Wonkery in the Face of Wankery

You might have noticed that most political reporting over the past several days has been focused on a guy named Bill Ayers. I have not written anything about Mr. Ayers nor do I intend to. Instead, in my own tiny little protest of how astoundingly useless the cable “news” networks are, I’m going to offer you the following wonky post about John McCain’s health care plan.

There are over 40 million people in this country without health insurance (8 million of them, by the way, are children), but the number of the uninsured is only one metric of the growing healthcare crisis we face. There are millions more who are “underinsured,” meaning they have some insurance but not enough to cover many illnesses or injuries. And then there are the millions of Americans for whom, though they have health insurance, health care costs are nevertheless eating up more and more of their budgets.

Not surprisingly, both candidates have plans to address this. Barack Obama’s plan (which I’m not going to go into in much detail) essentially builds on the current system, relying heavily on the employer-based healthcare coverage model, while expanding successful programs like Medicaid and SCHIP, and it includes subsidies for low-income families and mandatory coverage for children. Implementing Obama’s plan would actually mean very little for people who already have health insurance (though it may become somewhat cheaper under Obama’s plan), and is, fundamentally, not a particularly “revolutionary” proposal.

McCain’s plan, counter-intuitively, is much more radical, though much simpler. In a nutshell, Senator McCain wants to give everyone a $2,500 tax credit ($5,000 for couples) with which they can purchase their own health insurance coverage. This sounds great. If you don’t have health insurance, with the McCain tax credit, you’ll be able to buy it. If you do have health insurance, you can use the credit to help pay for it. Of course, in order to ensure that the credit is used only for health care, the money doesn’t go to you, it goes straight to the insurance company, but for those of you who already pay for health insurance (and most people do), that still means money in your pocket.

Now, if giving out checks of $2,500 to every American seems kind of expensive, you’re right, it is. McCain knows this and so his proposal is to begin taxing employer sponsored health benefits as income. This would be the first time in history that health benefits would be taxed like this.

To better understand this, let’s imagine up a hypothetical worker. Bob, age 25 and in good health, makes $40,000 a year at his job with Generic Co., where he also gets health insurance. His health benefit costs his employer $5,000 a year (which is about average for single coverage), and Bob pays about $50 a month. This year, when Bob pays his federal income taxes, his taxable income doesn’t include that $5,000 benefit, but under McCain’s plan, that $5,000 would be considered income and so, because Bob is in the 25% tax bracket, he would have to pay an additional $1,250 in federal income taxes.

But for Bob, that’s still a good deal. Sure, he has to pay more income taxes, but that’s offset by the tax credit, and the rest of the credit goes to pay all his health premiums. At the end of the day he’s $750 better off.

But wait. Bob’s a smart guy and he realizes pretty quickly that there is an easy way for him to be even better off under McCain’s plan. All he has to do is drop his employer provided health insurance and instead buy his own health coverage. Why? Because if he’s buying his own insurance instead of getting from his job, then he won’t be taxed on that benefit. He’ll still get the health credit to buy insurance, and he won’t have to pay the extra money in federal taxes. As long as he can find a private insurance policy that costs less than $2,500 a year, then he’ll end up the full $2,500 better off (and that’s not a problem for him, a young, single, healthy guy).

So, Bob drops his employer sponsored health coverage in favor of a policy purchased on the open market and he’s just made himself $2,500 richer. Herein lies the huge problem with the McCain health plan. It works just fine for people like Bob who are young and healthy and have no families to support. But for everyone else, things don’t work out quite as well.

Health insurance is, at base, is a bet that you make with your policy provider. You bet that’ll get sick sometime this year, and they bet you won’t. You pay them a monthly fee, and if you “win” they’ll pay for your care. If they “win” they get to keep your premiums. If you’re young and healthy, the health insurance company is especially eager to take that bet, and they’ll even take smaller monthly payments. If you’re older or you have some health problems, that company is going to be much more reluctant to make the bet without much higher payments from you and maybe they won’t make the bet at all.

But…perhaps they’d be willing to cover the older, sicker individual, to bet with him on his health, if he finds a young, healthy person to come in on the bet too, for a slightly higher cost than she would otherwise have to pay on her own. In that case, you see, the company feels a bit better about the bet because even if they lose on the older guy, they’ll win on the younger gal, and make money anyway. That’s essentially what happens with employer-sponsored coverage. The health insurance company offers “reasonable” premiums to large firms because they have both young and old workers, both sick and healthy employees.

Now back to Bob. Bob has figured out that under John McCain’s health plan he’s better off going outside his employer and getting health insurance on his own. Bob tells his co-worker Jackie, who is 28 and also healthy, about his discovery and she too drops out of the employer-sponsored coverage.

Jackie tells her colleague Sally about how great she has it now that McCain is President. Sally, unfortunately, is a bit older, and she has two kids. For family coverage, Generic Co. pays $12,000 a year (again, that’s the average cost for employer sponsored family coverage), of which Sally pays $100 a month. Sally makes $60,000 (also in the 25% tax bracket), and so the McCain plan means her health benefit costs her an additional $3,000 in income taxes at the end of the year, more than the $2,500 tax credit. Ouch. McCain has just cost her $500. Sally looks around for a private policy, but with her age and her two kids, she can’t find a single good policy (one with anything lower than a $1,000 deductible) that would cost less than $3,000 a year. Oh well, she guesses she’ll just stick with her employer coverage, even though its now costing her $500 more a year.

So far, we’ve seen that McCain’s plan is good for Bob and Jackie but not so good for Sally. Sadly, things are about to get a whole lot worse for Sally. Pretty soon, most of Generic Co.’s younger, healthier employees figure out that they’d rather get their coverage from private insurers. Soon after that, the health insurance company realizes that its bets on Generic’s employees aren’t looking so hot since all of the “good” bets are out of the game. They have no choice but to raise premiums for Generic Co. Now, Sally’s policy costs Generic Co. $15,000 instead of $12,000, and Sally’s income taxes rise by another $750. Moreover, Generic Co. can’t keep charging Sally only $100 a month, so they raise her monthly premium to $150 a month. All of sudden, the McCain health plan, which gave young and healthy Bob an additional $2,500 a year, has cost Sally and her two kids $1,850.

Sally’s actually not the biggest victim of the McCain plan, however. Sally, at least, still has health coverage because Generic Co. decided to eat the extra costs instead of dropping health coverage all-together. Lots of other companies, of course, will make the obvious choice and forgo offering health insurance altogether. Offering health benefits only to your older and sicker employees is a profit-killer, and most businesses won’t do it.

McCain wants people to buy health insurance on the open market like they would any other good, and his plan would certainly make this happen. It might take a few years, but the end result of his proposal would be an end to employer based coverage. While that might work out ok for young, healthy, single folks, it would be an absolute disaster for the middle-aged, for sick people, and for parents and kids.

I should also note, by the way, that I haven’t even touched on several other aspects of McCain’s plan that would also have extremely negative, but currently hidden, effects (things like the impact of the rising costs of health care, and his proposal to allow people to buy insurance across state lines).

Wonky blog post accomplished. Take that, CNN.