PETER O. ZIERLEIN
Deregulation has worked so well for Wall Street, John McCain wrote recently, that we should use the same approach to fix our healthcare system. In the September/October issue of Contingencies, the magazine of the American Academy of Actuaries, the Republican presidential candidate asserts, “Opening up the health insurance market to more vigorous nationwide competition, as we have done over the last decade in banking, would provide more choices of innovative products less burdened by the worst excesses of state-based regulation.”
McCain was writing just before Wall Street collapsed, and he obviously did not think Americans needed to be insured against the failure of a deregulated financial sector. Likewise, he was not concerned that the 53 percent of Americans who get insurance from their employers need protection from the risk of losing it. In fact, he’s hoping they will lose their employer coverage, betting they’ll be better off on their own in a deregulated market.
McCain’s healthcare plan replaces the tax incentives for employers to offer health insurance with a tax credit for people to buy insurance on their own. This proposal embraces a “consumer directed” approach to healthcare, a model that has become popular among free-market conservatives. The more directly people bear the costs of their care, the thinking goes, the more they will drive down costs by becoming better shoppers. Under this model, employees, not employers, should pay for their care.
Al Hubbard, a former White House economic adviser who devised a similar proposal unsuccessfully advanced by George W. Bush in 2007, explains this approach by suggesting we imagine a world in which employers offer “food insurance” instead of health insurance. If an insurance company paid for your groceries as it does your healthcare bills, he argues, “pretty soon you would start buying caviar, the most expensive steak, and you would start buying more than you needed.” The hope is that if we pay more of our costs, we will pass up “caviar care” for the equivalent of meat and potatoes, and the free market will offer more efficient care in order to lure customers. “When you’re paying for it yourself,” Hubbard says, “you don’t put the bells and whistles on there. You buy what you need.”
But critics who have watched the Bush administration implement many less ambitious consumer-directed reforms–from the creation of health savings accounts to state experiments in Medicaid–say they can work only in an idealized market, not the one we actually have. If the McCain plan were to go into effect as proposed, somewhere between 10 million and 28 million Americans insured through their employers would wind up in a market that, despite regulations, is already badly broken. Many would likely pay more for less coverage, and those with pre-existing health problems might be denied insurance altogether.
The McCain plan would jeopardize what coverage there is for millions while doing little or nothing to help the 47 million uninsured Americans. Forget meat and potatoes–many people may be lucky to get something closer to a cup of instant noodles.
The cornerstone of the McCain plan is the elimination of an existing tax break known as the “employer exclusion.” Under our current system, neither employers nor employees pay taxes on workers’ health insurance premiums. If McCain gets his way, employees would have to pay taxes on premiums as income. So if your employer-sponsored plan costs $4,704–the average for an individual in an employer plan–you will owe taxes on an additional $4,704 of income.
This would raise the taxes on a huge number of Americans. To offset this, McCain would give each individual a $2,500 tax credit. (Families–whose plans cost an average of $12,680–would get $5,000.) Those who do not receive employer insurance would be able to use this credit to buy insurance on their own. If your health insurance costs less than the tax credit, you could deposit the remainder in a tax-free health savings account (HSA).
Thomas Miller, former senior health economist for the Joint Economic Committee in Congress, who has advised the McCain campaign, says this would make the tax system more progressive. The employer exclusion costs taxpayers more than $212 billion per year, he notes, subsidizing employer benefits while giving nothing to those without employer insurance.
Critics of the McCain plan agree–if they were designing the system from scratch, they would get rid of the employer exclusion, along with other reforms. But it anchors the employer-based system that insures more than half of Americans. By eliminating it, says Linda Blumberg, principal research associate at the Urban Institute’s Health Policy Center, McCain is “basically undermining the employer-sponsored insurance market.” And he’s offering nothing reliable in its place.
The employer exclusion is one of the few remaining incentives for employers to offer coverage, which is increasingly expensive. Premiums have been rising roughly 10 percent a year since 2000, and as a result the number of employers providing health insurance has fallen 8 percent in that time. The employer exclusion allows businesses, in effect, to give their workers more take-home pay than they could by giving them the same amount in cash. Employers would lose this financial motivation to continue coverage, and the individual healthcare tax credits would give cover to bosses who want to shed this expensive benefit.
Some younger and healthier workers could come out ahead, at least at first. They might find policies that cost less than their $2,500 tax credit and invest the rest tax-free in an HSA. But they would likely enter plans that are far less generous than the ones offered by their employers. A typical family that is buying insurance on its own has to pay more than $2,000 above what an employer would pay for an identical policy, or face deductibles that are almost three times higher. Even those who found they could afford coverage in the first years of the McCain plan might quickly be priced out of the market–the tax credit does not increase with the cost of premiums.
If you already have a condition that requires medical care, you are in real trouble. Even if you can find an insurer who will sell you a policy, it may be exorbitantly expensive and still not cover you when you get sick. A recent survey found that more than two-thirds of people who considered buying their own policies found it difficult or impossible to find affordable coverage. This is in a market where some states currently prohibit insurers from discriminating based on health status. But McCain would effectively eliminate these state regulations by allowing insurers to sell plans across state lines.
To cover these uninsured Americans, McCain proposes expanding the high-risk pools that are in place in thirty-four states. These are misleadingly called “guaranteed access plans”–they are neither guaranteed nor do they ensure access to care. In order to qualify, you must be denied coverage because of a pre-existing condition. And they are critically underfunded, so states often cap enrollments and, perversely, exclude coverage for the very pre-existing conditions that force you into the plan. The plans do help a small number of people, but putting them to work the way McCain proposes, economists estimate, would cost as much as $100 billion. McCain proposes spending $7 billion to $10 billion. “It’s a disaster waiting to happen,” says the Urban Institute’s Linda Blumberg.
Consumer-directed healthcare proposals, says Karen Pollitz, project director of the Georgetown University Health Policy Institute, are the “triumph of politics over substance.” In 2003 the Bush administration passed legislation to create an alternative to traditional insurance: high-deductible plans paired with HSAs. According to a study by the General Accounting Office, the small number of Americans who have opened HSAs had an average income of $139,000, and 41 percent of account holders made no withdrawals. “They are being sold as a tool for promoting cost containment and consumer empowerment,” says Pollitz, “when in fact they’re tax shelters.”
The Bush administration also streamlined the process for states to make changes to Medicaid, the program for low-income families, paving the way for the replacement of the entitlement with a market model. At least five states have implemented experiments with proposals touted by groups like Newt Gingrich’s Center for Health Transformation. The boldest of these went into effect in January in Indiana, giving low-income Hoosiers health accounts to which they contribute on a sliding scale. Very few data are available because it is such a new program. Judith Solomon, senior fellow at the Center on Budget and Policy Priorities, says there are concerns about the quality of benefits, higher administrative costs and the ability of the poorest participants to make even minimal contributions.
“The national plan that McCain has pretty much fits into the same frame” as that of Bush, Solomon explains. “I wouldn’t expect [McCain] to be much different.”
In the 1980s then-Republican Congressman Bill Thomas of California began pushing precursors to the McCain plan, which he said would cause health insurance to be sold more like charter flights than regularly scheduled service. Charters are cheaper, he says, because the carrier has only one destination, and it flies only when all the seats are filled. In his vision, healthcare plans would lay out the minimal benefits packages needed to book a viable number of enrollees. This analogy captures the fundamental problem with the consumer-directed model for Pollitz. Health insurance “isn’t like a chartered jet,” she says. “It’s really more like oxygen. If the plane loses altitude and those masks come down…that is not a time for market forces to take over.” Twenty percent of patients–pregnant women and people with chronic diseases like diabetes and cancer–account for 80 percent of healthcare costs. Presumably, no plan is going to want to carry the burden of these expensive patients.
The McCain plan could steer a system that is already on a wobbly course straight into the ground. And those who need coverage the most will likely be the first to feel the impact.