McCain vs. the Critics, Part I

In my opinion, the McCain health plan would do two remarkable things.  First, it would virtually eliminate long-term uninsurance.  Almost no one would remain uninsured for more than a year, other than illegal aliens and people with unstable lifestyles.  Second, it would completely transform the type of insurance people are able to buy – as much as doubling the value of the typical insurance contract by encouraging smarter, more efficient ways of purchasing medical care.  And it would do all of this without any new taxes or any new spending programs.

However, these remarkable possibilities are nowhere on the radar screen of some traditional health economists – especially those who back Barack Obama.  Surprisingly, McCain supporters have not been much better.

The McCain plan would replace the current system of tax subsidies for private health insurance with a simple offer: a refundable tax credit for the purchase of health insurance of $2,500 (individual) and $5,000 (family).  This means that the first $5,000 a family spends on health insurance would be courtesy of Uncle Sam, and any additional coverage would be paid by the family with their own, after-tax dollars.

Now, $5,000 won't purchase all the bells and whistles found in a typical employer plan (cost: $12,000) and most people with employer coverage would probably remain there.  But all those who don't have employer coverage – even the poorest of the poor not on Medicaid – would be able to have at least $5,000 of private insurance at no cost to themselves!

If you limited yourself to the $5,000 credit, what could you buy for that sum?  If you have no assets to protect, a reasonable place to start is with a package of primary care and specialist services – allowing you access to virtually any doctor or group practice in the community in which you live. (A RAND study shows that the most important act people take is to enter the health care system; once there, they tend to get pretty much the same care, regardless of the type of insurance they have.)  On the other hand, if you do have assets to protect, you could buy catastrophic insurance – covering everything from cancer care to heart surgery.

So who could possibly turn this offer down?  Read what it's like for both the uninsured and Medicaid patients to get "free care" at a Dallas ER (here) in order to see why almost everyone would grab at the chance in a heartbeat.  But according to one set of critics (Buchmueller, Glied, et. al.,) roughly 40 million people would turn it down and choose to be completely uninsured instead….40 million?….Yes, 40 million….And why, you may ask, is that?  The answer so defies common sense it is not worth pursuing.  But gluttons for punishment can read my critique of it here.

People in McCain's world are not likely to be satisfied with bare bones catastrophic insurance, however.  They will tend to spend additional money for additional coverage, just as they do today.  Moreover, they will likely have access to new insurance products which will offer more value for money than they do today.  Here's why.

Under the current system, the type of insurance we have is shaped and molded by the tax law.  Each additional dollar of premium paid by an employer escapes income and payroll taxes.  So for a middle-income employee, government is effectively paying for up to half the cost of the insurance.  That means that (through their employers) people tend to obtain insurance until it is worth only 50¢ on the dollar at the margin.

[This is why private group insurance tends to pay for care in the same wasteful ways that Medicare pays for care.  And the individual market is so small, that insurers there are not in a position to challenge the payment schemes that dominate everywhere else.]

In a McCain world, however, each additional dollar of premium would be paid after-tax.  So people would not buy an extra dollar of insurance unless they got a dollar's worth of value (in contrast to 50 cents today).  This means that insurers would have to (a) find entirely new and more efficient ways of paying for midrange health care – which is often chronic care – or (b) lose premium dollars to health savings accounts (HSAs) and other direct-pay systems.

One way in which third-party insurance could be transformed is along the lines Mark McClelland and I proposed for Medicare, described here.  Providers would be given enormous freedom to repackage and reprice their services, provided overall costs do not rise and quality does not fall.

But another possibility is that new direct-pay markets would emerge, similar to the markets for cosmetic and Lasik surgery or like walk-in clinics in shopping malls.  To fund these purchases, people could make deposits to HSAs rather than pay additional premiums to insurers. [And, as Mark Pauly and I explained some time ago (here), the HSAs should be Roth HSAs, with after-tax deposits and tax-free withdrawals.]

Electronic medical records, price and quality transparency, telephone and e-mail consultations – all of the things Congress and the Administration are unsuccessfully trying to force on providers today would emerge naturally – without coercion, without new laws and without bureaucratic harassment.

Bottom line: expect the market for insurance and the market for care to change in radical ways once we fundamentally change the economic incentives of all the participants in those markets.

Comments (12)

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  1. Tom says:

    I haven’t heard anything like this from the McCain campaign. Why not?

  2. Tom says:

    I think insurance is not the answer because insurance companies always want to deny claims and it in their interest to do so. Do you know of any proposal that has insurance provide the insurance but has a third party decide on claims? Does your proposal?

  3. Tom says:

    This second Tom is not the same person as the first Tom.

  4. Scottt says:

    Although this makes a great deal of sense, the message needs to be drastically simplified for the masses. Without the simple translation, McCain’s campaign will not be able to deliver this message…it is too complicated unless you work in healthcare?!

  5. antiplanner says:

    John,

    Your post about the McCain plan raises two questions in my mind.

    1. If this is a tax credit, what about people who don’t pay taxes? They are the ones who tend to be uninsured. Or does McCain’s proposal actually give people who don’t pay taxes $2,500 for insurance?

    2. Would this be revenue neutral, i.e., would the elimination of existing tax subsidies be balanced by tax credits or would it increase the costs to the Treasury?

  6. Barry B. says:

    You might address more fully the problems of people who develop health issues while on individual policies. There are numerous anecdotes about people facing enormous rate increases when they are insured as individuals or even in small businesses. This came up in our debate last week and though I successfully ducked the questions along this line, it would be useful if could discuss how the laws could be tweaked to prevent having people priced out of the market after the fact.

  7. Laurence J. Kotlikoff says:

    John,
    Come on. The cost of a basic Blue-Cross plan in Boston for healthy family of four is close to $25,000. If the family has a member with diabetes, it will be much higher. This is the private healthcare system in operation right now. McCain’s plan needs to deal directly with pre-existing conditions with individual-specific vouchers. The vouchers have to be large enough to cover the true cost and then we need a highly efficient tax system — the FairTax — to pay for them.

    Best, Larry

  8. John Goodman says:

    Larry,

    That family already has insurance, right? Because 95% of everyone in Mass is insured. Isn’t it better to give them their federal subsidy in a lump sum?

    I’m in favor of risk adjustment. But there is no way the federal government could ever get it right.

    So leave that problem up to employers (who are already doing it) and state governments (who will also screw it up but the impact of their mistakes will be confined to their borders).

  9. Laurence J. Kotlikoff says:

    John,
    The federal government is getting it right already using a private-risk adjustment program developed by my colleague at BU (Randy Ellis). They use it for Medicare Part C. A lump sum subsidy is not a better idea. The original Goodman idea is the right and only right idea here. It’s time to move ground and get back to your original, absolutely brilliant plan.

    Best, Larry

  10. John Goodman says:

    Medicare does a very good job on risk adjustment, but a terrible job on incentives. It pays three or four times as much for care in Boston as it does in Vermont, but with no better outcomes.

    If we went from the current system of $250 billion in tax subsidies to a full blown system of risk adjustment, the federal government would probably end up spending $750 billion, no improvement in care and much worse cost control than we have now.

    So first things first. Start by correcting the inefficiencies in the current tax subsidy system and let the market adjust to that.

  11. John Goodman says:

    Reply to Antiplanner:

    1. The tax credit is refundable. You get the credit even if you pay no taxes.

    2. The scheme is revenue neutral. The current system of $250 Billion in tax subsidies is replaced by a new and better system.

  12. Steve Dossin says:

    John,

    You wrote “[McCain's Plan] would do all of this without any new taxes or any new spending programs.” May we suggest distributing federal contributions for healthcare via methods other than a tax credit? Tying social benefits to our tax code runs counter to the simplification we’ve been working for, and reduces IRS efficiency further.

    Thank you for how your efforts have built consensus for basic healthcare assistance for all full citizens. But we think the answer is to give efficient, non-stigmatized delivery of benefits to all – a true safety net, not a spider’s web catching some of our citizens.

    Steve at ComingTogether.info