Italics need fixing.

The bloody italics have infected the whole blog. It'a typographical meltdown!

Maybe this will help?

Ezra -- My recollection from earlier descriptions of McCain's plan (which is consistent with my sense as a small business owner who deals with compensation issues) is that taxing the employer for health insurance provided to employees is even worse than you describe -- because if the benefits aren't tax-exempt for the employer, then they probably won't be tax-exempt compensation for the employee either. Am I wrong?

Come on,

I am an Obama supporter, but there is no good reason that we should get health insurance through our employers.

Not only does the practice give companies perverse incentives not to hire unhealthy people, but it makes the market more rigid and inefficient.

I have reason to doubt that there are significant economies to scale with bargaining(Looking at how much corporate procurement costs, it might sometimes be the opposite). But if that is indeed the case, then the companies will take advantage of it in lieu of a higher salary.

At the same time, the benefit of allowing people to more easily change their jobs and insurance companies would be large.

I can understand if you support a single-payer system. But compared to the status-quo, I think it's clear that repealing the tax credit would be a net improvement.

@ David Shor: "there is no good reason that we should get health insurance through our employers."

Abstractly, that may be true. But under our current system, employer-provided insurance allows for substantial risk-pooling, whereas the McCain proposal apparently gives no means or incentive for risk-pooling. Perhaps unions, or private associations, or private companies could create their own risk pools, but unless they were under the kind of 'equal treatment' guidelines that state and Federal law now impose on employer-provided insurance, they would cherry-pick just as much as the insurance companies (or else cost more).

The key and essential social benefit (as a separate issue from private profit) that most kinds of insurance provide is risk-pooling, and as far as I can see, McCain's proposal simply throws that out the window with no replacement (as Ezra notes).

@Ezra,

What would be the effect under the McCain plan if employers continued to offer their employees pooled-risk health insurance, but increased the co-pay to $5000 (plus whatever it is already)?

I can imagine many larger companies and public institutions choosing this fairly conservative approach if the McCain plan ever became law. There are probably implications I don't see, though, and wonder if you could explore this possibility.

Thanks!

I'm not following this discussion at all. The current "tax break" is for the EMPLOYEE, not the employer. Under McCain's plan, The employer will continue to be able to deduct any healthcare coverage it provides as a business expense. Employers will have the same incentive to provide healthcare coverage as they always had. It is the employees that then might prefer salary instead since health coverage and cash will then be tax-equivalent. The cost savings inherent in group coverage would still apply however, so some, perhaps most employees would continue to prefer employer coverage. What am I missing?

Wait, wait wait, are you saying raising taxes on mean nasty terrible, good for nothing AMERICA BUSINESSES WHO ARE ONLY OUT TO MAKE A BUCK AND SCREW THE LITTLE GUY AND AMERICA BE DAMNED....is a bad thing??

But doesn't Obama plan huge tax increases on businesses?

So wouldn't Obamas huge new taxes on business be far more damaging to their employees? How many benefits will business cut to pay for Obamas taxes??
Why would they keep healthcare benefits if Obama raises there cost of doing business more then McCain...........Hmmmmm

Oh crap it's the idiot hmmmm guy again.

I don't like employer based coverage because it tethers people to their employer.

Universal single-payer health insurance would be the most liberating event of the last 100 years. People would be free to work as much or as little as they need to, rather than being pigeonholed into 40 hour workweeks.

You can make it real complicated by going into the details of McCain's health plan. Here's the truth: We have a health care system that works for some and fails for others. McCain's proposal STARTS by taxing the part that works. The power to tax is the power to destroy, and that's what will happen.

When McCain talks about not imposing government between the doctor and the patient, he needs to be reminded he has been on such a plan most of his life, first as a military dependent, then as a member of the military, and finally as a government official. And he claims he in in good health. What's the problem?

applecor, the part that you're missing is that the employer contribution to the employee's health plan, which is now tax-exempt (unless, of course, you're gay and you have your partner on your insurance), will be taxable. In other words, the net cost to the employers will increase, making it impractical for many employers to continue to provide health insurance for their employees.

No 'Darkrose' that is not what 'applecor' is saying. He has two points:
1. The employee contribution to the health plan out of his salary is currently 'tax deductible'. McCain plan wants to remove that and separately give tax credits of say $5K. So if I am contributing to my plan more than $5k, I will loose.
2. But more important, the remaining part of my health plan cost is contributed by my employer and under McCain plan it will continue to remain as 'business expenses' for the employer. That is it will not be treated as taxable income for the company.

We need confirmation here. I do not have more details nor sure if I have missed something or interpreted incorrectly.

BTW I am not McCain guy, I am Obama supporter.

To applecor/darkrose/umesh, my guess is that health care provided directly from the employer won't be a tax-deductible business expense. Otherwise, under this new system, companies would have the incentive to cover the entire cost of insurance - because they would have a tax advantage that employees wouldn't. (Of course, if this were the case, companies would then reduce salary accordingly.)

But this clearly doesn't seem to be consistent with anyone's description of the proposal. What this plan means in reality, I assume, is that while some companies may continue to offer (1-t)*benefits and slightly increase salary, for the most part, companies will decrease/eliminate benefits and offset it with salary increases so that companies can deduct the wage expense. From there, some companies will still offer benefits with the expense fully borne by employee and some will just no longer bother.

The real issue here is dealing with the risk-pooling/adverse selection concerns. (I am not at all opposed, theoretically, with insurance less employer-based but anyone older or with a precondition faces starkly more expensive insurance under this plan. Unless the proposal addresses this directly, this plan is untenable.) AND while many people will see their salaries increase by the full amount of their health benefits, I have no doubt that many lower, and some middle, income workers will not.

BTW, I do actually think the “massive tax increase” is a bit misleading. Unfortunately, I think the true potential dangers of this plan are pretty complicated to explain and so opponents fall back on a more simplistic characterization, which opens them up to charges of being disingenuous.

1. The employee contribution to the health plan out of his salary is currently 'tax deductible'. McCain plan wants to remove that and separately give tax credits of say $5K. So if I am contributing to my plan more than $5k, I will loose.

McCain's plan is actually better than you describe here. I'm an Obama supporter and I think McCain's move to all-individual insurance is a terrible idea. But for the sake of accuracy: a $5k refundable tax credit is the equivalent of a $15k tax exemption for someone paying a 33% marginal tax rate. If your top marginal rate is lower, it's even better. So if you're currently contributing $5k to your health insurance, under McCain's plan you'd still have plenty of room to come out ahead, strictly in terms of the tax question.

The main questions I think are: 1. will employers who drop health coverage for employees actually take the money they used to pay for employee health premiums, and add it on to employee wages? Or will they pocket it, in hard economic times? 2. How will McCain counter the disastrous effects of throwing away risk-pooling? A McCain plan that also established community rating, or set up massive citizen risk pools, or did a German-style tax-and-compensate system for insurers based on the riskiness of their pools, would be moving towards a sensible plan. But it would also start to look a lot like a Democratic plan.

McCain's plan is actually better than you describe here. I'm an Obama supporter and I think McCain's move to all-individual insurance is a terrible idea. But for the sake of accuracy: a $5k refundable tax credit is the equivalent of a $15k tax exemption for someone paying a 33% marginal tax rate. If your top marginal rate is lower, it's even better. So if you're currently contributing $5k to your health insurance, under McCain's plan you'd still have plenty of room to come out ahead, strictly in terms of the tax question.
- brooksfoe

The general mechanism/idea is correct here (and is a good clarification). BUT, I wanted to include a few adjustments: 1) Add 15% for payroll taxes (the total borne by you and your employer); 2) Consider that the significantly higher "income" will undoubtedly move some people up tax brackets, unless they change the tax code to reflect this (of course, only the amount in the new bracket will bear the higher rate); and 3) this doesn't consider state taxes. Presumably most states will add some subsidy to make this more tax neutral for them but that's certainly not a foregone conclusion.

Here's the simple point I'd like to hear Obama make:

"If you're satisfied with the health insurance you have through your employer, get ready to kiss it goodbye under John McCain's plan. It's designed to price employers out of the market. And if you or anyone in your family has a chronic illness, you will find that the $5000 tax credit he is proposing to replace it with is not going to go very far."

Is the credit granted regardless of the health insurance decision one makes? Or does one have to demonstrate $5000 of insurance spending to get it?

applecor: "I'm not following this discussion at all. The current "tax break" is for the EMPLOYEE, not the employer."

That's right. But what happens is that, currently, an employer can give you, say, $14,000 of cash, for which you would be taxed (say $4,000 and net $10,000), or buy you $10,000 worth of health insurance, for which you are not taxed. In either case the employee nets the equivalent of $10,000, but the cash choice costs the employer $14,000.

In order for you to net $10,000 without the tax break, the employer would have to buy your health insurance PLUS give you enough cash to make up the tax.

The McCain plan says it'll give the employee the equivalent of that cash to make up the difference. But there is no longer an advantage for the employer to buy the insurance, since the employee gets the subsidy regardless of who buys.

That might be fine for the individual... until the first time you get sick. Then you're on your own... one heart attack, one stroke, one group of cancerous cells can cause health insurance to double or more... IF you can even get it.

Under McCain you have a tax credit that rises with CPI, and taxable healthcare benefits that rise at the rate of medical inflation. All things being equal, that will eventually be a tax increase on everyone with employer provided healthcare.

The point, of course, is that all things won't be equal and then you'll end up on the individual market. Its the health care plan from people who brought you social security privatization.

Also -- some people are saying that the payroll tax doesn't apply here. I don't think you can square the $3.6 trillion without it. Also the tax seems like it should apply to employer provided retiree health benefits. And i suspect it changes the definition of income, such that state income taxes would apply as well.

Also, all employer taxes are -- to a very large extent -- born by the employee in the end.

McCain's plan is rooted in his conceit that there are some people who have too much employer-provided health coverage and that his plan will force people to take cheaper, less "gold-plated" plan or forcing those with those "Cadillac-level" plans to pay taxes on them. I can't say that I know who these people are whose health-insurance plans provided by their employers are just too good.

McCain's plan is in fact rooted in Hillary's having declared a healthcare crisis some time ago. Now that we are in the midst of a REAL crisis, can people still be peddling the idea that healthcare in this country is a crisis?

Jim G:

"In order for you to net $10,000 without the tax break, the employer would have to buy your health insurance PLUS give you enough cash to make up the tax."

Yes, I get that part, that the employer would have higher cost to give the employee the same net benefit. But given that all employers will be in the same boat, there's no reason to think that they will have to cough up more (or much more) than $10K to attract the same employee. And as you say, the employee is going to be a lot better off in a group plan, so the employee may prefer to stay with the employer's insurance plan even though the employee's income is dropping, assuming the 5K tax credit can still be applied.

What I really can't get my mind around is why insurance companies are happy to use employers as risk pools, but not other groups of people. Why can't you get basic health insurance through AAA or your church or your bowling league, for that matter? And if that causes people to group themselves too closely in pools that fit their own risk profile, the government can step in to level the playing field.

Thanks for the clarifications on how the tax consequences would change.

Applecor's last question -- why employers? -- is answered by noting that employers are not allowed to cherry-pick which employees they cover, pretty much. In contrast the AAA or your church will have very strong incentives to cover an individual in their risk pool ONLY if the individual is healthy.

Under ADA and various state laws, as I understand it, employers are neither allowed to ask nor allowed to exclude in this way.

Risk-pooling and adverse selection are the key issues that any plan must address -- and to be honest, Obama's lack of a mandate leaves adverse selection at least partly unanswered -- while McCain's 'high risk' pool is simply not plausible, if Ezra's analysis is correct.

Individual markets really are an attempt at divide an conquer. Comes from the same folks that brought you Right to Work laws to bust unions.

When has McCain ever had private health care insurance? 21 months between Navy and Congress.

When McCain says he doesn't want the government involved in your health care decisions, he proves that he has no clue about private insurance. They are involved, and may be more restrictive in approving care than the government, as they chase after profits (for those insurers that are for profit).

"In contrast the AAA or your church will have very strong incentives to cover an individual in their risk pool ONLY if the individual is healthy."

AAA or my church wouldn't be "covering" anyone. The insurance company would. I'm saying that groups other than employers still bring some clout to the table. If we are in McCainWorld, my church administrator calls Blue Cross on the phone and says "we have 5000 families and 3000 of them are looking for health insurance. I can deliver 2000 of those to you, but you don't get to screen anyone - it's take the whole group or leave it." Why wouldn't they be able to negotiate a favorable group rate?

applecor, the issue is not that the organizations couldn't say you don't have a right to screen, but that healthier, younger individuals would not voluntarily join this group. They could get cheaper insurance by joining a plan that DOES screen and so they will. And then the "no-screen" voluntary group will keep rising in cost. (This is the adverse selection, "used care/lemons" problem.)

This doesn't happen now because we have a system that has huge incentives for individuals to stay in the general pool. (I, as a healthy 30-yr old, might be able to get cheaper pre-tax insurance than what my employer offers, but the chances that I could find one that is cheaper after the tax benefit is taken into account is pretty small.)

"applecor, the issue is not that the organizations couldn't say you don't have a right to screen, but that healthier, younger individuals would not voluntarily join this group."

Right, that's why everyone has to be required to buy health insurance, and insurance companies, assuming they are permitted to continue to exist at all, can't be allowed to screen.

yes, theoretically, we could have a non-employer based insurance system (which I would favor), but my understanding is that mccain's plan doesn't address this and that's a fundamental flaw.

One thing that is still missed in the tax credit vs tax deductible discussion, cash flow. The tax credit only shows up after you file your taxes. The tax deduction shows up on each and every paycheck someone has insurance payments deducted. This means for anyone of any income level who is living paycheck to paycheck suddenly will have difficultly making ends meant because of having to wait for that supposedly better tax credit. Not many creditors want to hear that you don't have the money because you are waiting for tax time and the government to reimburse you with your tax credit.

It is really refreshing to see such a respectful dialogue between, obviously, smart and well researched people.... One thing that I would like to clarify though:

"When has McCain ever had private health care insurance? 21 months between Navy and Congress"

I doubt McCain has ever had private health insurance because part of his Navy retirement benefit would be lifelong health coverage. We use Tricare for retirees now but we still enjoy free prescriptions or a very small co-pay and the premium is extremely low cost. Less than four hundred dollars a year for a single person.

Here's a different idea. First the health care industry has to post their prices. Everyone now pays a different price with the uninsured paying up to 6 times more than the insurance company pays the hospital. Have Health Savings accounts that are not tethered to the insurance industry and all moneys put in are tax deductible. This account is portable and would go with you from job to job. Employers do not have to worry about administering the plan, they just have to pay you a living wage. If you take care of yourself and don't smoke, watch your weight & exercise you would be healthier and therefore spend less (I know not always). The HSA would convert to an IRA when you turn 65. An incentive to stay healthy. Catastrophic illnesses would be covered by the government. It could be paid for by stopping the war on drugs and taxing the now legal drugs.

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