The McCain-Palin Health Care Plan: Half-Baked Alaska

It must be disconcerting to health care economists to see one of their pet peeves about the inequities of the employer-based insurance system so poorly used by the Republicans, who would repeal it. I'm referring, of course, to the tax deductibility of health insurance premiums.

Gov. Sarah Palin repeated Sen. John McCain's promise to give every American household a $5,000 check to buy health insurance. They would raise the money to fund the program by repealing the deductibility of employer-based coverage. I can't recall if she gave one of her trademark winks when she said it, but she certainly gave an enthusiastic nod. Health care will become just like Alaska! The government will be sending you money every year so you can go out and buy your own insurance.

There is an argument that can be made in favor of repealing tax deductibility. Like the home mortgage deduction, the higher your tax bracket, the more valuable the tax deduction. So if your employer buys you a gold-plated health care plan that costs $15,000 and you're in the highest tax bracket (around 30 percent), you get the equivalent of a $4,500 tax break from the government. But if your employer buys you a plan that only covers hospitalization and serious illnesses for $7,000 a year and you're in the 10 percent income tax bracket, the tax deduction is only worth $700. Repealing all tax deductibility and distributing the revenue equally to buy individual insurance policies seems simpler and more equitable -- both appealing traits.

But, as Sen. Joe Biden pointed out, the average family plan today costs about $12,500 a year (about 80 percent of that picked up by employers, the rest coming out of workers' paychecks). Plans sold to single people or families in the individual market usually cost far more than employer-based group plans. $5,000 won't begin to cover that cost.

And where does that leave the 20 million families that analysts estimate would lose their employer-provided insurance under the McCain plan? They would be losing their coverage because their employers would find it more profitable to simply pay taxes on the $10,000 they used to pay for an employee's health insurance than to continue providing coverage. Employees would face a big gap where their coverage used to be.

Wouldn't some of that $10,000 go to the employees in the form of higher wages that they could use to defray the cost of individual plans? Some. But, given the power relationships in today's workplaces, I think it is fair to say, not all of it, and probably not even much of it.

And what would the $5,000 do for families whose employers don't currently provide insurance? Bare bones doesn't begin to describe the policies available at that price. Setting up a system that encourages millions of Americans to buy these bare bones plans would be the death knell of preventive care and a further deterioration in America's general health status, which already lags behind most other industrialized nations.

A year ago, when many people believed health care would be one of the central issues of this year's campaign, the rival Democratic candidates clashed over the specifics of their detailed health care reform plans. Now, all Democratic nominee Barack Obama has to do on the stump, or, as his vice presidential pick did last night in the debate, is go negative on a poorly thought out Republican plan.

It is interesting to note that Sen. Ron Wyden (D-OR) has been pushing a plan that sounds vaguely similar to the McCain plan. S. 334, the Healthy Americans Act, has 17 co-sponsors in the Senate, half of them Republicans. Significantly, John McCain is not one of them.

Does it have anything to do with the fact that Wyden's plan would lead to a lot of new regulations of the insurance industry and a mandate that would force everyone go out into the individual market and buy insurance? As a recent analysis by the Center for Budget and Policy Priorities points out, it's not even clear that the Wyden plan would adequately protect against adverse selection -- where insurance companies cherry pick the healthier people and force sicker people into high-risk pools where the policy premiums would be sky high.

I wish Biden would have turned to Palin (after pointing out the negative household budget consequences of the McCain plan) and asked: "Would you be willing to have national regulation of the insurance industry to make sure they didn't discriminate against people with pre-existing health conditions or against people who are older and approaching retirement age, which are the higher health care cost years?" Alas, he didn't. And neither did moderator Gwen Ifill, who failed to follow-up on any question of significance.

If they had, maybe she would have given the same answer John McCain recently gave to the magazine of the American Academy of Actuaries, where he called for less regulation of the insurance industry, "as we have done over the last decade in banking."