Why McCain has the best health-care plan

Fortune: Why McCain has the best health-care plan

McCain

Who has the best plan? Both have huge flaws, but on balance McCain's is better.

McCain's main pillar is the elimination of a tax break that employees receive if their employer provides their health care. That may not sound like a shocker, but it is. The exclusion dates from World War II, when the federal government imposed controls on wages, but allowed companies to compete for workers by offering tax-free health benefits in lieu of pay. The law is largely responsible for the nightmarish patchwork of corporate-provided medical plans we enjoy so much today. Employees and their unions demanded richer and richer packages, and employers complied, since they could buy far more benefits for their employees than workers could buy with after-tax dollars on their own. Americans have paid a steep price, however, by sacrificing their raises as corporate insurance bills exploded, never more so than now.

McCain suggests that we junk all that. Say you're earning $100,000 a year and your company provides about $9,000 toward your $12,000 family premium, which is about average. Today you're taxed only on the $100,000. Under McCain's plan, you'd also pay on the $9,000. That could mean an extra $3,000 or so in federal taxes alone. To compensate for the extra levy, McCain would provide a $2,500 federal tax rebate for individuals and $5,000 per family, meaning a family would simply subtract $5,000 from its tax bill, the equivalent of a big cash payment.

Here's where it gets interesting. Employers would no longer be able to buy more health care with $9,000 of their employees' money than the workers could buy on their own. The raison d'être for corporate health benefits would vanish. Employers have another compelling reason to pass the ball to the employee: While wages are rising around 3% ayear, their health-care costs are growing at three times that rate. "I predict that most companies would stop paying for health care in three to four years," says Robert Laszewski, a consultant who works with corporate benefits managers. Hence, an employer that pays $9,000 for your benefits would simply pack an extra $9,000 a year into your paycheck. (Why? Because in a competitive labor market, companies would have to hand over that cash to employees or risk losing them.) So you'd have $6,000 after tax, plus the $5,000 family credit, to buy insurance. That's $11,000 in new cash that employees can set aside for health care. …

…Besides eliminating the employer exclusion, McCain's plan boasts another nice feature. It would allow consumers to choose an insurance plan that suits their stage of life….

…The problem with McCain's approach – and it is a huge problem – is that McCain ventures so far toward total laissez-faire liberty that he risks leaving the poor and sick behind. Here's why. Perhaps his most drastic proposal is allowing the same insurance products to be sold across state lines….

…To his credit, McCain does have a plan for relatively young, low-income Americans who can't afford insurance. "We would increase the tax credit according to income so that poor families could buy insurance," says Douglas Holtz-Eakin, McCain's policy director. But McCain sorely lacks a plan for people in their 50s without corporate benefits, and Americans with pre-existing conditions, who would be brutally stripped of coverage if insurance crosses state lines. "For his plan to work, McCain has to tell us how he would deal with the old and sick," says Jon Gruber, an MIT economist. "If McCain doesn't tax the healthy to pay for pre-existing conditions, as happens under community rating, he has to tax the taxpayer. That means his plan will require huge subsidies he's not talking about."

Clinton/Obama

The core of their plan is a "pay or play" option for employers. Large companies would have the choice of either providing benefits for workers or dropping their coverage. If they chose the latter, they would pay a mandatory payroll tax to support a new government-administered system. That system would have two parts: a Medicare-like public program, and a menu of private options similar to the generous plans available to U.S. government employees today. Workers who are self-employed or lack insurance would go straight into one of these two options. Low-income Americans would receive federal subsidies to purchase the premiums.

In practice, the system would quickly swell the ranks of Americans with government-paid health care. Remember, health-care costs are rising far faster than wages, so companies have a strong incentive to pay the tax and erase that rapidly growing burden from the books. It's also likely that the government plan will offer better benefits than many, or perhaps most, corporate plans. In fact, the Democrats call for rich standard benefits packages based on the plan offered to federal employees. Those packages would have deductibles of just $300 and offer prescription drugs, mental health benefits, and "spinal manipulations" (i.e., chiropractic services), among a cornucopia of other benefits. As a result, the federal plan, potentially packed with new benefits pushed for by lobbyists for various medical specialties, will quickly cause an exodus from employer plans.

The standard benefits package isn't just a bad idea because it will substantially raise the cost to taxpayers. It will also make it virtually impossible for Americans to buy insurance tailored to their needs. …

…The Democrat proposals have some additional drawbacks. First, the Dems want to heavily regulate the insurance industry by limiting everything from profits to marketing expenses. If the earning power of insurers is determined by federal regulators, their pricing will be too, and thus they will evolve into the equivalent of public utilities. Would you rather have medical prices set by fiat or by nationwide market competition?

Second, the Democrat plan exacerbates the fundamental problem in the American health-care system, which is that no one has any incentive to care about price….

…Despite all that, the Democrats' plan probably beats McCain's if you're scoring on political viability. Their program doesn't involve anything that smacks of a cut in benefits, and it's just easier to win with largesse.

But on economic merits, McCain wins. For all its problems, at least it puts the consumer in charge. Would that create a world where we're forced to dicker with heart surgeons? No. It will create a world where health care is treated as the precious resource that it is, rather than a costless entitlement; where nationwide competition pushes down the price of catastrophic care and consumers focus their attention and budgets on what's really crucial to their health. That's an important first step. The price of health care is never going to get under control until patients get what they deserve: the right to be customers too.