John McCain (R., Ariz.) just spent a week rolling out his plan to reform how Americans purchase health insurance. Elizabeth Edwards, the wife of former presidential candidate John Edwards, claims McCain’s plan would not cover people with high-cost conditions such as cancer. Conservatives, on the other hand, fear the plan may leave some workers paying higher taxes.
Mrs. Edwards is mostly wrong and the conservatives are mostly right. But McCain could improve on his plan in a way that would address both criticisms.
The centerpiece of Sen. McCain’s plan would replace the current tax break for job-based health coverage with a broad-based health insurance tax credit. Every individual who purchases health insurance would save $2,500 on his taxes; families would save $5,000.
Conservatives are quietly grumbling that if the amount of your McCain credit is less than the tax break you currently get for your job-based coverage, your taxes would rise. Those taxes would fund what are essentially welfare payments to people whose tax liability is less than the amount of their credit.
In contrast to the existing tax break, which only works with job-based coverage, individuals and families could use McCain’s tax credit to purchase health insurance from anywhere they wish. They could continue to get health insurance through an employer. They could also purchase coverage through a church or civic organization. Or they could purchase coverage directly from an insurance company on what is called the “individual” market.
Ms. Edwards suggests that if people could purchase insurance on their own, insurers would never cover people with high-cost conditions. That is simply not true.
Researchers such as Mark Pauly of the University of Pennsylvania and Susan Marquis of the RAND Corporation have found that the individual market covers lots of people with high-cost medical conditions – so long as they purchased the insurance when they were healthy. Moreover, those high-cost patients do not pay premiums that correspond to their health risk, and their coverage does not disappear when they change jobs. Over the long term, then, McCain’s plan would provide more secure coverage of high-cost conditions than the current job-based system does.
Ms. Edwards is right in some respects. Insurance markets will not cover someone who waits until he has cancer to purchase insurance — nor should they. That would be akin to selling auto insurance to someone who just had an accident, and would invite irresponsible behavior. No one would purchase insurance until they needed it. I expect all Americans want to provide assistance to uninsurable patients, but insurance markets are not the proper means.
She is also correct that McCain’s tax credits do nothing for those who are currently uninsurable. To fix that inequity, McCain should consider replacing the tax break for job-based coverage with tax-free “large” health savings accounts (Large HSAs).
Large HSAs would work like this: Employers would take the money they currently use to purchase health benefits and add it to their workers’ wages. On average, that comes to almost $5,000 for workers with self-only coverage and $9,000 for family coverage. Then, individual workers could put up to $8,000 into a Large HSA, tax-free, each year. Families could contribute up to $16,000.
Workers could purchase health insurance from any source, tax-free. As with McCain’s tax credit, workers could stay on their employer’s plan, or purchase health insurance that stays with them when they get sick, and when they move from job to job. Large HSAs also would encourage consumers to obtain coverage that focuses on cost containment, such as high-deductible plans or managed-care plans like Kaiser Permanente.
Large HSAs would achieve as much as McCain’s tax credit, and would be less vulnerable to criticism from the Left or the Right. They would avoid the criticism of the left by providing a tax break for health savings rather than health insurance. Thus the uninsurable would get the same tax break as everybody else, which could be worth $2,800 to an individual and $5,800 to a family.
Large HSAs would likewise head off complaints from the Right; unlike tax credits, they would create no new government spending and would likely be a tax cut for all concerned.
Sen. McCain’s plan is a lot better than his critics suggest. But there’s still room for improvement.
– Michael F. Cannon is director of health-policy studies at the Cato Institute and author of “Large Health Savings Accounts: A Step toward Tax Neutrality for Health Care,” published by the Forum for Health Economics & Policy.