't pay.

    If you're unwilling to make that case, then you might as well skip all the BS and start arguing about how to make a universal system the cheapest and most efficient.

    Anything else is handwaving bullshit.

  • Naga Sadow||

    Morat20,

    Great point. Also, it's funny how militant the tone of your thread sounds.

  • ||

    So does McCains plan include a deduction on social security taxes as well as income taxes?

  • ||

    So does McCains plan include a deduction on social security taxes as well as income taxes?


    I doubt it. The self-employed health insurance deduction doesn't reduce SS taxes either. If McCain is like most politicians, he doesn't really understand how taxes actually work.

  • ||

    The one benefit to employee sponsored health plans is that they allow for group coverage. This means that individuals who would otherwise be refused coverage can get it, because they are grouped together with people with average and above average health.

    With individual plans, adverse selection means that more and more people are going to be refused coverage.


    Having done some work in this area, I can tell you that this is largely a problem created by government mandates on insurance companies (often aided and abetted by the insurance companies).

    States place limits on the abilities of insurance companies to create groups for purposes of health insurance. Depending on the state, it can be difficult to impossible to create groups for people who don't have some pre-existing affiliation or other (such as a common employer). The insurers who are big in the employer-sponsored insurance market think this is just dandy, as it prevents competition, so they lobby like hell to keep it that way.

    Free up insurers to create groups of unaffiliated individuals, and you can get the benefits of group coverage for people buying outside their employer.

  • ||

    If you're serious about ending "universal health care", stop dicking around with employee coverage and start convincing America to allow doctors to turf the sick out to get better or die on their own, because they can't pay.

    Doctors already can refuse to treat the poor and uninsured, and many do.

    Its hospitals who have to take anyone who wanders onto hospital property. Many, many hospitals in the US are non-profit, and provide care without regard to the ability to pay. The mandate merely means that those prone to abusing this system (and they are legion) have a roadmap for doing so, and hospitals have no way to manage them.

  • Kneil||

    This would also be a step towards eliminating the inefficiency inherent in a one size fits all insurance plans. If I had a tax efficient way to buy my own health insurance I would at least try to find a plan that didn't cover treatments that I have no use for. I haven't made a deliberate survey but I know that while I have no intent to use them, my current plan covers: homeopathy, color therapy and aroma therapy.

    There would probably still be some state laws in the way, but it is a step.

  • ||


    There would probably still be some state laws in the way, but it is a step.


    Excessive minimum coverage requirements are pretty much a state law problem. I don't think there's any federal legislation on that (yet). It's one of the reasons states like Maine have very expensive health insurance. Rules allowing you to buy coverage after an adverse event has already happened are also to blame. That's a problem in both Maine and NY (and 2 other states IIRC).

    Federal anti-discrimination law is also a problem. As a man, I have no use for pregnancy coverage, yet I must buy it and I can't be charged less for coverage than a childbearing-age woman even though a heck of a lot more healthcare dollars are spent on women. If rates are supposed to be a reflection of cost to insure, this is clearly wrong.

  • Ken||

    Jacob, you can't just ignore facts that don't fit neatly into your ideology. Explain to my Type 1 Diabetic friend, who is self-employed, how she should pay $3,000 to $4,000 per month for decent insurance.

    In the cases of pre-existing conditions and chronic conditions, the market simply will not fix this. I'm a pretty libertarian-minded person myself, but I have to admit that there's no market solution for these people, and yes, this means a solution must come from the government and only the government.

  • Smedloff||

    Having heard from all of the folks that want so many changes to the national health care system, people should understand...we do not have a national health care system...hopefully, that will be one of the next President's priorities.

    How can we, as a nation, fix the healthcare situation until we combine into one system that everyone has to follow. At present, each state regulates most of its insurance industry with a small smattering of federal government interference.

    We hope for federal and state oversight, not regulation! Witness Florida's attempt to control insurance, they are chasing the big carriers out and will not make room for the smaller ones.

    We need a national standard for healthcare. We need set rates for care, irregardless of whether one has insurance or self-pays!

  • ||

    I have a hunch that this is going to
    hurt older employees. Younger ones may
    prefer to take the cash and shop for
    inexpensive plans but older ones cannot.
    But now if the employer only has older
    employees to cover, its group rate will
    increase. At the end older ones suffer
    the most.

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