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.