Skip to content

The Answer: McCain Health Plan – WSJ.com

October 28, 2008

I think the following may be the best answer to the question asked in the previous post.  The ‘answer’ guides and encourages the John and Jane Does out there to use their portion of responsibility and effort to choose and acquire what they, not government, want from their health care . . . (see the previous post and read it first) 

Hats off to Mr. Carroll’s opinion piece in the Wall Street Journal.

These policies look a lot less like insurance and more like prefunded spending accounts purchased through employers and managed by insurance companies. Consider homeowners and auto insurance policies. Do these cover routine spending on cleaning the gutters or tuning up a car?

The subsidy encourages people to buy bigger policies that cover more, and leads to greater health-care spending. Moreover, lower deductibles and coverage of routine spending dulls consumers’ sensitivity to price. Reducing the tax bias should result in insurance that is more focused on catastrophic coverage and less on routine spending.

By replacing the income tax exclusion with a fixed, refundable credit, the McCain proposal reduces the tax bias for large insurance policies. Because the credit is for a fixed amount, regardless of how much you spend on health care, it helps break the link between the existing tax subsidy and how much is spent on health care. This improves incentives in the health-care market by reducing the bias that has contributed to such a high level of health-care spending.

Moreover, the credit provides a powerful incentive for people to purchase insurance. The two tax provisions — the new credit and the repeal of the income tax exclusion — on net provide a substantial tax cut of $1.4 trillion over 10 years. Not only do most Americans receive a tax cut under the McCain proposal, but the tax cut is directed toward low and moderate income taxpayers.

[Commentary]

Consider the family of four shown in the chart nearby, assumed to purchase a $14,000 health insurance policy. The straight line reflects what the family would get under the $5,000 McCain tax credit. The lower line shows the value of the current income tax exclusion, which rises and falls with a taxpayer’s tax rate.

What is striking about this picture — and contradicts Mr. Obama’s public comments — is that the McCain tax credit for the purchase of health insurance exceeds the value of the current exclusion for all income levels shown. Indeed, it generally provides more resources to purchase health insurance than the existing exclusion. The total subsidy for health care would rise from about $3.6 trillion over 10 years today to roughly $5 trillion under his proposal.

How large an effect does this proposal have on the number of uninsured? Based on estimates by career economists in the Treasury Department’s Office of Tax Analysis of similar proposals discussed in the Washington Beltway several years ago, the McCain health-care tax credit can be expected to increase the number of insured by 15 million and probably more. The Lewin Group, a respected private health-care research outfit, recently estimated that the McCain credit would increase the number of insured by as much as 21 million. It is true that many may no longer get their insurance through their employer, but they will be given the resources to purchase insurance on their own.

Will the insurance that is purchased be a generous plan with first dollar coverage or low deductibles? It is much more likely to be a plan with higher deductibles that is more focused on providing true insurance against catastrophic losses rather than a more generous plan that includes a lot of prepayment for routine and predictable medical expenses. But this is precisely one of the objectives of the policy: to reduce the current tax bias that encourages people to funnel routine health expenses through insurance policies.

Finally, the credit has important implications for the nation’s finances down the road. This is perhaps the most important aspect of the proposal.

There is an enormous unfunded liability associated with the major entitlement programs of Social Security, Medicare and Medicaid. If left unchecked, the growth in these programs will nearly double the size of the federal government by 2040, consuming roughly 40% of the nation’s output rather than the 20% today. While the growth in Social Security is largely the result of demographics, the growth in Medicare and Medicaid is also driven by the rapid growth in health-care spending. This is where a proposal like Sen. McCain’s can be so important.

The elimination of the income-tax exclusion should reduce private health-care spending; to the extent this reduces the cost of health care, it should also put downward pressure on the growth of Medicare and Medicaid costs. Thus, by removing the tax bias for more generous health coverage, the McCain health credit also has the potential to provide important dividends to the entitlement problem down the road.

Mr. Carroll served as deputy assistant secretary for tax analysis at the U.S. Treasury. He is now vice president for economic policy at the Tax Foundation, and an executive-in-residence with American University’s School of Public Affairs.

Almost Everyone Would Do Better Under the McCain Health Plan – WSJ.com

Advertisements
No comments yet

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: