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An Analysis of Senator John McCain’s Health Care Reform Plan By Robert Laszewski

RobertlaszewskiRobert Laszweski has been a fixture in Washington health policy circles for the better part of three decades. He currently serves as the president of Health Policy and Strategy Associates of Alexandria, Virginia. Before forming HPSA in 1992, Robert served as the COO, Group Markets, for the Liberty Mutual Insurance Company. You can read more of his thoughtful analysis of healthcare industry trends at The Health Policy and Marketplace Blog.

John McCain’s campaign reinvigorated, I am reposting my earlier analysis of his health reform plan.

McCain very rightly points to health care costs as the biggest issue, "We are approaching a ‘perfect storm’ of problems that if not addressed by the next president will cause our health care system to implode."

Therefore, his focus  is on the health care costs that make health insurance so expensive that individuals can’t afford it for themselves, employers can’t afford to provide it to their employees, and government can’t afford a wider safety net for the poor. He also reminds us that costs can’t be improved without dealing with quality in tandem. so expensive that many

Senator McCain’s health plan clearly reflects a belief that we need to put as our first priority getting at the things that make health care so expensive and frustrating for consumers rather than, as he would put it, promising everyone a painless access to a system that isn’t working.

In his words:

"For
all the grandiose promises made in this campaign, has any candidate
spoken honestly to the American people about the government’s role and
failings about individual responsibilities? Has any candidate told the truth about the future of Medicare?
Its costs are growing astronomically faster than its financing, and
leaving its structural flaws unaddressed will hasten its bankruptcy.
Has any candidate warned that we have a personal responsibility to take better care of ourselves and our children? Yet that is the only way to prevent many chronic diseases. Has any candidate insisted that genuine and effective health care reform requires accountability from everyone: drug companies, insurance companies, doctors, hospitals, the government and patients? Yet that is the truth upon which any so-called solution must be based.

“Democratic presidential candidates are not telling you these truths. They offer their usual default position: If the government would only pay for insurance everything would be fine. They promise universal coverage, whatever its cost, and the massive tax increases, mandates and government regulation that it imposes. I offer a genuinely conservative vision for health care reform, which preserves the most essential value of American lives — freedom.”

So, how effective would Senator McCain’s plan be in making health care, and insurance, affordable and better? Let’s take a look at his very brief outline:
Allowing people to buy health insurance nationwide instead of limiting them to in-state companies.

His focus here is on making individual health insurance lower in cost so people can buy it. Creating one national health insurance policy form which would save insurers the need to comply with insurance regulators in each of the states would make things more efficient. However, this tackles only the non-medical expense portion of a health insurance policy
and only a small part of that. Non-medical policy expenses increase
each year with inflation–maybe 3% a year–while by far the larger individual health insurance medical costs
have been trending at 10% or more in recent years. While making the
distribution of insurance more efficient is a good thing, it is the far
smaller part of the problem–and it’s a one-time fix.Often when we hear
of these proposals, we also hear that the states should continue to do
the consumer protection work since they tend to be closer to their citizens than one big national regulator could ever be. McCain is not clear on this.

In this context, we also sometimes hear proposals to give insurance companies greater freedom to set policy and rating provisions (Romney has suggested this). That begs the question, would McCain allow insurers to have greater flexibility in rating the healthy versus the sick and continuing to be aggressive in applying pre-existing condition provisions?

It will be most important for McCain to make the individual health insurance system
more workable than it is now. Today, healthy and young people can get
very cheap policies. But if you are 55, an individual policy can cost
more than $10,000 for a couple. If you are 55 and have hypertension, or
diabetes, or heart disease, you won’t get any coverage.

It is not clear how Senator McCain will make the individual market more viable and robust beyond dealing with these marketing expenses.

Permitting people to buy insurance through any organization or association they choose as well as through their employers or buying direct from an insurance company.

Here Senator McCain endorses a vibrant insurance market as a way to use competition
to meet the very different needs one consumer has compared to another.
The buzz words we very often hear in regard to this point are, "choice" or "freedom of choice."
These are all good principles but he does not answer the issues I
outlined above about just how people will know they will have access to
an affordable health insurance policy given the issues of rating, medical underwriting,  and pre-existing conditions.

He clearly says that the employer market would be a part of his future system.

His mentioning of  associations as one way to purchase health insurance reminds me of the big debate we had a few years ago in Washington about letting trade associations offer their own health plans and exempting them from certain rating and underwriting laws. That debate led many to believe that brand of association heath plans would take us back to "cherry picking." Senator McCain needs to clarify what he means here.

Providing tax credits of $2,500 to individuals and $5,000 to families as an incentive to buy health coverage.

This provision is not unlike the proposal made by President Bush at this year’s State of the Union Address. The President called for ending the longstanding tax exemption consumers get on any health insurance benefits paid for by their employer. The President would replace that with a standard $7,500 deduction for individuals and a $15,000 deduction for families.

McCain would also end the employer tax exemption–meaning that if your employer spends the average $12,000 a year on family health insurance for you, you would now have a tax bill on $12,000 of benefits.

Like Bush, McCain would offer a tax offset but he would do the new offset a bit differently than Bush—who would give a family a new $15,000 deduction on their personal return. McCain would give each single person a $2,500 tax credit and a $5,000 tax credit for a family. A tax credit means that when you calculate your taxes, instead of taking a deduction as Bush
would do, you just subtract the amount ($5,000 for a family) from your
final tax bill (and you would likely be able to take advantage of it
during the course of the year to pay your monthly premiums).

By exchanging the longstanding tax deduction for this tax credit McCain swaps money around and creates what should be a revenue neutral scheme in the short term. President Bush’s budget numbers actually showed a lower cost program in the long-run as health care inflation out-striped his new deductions. Senator McCain did not provide financial projections.

If you are in a 33% tax bracket, it works out the same. But, McCain’s way of doing it helps low income people the most. If you are in a 15% tax bracket, a $15,000 tax deduction is worth only $2,200 off your taxes toward your health insurance bill. By making it a flat $5,000 for a family, McCain is giving low income people more and high income people less–consistent with a progressive tax policy strategy.

However, the real question is, will McCain’s plan give you enough to buy health insurance? With the average cost of employer-provided family health insurance at $12,000 a year a $5,000 tax credit will often come up way short–especially for higher age people and those who don’t have the benefit of an employer contribution. High deductibles and HSA plans
will help but families who don’t have employer contributions should be
prepared to pay at least a few thousand extra dollars.

He calls for the states to develop a "risk adjustment" bonus for high cost and low-income families to supplement tax credits and Medicaid funds. But just who will pay for this (the states alone?) and how it would close the cost gap is not explained.

Families who have an employer paying a large part of their health insurance costs may actually come out ahead–at least in the early years before health care inflation erodes some of the tax credit’s impact.

This kind of structure is also designed to encourage the individual market over the traditional employer-based market that many conservatives believe has led to employer plans that are too rich and shield consumers from the true costs–all of which contributes to overspending and the high health care costs we have. With the tax benefit of health insurance moving to the individual, the employer
arguably has a smaller incentive to continue providing these benefits.
Many employers may simply say, "Here’s the money I was paying–go find
your own coverage." It may just be easier for the employer to drop the
coverage and freeze his contributions.

McCain does not have a mandate to buy insurance for individuals or employers. So, people can still opt to go without coverage.

Again, the big question is how does McCain see his individual health insurance market working? How will he deal with age rating, medical underwriting, and pre-existing conditions? If McCain does not develop an individual health insurance market everyone can access, no matter how old they are or how sick they are, his scheme
will fall way short.
Allowing veterans to use whatever provider they want, wherever they want by giving them an electronic health care card or through another method.McCain has always had a special place for veterans and his health plan is no exception. While his goal of giving veterans
access to any provider is noble, it will also be very expensive and
there is no mention of what he estimates the costs will be or how he
will pay for it.Supporting different methods of delivering care, including walk-in clinics in retail outlets across the country.McCain makes
the common sense suggestion here to deliver care in more efficient
places. However, there is no estimate for just how much this would
save. It’s like his health insurance proposal to cut administrative costs–a good idea on the surface but likely relatively small in scope. It is also not without controversy as the physician lobby has been opposing walk-in clinics that use nurse practitioners rather than physicians to deliver care.

Developing
routes for cheaper generic versions of drugs to enter the U.S. market,
including allowing for save reimportation of drugs.

In fact, drug "reimportation" from Canada has dropped in half from its height a few years ago. With Part D, seniors are now able to get prescription drugs, in great part because of the managed care discounts that underly the plan, for a lot less than before the program. Generic drugs
are already very cheap and readily available. It is not clear how
McCain sees any major savings here. It is also not clear to what degree
this free market conservative would use drug "reimportation" schemes to use the single-payer systems in places like Europe and Canada to negotiate his drug prices ("allowing for safe importation of drugs"). If he believes using the Canadian government to negotiate drug prices, why not the U.S government?Revamping Medicare payment systems to pay providers for diagnosis, prevention and care coordination without paying them for preventable medical errors or mismanagement.McCain would use the Medicare program to lead the market in the development of a system of bundled service payment–often referred to as "coordinated care". Effectively, he would create a budget for each treatment program thereby putting providers at risk for delivering the care effectively and efficiently. He’s really talking about pushing the market back toward capitation as  a means of controlling costs. This may be the only real cost containment proposal that any of the candidates, Democratic or Republican, have made.

However, as we learned, when capitation was in vogue in the mid-1990s, it is hard to do and providers push back.

Senator McCain is a big believer in the value of "coordinated care." The Kaiser Permanente medical group is a good example of a system of coordinated care. In fact, lots of data points to that as the best provider model to follow for both cost and quality. Many doctors love it and most don’t want to be "managed" by it.

This McCain payment system proposal needs to be developed further and McCain will have to show us how he is going to get the broad provider community to allow themselves to be put at risk once again.
If
the cheapest way to get high quality care is to use advances in web
technology to allow a doctor to practice across state lines, then let
them.

His proposal to let doctors practice across state lines
is another idea that makes sense. However, it will be the physician
community looking to protect their markets that will question this on
quality grounds.
We
cannot let the search for high-quality care be derailed by frivolous
lawsuits and excessive damage awards. We must pass medical liability
reform, and those reforms should eliminate lawsuits for doctors that
follow clinical guidelines and adhere to patient safety protocols.
Senator McCain also favors medical malpractice reform that would place a cap on the damages a patient can collect. This traditional approach to tort reform went nowhere when George Bush and his Republican Congress pushed it when they controlled the government between 2001 and 2006. So long as at least 40 Democrats are in the U.S. Senate–almost a certainty during any McCain presidency–his medmal proposal will also go nowhere.

McCain would go further on tort reform by eliminating law suits to doctors that followed established clinical guidelines and adhered to patient safety protocols–a good idea. But here again, the details are difficult and getting agreement among doctors about "appropriate protocols" has been a struggle. The trial bar will also likely expect their Democratic allies to block it.

Senator McCain has also called for a greater use of health information technology to confront the cost and quality problems. So have about all the other Democratic and Republican candidates. While this is a good idea, these efforts have been underway in the U.S. health care system for many years. It has been slow going because like every other effort to control health care costs its always harder to do then it first sounds.

And like all of the other Democrats and Republicans he would promote disease prevention, healthy diets and exercise. But, like all of the other candidates, exactly how would he be any more effective in this regard?

So, how does Senator McCain come out toward his objective of dealing with health care costs and quality?

Will the McCain Proposal Work?

Like all of the other presidential health care proposals, this is a political proposal in outline form–well short on details.

We will need a great deal more detail than a few bullet points. But generally, Senator McCain has prompted many more questions than he has provided answers.

His program won’t cost a lot since most of his spending comes from rearranging the existing tax exemption on employer-provided health insurance. But it is not at all clear how he would give the individual health insurance market the fundamental overhaul it would need to become the primary insurance market he would make it. Age rating, medical underwriting, and pre-existing conditions are on top of that list of overhaul questions.

He also needs to show us how a $5,000 tax credit will give a near-poor family enough assistance to buy a health insurance policy with meaningful benefits when the average cost of employer-provided care is $12,000 a year. Even HSA-style employer-based plans
still develop costs in the $10,000 area. Cheaper plans are available to
young and healthy people in the individual market but it will be the
sick and old we will need to hear more about. Beware of claims that cheap individual insurance is already available–it is if you can pass medical underwriting.

He says that cost containment and improved quality are essential to a sustainable system–and he is clearly right on that point. But he has very little in the way of cost and quality improvement in his outline. The primary proposal here is to put providers at risk in Medicare by taking us back to the days when the market believed the same thing and unsuccessfully tried to implement capitation.

His system would also take many years to implement before it
finally begins delivering the benefits he believes it has the potential
to give us. How would he manage the transition and what would we do
with 47 million uninsured in the meantime?

My sense is that his plan is a patchwork of largely good ideas.
It is hard to see how he would focus a national initiative toward
accomplishing so many disparate goals. Make no mistake, I am not
suggesting the big government program he disdains. But I will suggest
he needs a cohesive approach.

He
makes a good point when he says we need to fix the cost and quality
problems before we just load tens of millions more people on a
dysfunctional system. OK. But he needs to fix the problems
quickly or justify why so many have to wait outside the mainstream care
system while the work is underway–perhaps for years.

Mr. McCain’s health care proposal is one that will appeal to conservative Republican voters more than centrists or certainly liberals. But it is the conservative Republican voter he is fighting for in the primaries.

If that is the current standard for him–really to survive the contest for Republican votes and go on and win the Republican nomination–then this proposal will help him in that effort.

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16 replies »

  1. Will McCain’s plan call for taxing the actual benefits received? If my insurance company pays $50,000 for an operation I had will I now have $50,000 tacked on to my reportable earnings for that year? And if this is not so, what’s to prevent a future IRS ruling that under the law they will now consider the $50,000 as taxable income?

  2. 2 questions:
    If the plan leads employers to stop offering coverage (and that is one of its goals) how long will it remain revenue neutral as less taxes levied on employer paid benefits decline?
    How can low income individuals that do not pay income tax benefit from this plan?
    If Sen McCain is elected, can I start an private organization called Ohio Insurance Consumers that is specifically organized to negotiate group rates?

  3. Correction… Apparently the proposed tax credit is refundable, so people in the 15% marginal bracket could get the full $5000 benefit. Still, few uninsured families in that bracket ($32k or less) would be able to afford $7000 for health insurance. The equation isn’t really changed.

  4. Here’s what the McCain plan would do for someone in a 25% marginal tax bracket (earning between $32k and $78K) working for a company that pays 35% income tax, where the company pays 85% of a $12,000 annual medical insurance premium for the family.
    Now…
    • Company pays 0.85 x $12,000 = $9,600.
    • This is deductible, so the company is out a net of $6,240.
    • The individual pays $2,400, which is itemizable as a deduction. Itemizing doesn’t make sense for everyone, though.
    McCain…
    • Company gives employee the $6,240. (Hopefully companies will do this.)
    • Employee pays 25% tax on that money = $1560
    • Employee gets $5000 tax credit
    • Total net cost to employee = $13,560 – $5000 – $6,240 = $2320 (vs. $2400 above)
    In this scenario, the employee is actually better off by $80. Now, $80 is 0.7% of $12,000. Within one year the employee will be worse off, as the proposed tax credit will not adjust annually. But in fairness, under the current system the employer might drop their percentage below 85% next year, so it is reasonable to say that such a person comes out about even under the McCain’s plan. But, let’s say the company only pays 60% of the insurance premium. The same sort of calculation shows the employee is worse off by $1090 (if they have not been itemizing, even worse if they have been itemizing).
    If you have no employer-based insurance, are in the 25% bracket, are currently paying the full $12,000 for a policy yourself and have not been able to get the full deduction through itemization, you will be better off (less than the $5000, though, if you have had any benefit from itemizing). There are very few families that fit this description, though.
    Each uninsured family in the 25% bracket who purchases insurance will cost the government $5000 in tax revenues, but that shouldn’t be much of a problem, since 93% of the uninsured earn too little to make it into the 25% marginal tax bracket. And, that cost will be at least partly offset by those people at the top of the 25% bracket, who will be pushed into the 28% bracket because of the extra reportable income under this method of health insurance financing.
    People in the next lower bracket (15% marginal, earning $8k-$32k), pay between $802 and $4480 in taxes. So, they cannot get the full benefit of the $5000 credit. If they have employer-provided insurance, they’ll be worse off under this plan. They could even be pushed into a higher tax bracket, though they have no additional disposable income. Some people who are currently insured may choose not to purchase insurance. Certainly, this plan does not enable currently-uninsured families in this income bracket to afford insurance. A family earning $30k, purchasing a $12k policy, would be out-of-pocket $7600. Few of these lower-income families could afford to spend that kind of money on a health insurance policy. The lower you go, the worse the calculation gets.
    So, it is unlikely that the McCain plan will significantly increase the number of families with insurance. However, it could decrease the number of insured if individuals choose not to purchase policies. This would increase cost-shifting to those with insurance and increase the cost of insurance. The plan could also decrease availability for people with chronic medical problems in some areas. McCain’s proposal to allow purchase of insurance across state lines will essentially nullify laws in some states that require community rating, which would lead to a decrease in cost for healthy young people but a significant increase for people with chronic medical conditions.
    With McCain’s plan to provide large additional tax breaks primarily to the wealthiest Americans, there will be no public money available to fund subsidies for health insurance for those who currently cannot afford it. So, it is not surprising that the mechanics of the McCain health plan do not accomplish this. If, under a Republican administration, trends continue as they have during the last 8 years (e.g., with 90% of Americans earning less in 2005 despite a 9% increase in national income), we could expect continued growth in the number of uninsured.

  5. What happens when people get their tax credit, but don’t buy insurance anyway? Just like auto insurance, they buy it just long enough to get their tags renewed, then drop it. When they show up at the hospital who pays?

  6. In your analysis of the McCain proposal, you state: “A tax credit means that when you calculate your taxes, instead of taking a deduction as Bush would do, you just subtract the amount ($5,000 for a family) from your final tax bill (and you would likely be able to take advantage of it during the course of the year to pay your monthly premiums).”
    THe current McCain campaign web site mentions that the tax credit is refundable, but there is no mention that the tax credit is would be available during the year to pay the premium. If the tax credit is not something that families can use in advance to pay for the $10,000 – $12,000 cost of individually purchased premiums, how will this system work?

  7. To take full advantage of a $5000 tax credit a family of for would have to make a minimum of $62,000 after accounting for personal exemptions and the standard deduction.

  8. this would basically end being the government paying for health care. if i’m a small company i’ll just tell my employees buy you insurance with the government credit , in many cases especially with the young and healthy that would be enough.

  9. His proposal does nothing for someone who cannot find health insurance at any cost.
    Nor doe his proposals offer materially meaningful helf
    for those who can find it at extreme costs. I can find it–but at five figures a year. A $2500 tax credit is wonderful if he plans to roll prices back for all goods and services to 1970 levels.
    The greater question about his proposal is whether it’s more like the emperor’s new clothes or the pie-in-the-sky dreams Clinton accused Obama of having.

  10. Great post even if I don’t agree with all of it.
    Has anyone considered that what McCain proposes doesn’t matter assuming he would be elected with a very partisan and left-leaning Congress?
    To me, the question is whether he and a Democratic Congress could come up with any changes that would benefit taxpayers and patients. Would Ted Kennedy continue to block all partial and market-oriented reforms in the hope that he’d eventually push his socialized medical plan through Congress after McCain’s single, lame duck term?
    I think this thread deserves to be read again.

  11. After many years of managing large organizations in the corporate world I started my own small discount office furniture business five years ago. I have struggled to offer a solid health care plan for my employees. We have had steady growth over the years, but not the cost of health care has grown even faster. Do you know of any states that offer a subsidized small business health care plan like Arkansas?

  12. I concur with everyone above. As a physician and businessman, I’ve looked at McCain’s proposal with the same critical eye as Mr. Laszewski and asked some of the same questions. But one issue has been missed. If employers lose the tax exemption for the provision of health insurance for their employees, then employees would receive them as taxable benefits or increased wages. Not only would the employees be hit with additional Social Security and Medicare taxes, the employers would be resonsible for the matching taxes as well. The net effect to the employers is an additional cost of 7.65% that they don’t incur currently. As a cost conscious employer, the natural reaction would be to attempt to reduce your costs (wages or benefits) by 7.65% to accomplish a net change of zero in your employee costs. Employees would be paying the additional taxes but receive an offsetting tax credit, that again, likely will not be enough to purchase good, quality health insurance.
    Too many points to consider in all of the candidates proposals to discuss at once, but no one has come up with a workable solution that tries to maintain any part of our current system of healthcare delivery. Maybe trying to keep and fix the current system IS the problem.

  13. I guess at this point I’m glad McCain does not advocate mandates. The system is so screwed up, so complex with so many players to satisfy, that I’d just as soon stand on the sidelines and watch the madness turn on itself.
    I’m in the individual market (uninsured with resources and happy) and I know my income level will put me out of any subsidy, or at least a meaningful one – so with a mandate I’ll be forced to bear the full brunt of a mess of a system I don’t want to contribute to. I’ll be the one the insurance industry uses to spike their profits. Employees get subsidized healthcare, the self-employed get to write off their healthcare, Medicare subsidizes retirees, and the poor get subsidized either directly or by being able to get treatment and avoid payment. If a canditate’s only platform was to make everyone purchase healthcare on the individual market we could have this fixed in about a year. The anger would be so thick that congress would be forced to adopt the David Kucinich plan. Where will McCain even get the political support to tax employer paid healthcare, that will be as successful as trying to repeal mortage interest deductibility (shelter subsidy for homeowners, profit subsidy for lenders)?

  14. This is a great post! McCain is smart politically to target cost, particularly since that’s what makes people angriest about the health system. Robert is correct, however, that these proposals would have, at best, a negligible impact on cost. What people are really angry about is having to pay a larger share of extremely high medical bills, which they didn’t notice when the employer or government paid the vast majority for them. These proposals will not meaningfully reduce the actual cost of delivered care, and will have a negligible effect on the cost of health insurance.
    Robert is correct that the tax credit idea falls about 60% short of covering the cost of a typical family premium. And unless it is refundable, it won’t reach the 40% of the population that pays no taxes. The Wall Street Journal, which McCain and the other Republican candidates follow closely, opposes refundable credits because it is redistributive (duh!), and even opposes credits because it would further shrink the number of people who pay taxes (making it easier for the Democratic Congress to raise rates on the remaining, largely Republican, tax payers). If McCain continues to be held hostage by the Wall Street Journal, it will be hard to take his proposals seriously. The WSJ editorial board believes you can fix most of our health system’s problems by cutting taxes, and it’s hard to know whether to laugh or cry that supposedly intelligent people actually believe this. They have scared the entire Republican field to the right on healthcare.
    Bundling isn’t like old style capitation, because it focuses on a specific episode of illness. The providers who got into trouble in the 1990’s did so by assuming global risk across an entire year (and then bidding aggressively on rates without any ability to manage the cost). Bundling begins with the diagnosis of an illness. All the electronic health records hospitals and medical groups have installed will enable them to manage the illness-specific risk a lot more effectively.
    Since it would put surgery, imaging and lab fees inside, rather than outside, hospital payment, it would have a revolutionary impact in containing Medicare expenses, and a similar broad impact if private payers followed, as McCain suggests. It will cause huge fights inside medical staffs, however, putting hospital execs in the position of wading out into the swamp with arm loads of raw meat to feed the alligators. However, it needs to happen. Plus, if you paid primary care docs more to manage illnesses like diabetes, congestive heart failure and the like, you could avoid a lot of medical expenses (if not actually reduce the cost of the care ultimately provided). There is lot of gold to be mined in changing how we pay for care.

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