After the jump, I try to add something to Tom Bozzo’s post below (which you should read first because he actually knows something about the issues).
Here I take as fact Buchmueller et al’s assertion (as summarized by Bozzo but at least I admit it) that a typical family health plan costs employers $12,000 and a similarly generous plan costs $14,000 on the individual market.
I think about how employers might respond to the McCain plan.
First I’m sure many will just keep on keeping on providing health insurance to employees with the same limited range of options (maybe one size fits all, definitely “no thanks, I’ll get mine on the individual market” is not an option). The plan will simply be a tax increase for their employees*. I think the McCain team sincerely thinks this is no big deal, because they think tax treatment is the real reason for employer provided health care, so they assume few employers will be so dumb and no one will want to work for them unless they increase wages to bear the cost of the tax and that would drive any really stubborn firm bankrupt.
Basically, I think they assume that either employers will have nothing to do with health insurance or, at least, they will give employees the option of taking the benefit as cash instead of health insurance.
I think that this is about the same thing, to a rough approximation. The advantage to insurance companies of selling insurance to employers is that the employees don’t have a choice and so the insurance companies don’t have to market or, more importantly, worry about adverse selection. I think that, quickly if not immediately, insurance formally provided by the employer but with an opt out, will vanish as the important lasting difference from the individual market will just be the $5,000 credit.
OK so why did I slip in the weasel word “lasting”. Well given how scared people are of the individual market, I think it would take a long time for the more healthy to all opt out of employer provided coverage, so the adverse selection in the employer provided pool will only slowly become as severe as that in the individual market.
So I claim an either/or either a lot of people will have employer provided insurance whether they want it or not, so the plan is a tax increase on them, or the plan will, for practical purposes, eliminate employer provided health insurance.
Now, assuming the extra $2,000 calculation is accurate, where does the money go ?
I’m sure only a small part of it goes to health insurance company profits. I would guess that the individual health insurance market is quite competitive and the profit rate, while probably higher than in group markets due to bargaining power, is nowhere near 28% of sales higher.
Some goes to increased marketing administrative and screening costs and amounts to pure inefficiency.
Some goes to the free riders who get a (partially) free ride. That is the other side of adverse selection is that some healthy people benefit by not having insurance. If they are insured they subsidize the less healthy. If they are not they get some health care without paying for it (if they go bankrupt or if the provider gives up on chasing after them to pay the bill).
If Buechmuller et al are right then, there is another either/or.
Unless the McCain plan increases the number of uninsured, it would cause the US to waste about $2,000 per family that currently has employer provided coverage. Not as huge a waste as the Iraq war but well over $100,000,000,000/year (way more than total earmarks which aren’t pure waste).
The actual waste will be lower as part of the cost to (employers + the treasury + the insured) will be an increased transfer to the increased number of free loading uninsured. It will also be lower as some people will stick (or be stuck) with employer provided insurance with no opt out and so they will just pay more in taxes.
But the plan is partly a tax increase, partly a windfall for freeloaders and partly increased waste.
Importantly, the McCain supporters argument that the plan will benefit tax payers is based on assumptions about responses such that it will reduce tax revenues. It is typical Republican logic to assume that cutting taxes gives benefits to taxpayers at no cost to anyone ever, but it is still nonsense.
Now what is the logic of serious economists who helped design the McCain plan (Douglas Holtz-Eakin is, for all I know, not the only serious economist on the McCain team, and he is serious or, at least, he was, when they were working on the plan).
The argument is that, on the individual market, people will purchase plans less generous than the one they get from their employer. That their having skin in the game will make their health care consumption choices more efficient and that this outweighs the increased costs of marketing, administering and screening. Basically I find this argument absurd, because it if it were true one would imagine that the US health care is more efficient that that of other developed countries and it obviously isn’t. But that is very crude data. To get more micro (much more micro) I suspect that underuse of health care (statins, oral anti-diabetics, insulin, anti-hypertensives, antacids that actually work and prevent ulcers, cancer screening etc etc etc) is more costly than overuse (even though the cost of accelerated morbidity is just interest on the cost of people getting deathly ill as most do before dying). Experimental evidence (the RAND study) suggests that copayments reduce demand equally for necessary and un-necessary treatment.
* and update: I was totally confused about the McCain plan. Sorry. Should have done my homework. If one still gets insurance from one’s employer, the change is pay income tax but get the $2,500 or $5,000 for a family. For most people, this is a tax cut. It is a tax increase only for people in the 33% bracket (over $200,000/yr if married filing jointly) with more costly than average insurance. The way McCain manages to cut almost everyone’s taxes while giving a lot to those with low incomes and/or without insurance is by adding 1.4 trillion More to the 10 year budget deficit.
He’s addressing the problem by throwing money at it.