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Thomas Buchmueller, Sherry A. Glied, Anne Royalty, and Katherine Swartz Cost And Coverage: Implications Of The McCain Plan To Restructure Health Insurance Health Affairs, November/December 2008; 27(6): w472-w481. [Abstract] [Full Text] [PDF] [Reprints & Permissions]

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Response To McCain Plan Critique

Michael F. Cannon   ( 29 September 2008 )

Response To Critique Of McCain Plan

David C. Brown   ( 6 October 2008 )

Response To McCain Plan Critique 29 September 2008
Michael F. Cannon, Director of Health Policy Studies Cato Institute Send comment to journal: Re: Response To McCain Plan Critique mcannon{at}cato.org Michael F. Cannon	Thomas Buchmueller et al. estimate that replacing the tax exclusion for employer-sponsored insurance (ESI) with Sen. John McCain’s proposed health insurance tax credit would have zero effect on the uninsured. Yet their estimates neither incorporate nor even acknowledge factors that would tend to increase coverage. First, workers who lose ESI would see their wages rise significantly as labor markets force employers to “cash out” those workers. Second, the authors estimate that nongroup enrollment would double, yet they ignore that administrative costs would fall in a thicker non-group market. Third, the authors acknowledge that employment-based insurance forces the healthy to subsidize the sick, yet they ignore that the nongroup market would reduce premiums for a majority of workers by allowing them to avoid that hidden tax. Fourth, though the Congressional Budget Office estimates that state health insurance regulations increase premiums an average of 13 percent, the authors ignore that McCain’s proposal to let consumers shop nationwide for insurance would further reduce premiums by allowing consumers to avoid that hidden tax as well. The authors decry that McCain’s tax credit would leave many workers with less coverage, while ignoring the overwhelming economic consensus that the exclusion for ESI leaves most workers with too much coverage. They decry the high administrative costs of nongroup insurance, but they ignore the welfare losses that result from ESI denying workers greater choice. The McCain plan would eliminate forced subsidies: of the sick by the healthy (via ESI and community rating) and of particular providers by unwilling consumers (mandates for chiropractic coverage, etc.). Buchmueller et al. would have us believe that if we stop robbing Peter to pay Paul, not even Peter would benefit. A more balanced critique might have been more persuasive.
Response To Critique Of McCain Plan 6 October 2008
David C. Brown, Retired Send comment to journal: Re: Response To Critique Of McCain Plan ahb1027{at}yahoo.com David C. Brown	I am struck by what I think is a glaring omission in the analysis of Senator McCain's health plan. The analysis seems to have assumed that if an employer discontinues coverage, wages would not rise to capture some or all of the savings. Health care is provided in lieu of cash compensation. If health care is eliminated, the market will force some or all of those savings to be passed on to the employee, so his total compensation is roughly unchanged. This money (on an after-tax basis) would then be available along with the McCain tax credit to purchase nongroup insurance. Consider the following example. An employee earns $50,000 and gets health care that costs his firm $10,000. The employer has 100,000 employees and drops coverage. What are the possible scenarios? (1) The employee gets no increase in pay to compensate for the loss of insurance. He is worse off by $10,000, all of which drops to the employer's bottom line. The firm earns an extra $1 billion. The market for labor would never allow this. Labor would flow to other firms that had not dropped coverage. (2) The employer increases wages by the full cost of the forgone health care benefit so that the employee's net position is unchanged. The firm and the employee are in exactly the same economic place they were before coverage was dropped. The employee now has $10,000 (less taxes) plus the $5,000 credit to purchase insurance in the nongroup market. Surely this is enough to replace his lost $10,000 policy. (3) Some combination of 1 and 2, with the employer capturing some of the savings and the employee capturing some of the savings. This is my guess at the result, with the labor capturing the bulk of the savings, so total compensation is largely unchanged. In fact, this is what happens to a large extent in the market today. At many large firms, the employer gives the employee an allocation of dollars to spend on benefits. If the employee wants a more deluxe plan than the allowance can purchase, he pays for it out of his earnings. If he chooses, for whatever reason, to purchase a less costly plan, some or all of the savings are returned to him in his paycheck. The employee is in approximately the same economic place, regardless of his decision. If your analysis captured this effect and I missed it, I apologize. If it didn't, the estimate of the number of people covered under the McCain plan is too low.