Addressing Distortions of McCain's Plan in Health Affairs

Misunderstandings of Sen. John McCain's health policy initiatives continue to confuse the policy debate, as the Health Affairs article by Tom Buchmueller, Sherry Glied, Anne Royalty, and Katherine Swartz demonstrates.

Among other initiatives, Sen. McCain would provide a new health credit of $2,500 for individuals and $5,000 for families to help them buy health insurance, substituting this direct and portable credit for the current invisible, inflationary, and outmoded tax break that ties health insurance to the workplace.

The article concludes that Sen. McCain's plan would cause 20 million people to lose their job-based health insurance, while 21 million would pick up coverage in the individual market.

The authors do not acknowledge in their paper that there are two tax breaks currently provided through the Internal Revenue Code to support employment-based health insurance -- a "deduction" for employers, and an "exclusion" from taxable income for employees of the compensation they receive in the form of health insurance.  In addition, they do not acknowledge that the wages of employees would be grossed up to account for the value of the policy.  Not fully taking into account these three aspects of Sen. McCain’s plan, described below, could have distorted their results. 

•    For employers: The McCain plan doesn't touch the employer deduction so the incentives for the employer would be the same as today: Whether the employer offers compensation in the form of health benefits or direct compensation, employers still receive a tax deduction for the amount they spend on health coverage. In addition, the payroll taxes they pay continue to be protected from corporate income taxes under the McCain plan. These provisions make providing health insurance neutral for employers in terms of financial incentives.

•    For employees: The article emphasizes the repeal of the current tax exclusion that protects the value of the health insurance policy from being taxable to employees, but it gives only passing mention to the new refundable health credit that replaces the exclusion. The McCain health credit of $5,000 would actually be worth more to the average family than the $4,200 estimated value of the current tax exclusion for job-based insurance.

•    Grossing up of wages: The paper does not mention that employees' wages would be grossed up to account for the value of their health insurance policy, giving them additional resources to purchase coverage.

The value of job-based health insurance is part of the compensation package of workers. The great majority of workers would keep their coverage at work and, for them, substituting the credit for the exclusion would be merely a bookkeeping change. But for those who don't, they would demand the money they had been receiving in the form of health insurance be returned to them in the form of higher wages.

Combining the health credit, the added pay, and the amount that workers are paying now for their share of the health insurance premium can put as much or more money on the table as today.

In addition, it would provide new incentives for more affordable, portable insurance. And the credit would provide greater fairness, giving people the same tax break whether they receive their health insurance through the workplace or on their own.

Workers would have more options in a health insurance market that is competing for their business, and not just in the individual market.  People would find new kinds of groups to help them make their health coverage arrangements -- churches, professional associations, labor unions, and other groups that may be a more stable force in their lives than their jobs.

The refundable health credit also would provide significant new resources for workers at the lower end of the income scale, who often receive no help at all today in purchasing coverage. They would get the full value of the credit toward the purchase of insurance, even if they don't owe that much in taxes.

Updating the intersection of health and tax policy is vital to bring our health sector into the 21st century.

The Buchmueller article does not give the detailed assumptions on whether the studies they relied on accounted fully for current and proposed changes. But one thing is certain: They don't account for market dynamics that would give people many new options in a much more functional market and increase access to more affordable health coverage.

Joe Antos, Gail Wilensky, and Hanns Kuttner have a companion article on the Obama plan. I will review that next week, along with Mark Pauly's piece on adapting features of both plans which he says "would work better together than separately."