Saturday, September 27, 2008

Election 2008 - Health Care Issue - McCain Version

Over the course of the next week, we'll attempt to examine each of the major issues facing the two Presidential Candidates. Major topics will include Health Care, Foreign Policy, Taxes, and Energy Policy. The first topic we'll examine is Health Care.

Not unexpectedly, both Senator McCain and Senator Obama offer strikingly different options for health care as part of their 2008 campaign platforms. While nobody on either side of the aisle would dispute that something must be done about the health care situation in the US, finding a viable solution that does not compound the existing problems appears quite elusive. In this first of two articles, I'll review the John McCain Plan and will follow with the Barak Obama plan in a second article.

The John McCain Plan

Details of this plan are found on the official John McCain Campaign website.

Currently, most people employed full time by companies with 10 or more employees enjoy some form of health care as part of their employment benefits. Most of those plans include a pre-tax contribution by the employee and a contribution (on average up to 5 times what the employee pays) by the company. That contribution is not considered income and is therefore not a tax burden imparted to the employee.

The heart of the John McCain plan would change that. Under his proposal, the employee contribution would be made after taxes are deducted, and the employer's portion would be taxable income assigned to the employee. On average, the cost of health care in the US is approximately $12,000 for a family of 4 or $4,400 for an individual. (National Coalition on Health Care.) So under the McCain plan, employees choosing a family plan would see their gross income increase by $12,000 or an individual would see gross income increase by $4,400.

To offset this, what McCain proposes is a $2500 direct refundable tax credit for individuals and $5000 for married couples. He envisions a plan whereby the individual would be able to choose their own health provider, either using the one sponsored by the company or choosing one on their own, with the tax credit being paid directly to the provider. Any surplus in the credit would be deposited into a Health Savings Account.

What this portion of the plan fails to consider is that the only viable option for the employee is the plan offered by the employer. An individual simply cannot obtain the same level of coverage at the same price by purchasing a plan on their own. The corporation has the advantage of purchasing a large pooled plan and invariably receives a better rate than any individual could obtain on their own. To purchase a non-corporate sponsored plan, an individual is going to end up paying $4,400 or more minus the $2500 credit, or at least $1900 out of pocket. That is compared to a national average today of about $880.

It's even worse for the family of four. As stated above, the average cost is $12,000 of which the individual typically pays 20%. So today, the individual has a pre-tax expense of about $2400. Under the McCain plan, that individual (purchasing a plan on their own) would end up paying $7000 and would lose the pre-tax benefits of the current system. That doesn't sound like much of a bargain to me.

Sticking with the employer sponsored plans, the employee may come out slightly ahead based on their tax bracket. For instance, for a family of four in the 15% tax bracket, there would be a potential savings of about $800. The individual may see a savings of about $900. Keep in mind, however, that the surplus goes into a Health Savings Plan, so you only really get to use that surplus if you have a major medical issue in that calendar year. It's a "use it or lose it" savings plan, so it does not add to the discretionary income of the individual or family.

What the McCain plan assumes is that there will be greater competition between the health care providers, thus lowering the costs of health care in general. Unfortunately, the assumption is fundamentally flawed. The deck is already stacked in favor of the corporate sponsored plan, so the individually purchased plans will be minimal at best. What is driving the cost right now is the overall cost of prescription drugs, routine tests, and hospital visits. Competition - or lack of competition - on the part of the providers is not a factor, so attempting to increase that competition will have no positive impact.

In point of fact, the competition between providers already exists today at the corporate level. Each year, corporations review their health care options and attempt to negotiate the lowest cost from a variety of providers. Despite that, we still see significant yearly increases in the cost of health care. This year alone, the rising cost was approximately double the current rate of inflation. So clearly, the driving force is something other than competition between providers.

The second portion of the McCain plan is to attempt to cover, at the state level, those individuals that are unable to obtain insurance. This portion of the plan calls for the federal government to work with states to establish "Guaranteed Access Plans" with "reasonable limits on premiums" and "assistance for Americans below a certain income level."

Not surprisingly, this portion of the plan is a bit vague on the details. The vast majority of people that fall into the the category that would warrant a GAP plan are those with extremely low income levels. Well, at that income level, there is absolutely no discretionary income left after paying just the most basic of bills. All too often, these individuals are floating month to month with at least one bill overdue. For these individuals, no premium is at a "reasonable limit". Given the choice of paying the rent or paying for health care, health care will lose.

It must also be noted that the GAP plans being proposed by Senator McCain are at the state level, not national. This sounds very much like another program mandated by Washington but without any federal funding to back it up. Placing that burden on the states all but insures higher state or local taxes, especially in states with depressed economies or low income levels.

What it all boils down to is my belief that the plan as proposed is neither viable nor beneficial to the average American. I believe this plan will do nothing to reduce the cost of health care, will increase the tax burden on the individual at the state level, and will result in even less people covered by some form of health insurance. I can't support this plan as written.

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