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Wednesday, October 08, 2008
McCain Has Better Prescription for Health Care
By Micha Gisser And Kenneth M. Brown
Albuquerque Economists
When both major candidates for president promise vast changes in health care, it's likely that something will happen. Like it or not, substantial expansion of the federal role is on the way. We maintain that the crucial factor is how much competition and how little bureaucracy is involved. On these criteria, Sen. John McCain's proposals are the clear winners.
Government's role in health care started growing during World War II, when employers were prohibited from giving raises in salaries. They got around this by giving tax-free benefits, including medical insurance. Over time workers got used to this welcome tax-advantaged fringe benefit.
But there was a downside for those who were locked into their jobs because their insurance wouldn't follow them to a new employer. Also, the tax code that created the traditional employer-based health plan hands out huge tax subsidies to health-care services — to the tune of $200 billion annually. It is thus partially responsible for the high demand for medical services. Additionally, this plan subsidizes employees in a regressive fashion: The higher the employee's income, the larger is the tax relief handed to him or her. Employers, for their part, chafed under ever-increasing costs of insurance and sought to shift the burden to the government.
The plan of Sen. Barack Obama would leave the current employer-based health insurance intact and would guarantee eligibility to each and every American. The poor who do not qualify for Medicaid or SCHIP would receive a subsidy to buy into a new public plan or purchase a private health-care plan. Employees participating in the new program would be able to move from job to job without jeopardizing coverage.
Participating private insurance companies would have to issue every applicant a policy and charge a fair premium that does not depend upon health status. Obama's plan would impose payroll taxes on employers who do not make meaningful contributions to the cost of quality health coverage for their employees.
But, forcing participating private insurance companies to cover any applicant at a fair premium not depending upon health status will drive private insurance companies out of the market. And, it is likely that the payroll tax will be intentionally set at a sufficiently low rate such that employers will opt to pay it. As a result, millions of employees will be pushed into Obama's national health plan—a sure step away from the marketplace and toward socialism.
Eventually Obama's arbitrary rules will crowd out private insurance companies from the market and consequently increase government control of the medical sector. Quite clearly, in the long run, this program is meant to grow into a single-payer system in which all medical care is in the grip of the federal government.
McCain's plan is radical yet simple: It would offer every individual $2,500 and every family a $5,000 refundable tax credit to purchase health insurance. He would abolish the current tax code where employers purchase health insurance for their employees with pre-tax dollars. We can safely assume that his plan, while subsuming Medicaid, would leave Medicare intact.
For the poor, McCain's tax credit would be offered in the form of a negative income tax. Thus, McCain's plan is in fact a voucher extended to every citizen, from Bill Gates to the poorest person sleeping under a bridge. Allowing people to purchase health insurance across state lines, and overriding the hundreds of state-coverage mandates, will open up a huge national market for the tens of millions of voucher holders. At long last the spiraling cost of health care will level out.
The Achilles heel of McCain's plan: The young and healthy workers would forgo the employer-based insurance in favor of cheaper options available on the market. The older and the bad-risk workers would be left behind facing higher premiums. The McCain health proposal overlooks the reality that during the transition period insurance companies would price the bad-risks out of the private insurance market.
To properly address this issue he should borrow a page from the Swiss health-care system. In Switzerland consumers purchase health insurance neither through the government nor through the employer but directly from private insurance companies in the marketplace. The premiums paid by individuals are risk-adjusted.
McCain's plan is a real change. It would achieve the marriage of universal health care with free markets for medical insurance. Obama's plan may bring us close to universal health care; however, his change is more government control of the medical sector. While neither change would be cheap, in the long run McCain proposes the more efficient plan.
So if universal health care is coming, we'll take the McCain version.
Micha Gisser is professor emeritus of economics, the University of New Mexico. Kenneth Brown is an Albuquerque economist.
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