McCain's Brilliantly Destructive Health Care Plan

Why is health insurance tied to employment?

For all the panic on Wall Street and the stark fear on Main Street, there are a lot of other concerns in America besides the economy.  Health care and health insurance are longstanding concerns which are generally considered to help the Democrats.

This week, the Obama campaign has begun a pointed attack on John McCain's plans to change the rules of the health insurance markets with radio ads in major markets claiming that McCain would raise the cost and reduce the availability of health insurance, just the opposite of everyone's goals.  They even studies saying that the McCain plan would encourage employers to drop coverage for their employees even faster than they already are.

It's no surprise that Obama's allies in the press corp are pushing the same theme.  The New York Times said,

American business, typically a reliable Republican cheerleader, is decidedly lukewarm about Senator John McCain's proposal to overhaul the health care system by revamping the tax treatment of health benefits, officials with leading trade groups say. The officials, with organizations like the U.S. Chamber of Commerce, the Business Roundtable and the National Federation of Independent Business, predicted in recent interviews that the McCain plan, which eliminates the exclusion of health benefits from income taxes, would accelerate the erosion of employer-sponsored health insurance and do little to reduce the number of uninsured from 45 million. [emphasis added]

Now, John McCain has accurately called out the New York Times for its extreme liberal bias and imbalance towards his campaign in particular and Republicans in general, but in this instance, without meaning to be, the Times is right on the money.  In fact, while Obama's radio ads are certainly designed to give the impression that McCain's plan is a dreadfully bad one, their specific accusation regarding employer coverage is spot on.

Yes, John McCain's health care regulatory changes would, indeed, be likely to lead to employers dropping health care coverage.  That's not an accident.  It's precisely the point.

What's more, it's not only a good idea, it's essential if we are to ever solve the real underlying problems that have caused our health care "crisis."

Government Meddling

Our American system of health care and health insurance has worked more or less the same way, from the point of view of the patient, for the lives of most voters.  It's familiar, so it's easy to assume that it is the way it is by natural law.  Nothing could be further from the truth; our system evolved, not by happenstance or according to market rationale, but as a direct result of government interference with free markets when our grandparents were young.

Through all of history up until the 1940s, doctors and other medical vendors operated just like any other vendor of professional services.  If you needed a doctor, you went to one, got treated, and paid your bill.  If you could afford a fancy doctor, that's where you went and paid accordingly.  If you were poor, you went to a cheap doctor or no doctor at all.

Much like lawyers, most doctors felt some obligation to assist those who couldn't afford treatment and there were many religious charity hospitals that also would take care of the poor for free or a reduced rate; but for the vast majority of Americans, a trip to the doctor was no different economically than calling a plumber.

That changed in World War 2.  When the United States was attacked at Pearl Harbor, the vast unemployment of the Great Depression was abruptly replaced by a labor shortage as every able-bodied man was placed in uniform and sent overseas.

Then as now, most military equipment was provided by private companies operating under military contract.  To fulfill their contracts, the companies needed bodies; there was a shortage of bodies; the laws of supply and demand dictate that in a supply shortage, the price should rise.

But the government didn't want wages to rise - not only would it lead to inflation, it would increase the cost of manufacturing war supplies and thus the contract price.  So the authorities put into place wage controls; companies were not permitted to offer higher wages to tempt workers into their factory.

It should come as no surprise that factory owners found other ways to add to their employee compensation packages without, technically, increasing their wages.  American industrialist and shipbuilder Henry J. Kaiser decided to offer his thousands of dockworkers free medical care at a company-contracted clinic.  This eventually evolved into what we know today as the Kaiser Permanente HMO.

This end-run around government regulations proved to be enormously popular, for a very simple reason.  Yes, it met the need of additional perks in lieu of forbidden raises; but far more than that, the income tax system gives a tremendous advantage to employer-provided health coverage.

If you go to the doctor and pay him yourself, you are paying the bill with after-tax dollars.  For a doctor's charge of $100, you have to earn $135 and pay $35 worth of income taxes in order to be left with the $100 to pay the fee.

But a company can deduct its business expenses, including health coverage.  When your employer pays the doctors bill - or, nowadays, the health insurance bill - there is no tax paid on that money.  In effect, the company gets a 30% (or more) discount compared to what an individual would pay.

This has always been true, but it was first exploited during World War II.  By the end of the war, American employers of any size had gone down a similar path of providing health insurance to their staff, and of course all the fighting men had their health care provided by Army doctors.  In short, all of middle America got used to someone else taking care of their doctor bills.

The Unintended Consequences

For a while, this system worked fairly decently - after all, there are only so many ways to get sick, aren't there?  Unfortunately, that was before the explosion of medical technology we have seen in recent decades.

Nowadays, thanks to all the fantastically expensive machines, medicines, and treatments, it is quite possible if not routine to spend more on a person's medical care for one illness than they could ever earn in their entire life.  It should come as no surprise that health care takes up four times as much of our economy as it did in 1960, with no end in sight for the cost and expense increases.

This is a severe problem for employers, and has predictably led to the crisis we read about every day in the papers: companies canceling coverage, or making employees pay a larger and larger share of it.  But the problem isn't the one that makes the headline, of "how to cover the uninsured."

No, the real problem is, how can we stop the tremendous increase in health care costs?  And that brings us to the pernicious effect that was begun so many years ago by Henry Kaiser:

People don't care about the cost of something they don't pay for.

Do you eat more food when you are at a regular restaurant, or at an all-you-can-eat buffet?  Do you worry about buying cheap gas for the company car?   Everyone knows that people don't value what they aren't paying for; every parent with children sees this every day.  It's every bit as true for health care: when individuals are not paying for their own medical treatments, they don't particularly concern themselves with cost, and they certainly don't bother to look for cheaper alternatives.

When you go to the hospital, do you have any idea what the bill actually is?  You know what your bill is, of course - the $100 copay, or whatever.  But if you had to pay the whole thing yourself, do you have any idea what it would be?

How about checking what the hospital down the street would charge?  Would it cost less if you went to an urgent-care clinic instead?

Because of decades of not paying directly for their own health care, Americans have become totally unused to even thinking about medical costs, much less comparison-shopping or pressuring providers to be more efficient.

We think about prices in every other aspect of our lives.  Even in health care, in those handful of areas where there is a price signal, Americans react as you'd expect: now that most prescription drug plans have a cheaper copay for generic drugs versus the vastly more expensive name-brands, it's become far more common for patients to work with their doctor to find a cheaper alternative that qualifies for the reduced rate.  This saves the patient money and it saves the insurance company even more money.

Competition Leads To Transparency

That's why John McCain's plan for healthcare is so powerful.  Why should you, as an employee, have to make do with whatever health-care plan your employer offers?  Would we tolerate a system where your clothes were provided by your employer as part of your salary, because they could get them for half the price you could - but they got to pick what you would wear?  Of course not; yet isn't health care even more important than being in style?

The goal of the McCain plan is to set a level tax playing field for health insurance, regardless of who buys it.  Given the choice between purchasing the insurance plan of their choice from anywhere they found appealing and sticking with their employer's plan, many people would love to do it on their own.  They might pick a more expensive plan with expanded coverage; they might choose a basic plan and pocket the difference.  What's wrong with that?

Once individual consumers start picking their own health care plans, the high prices and lousy service medical insurance companies are famous for will be forced to change.  Insurance companies can afford to be mean to people because, unless you are the company president, it doesn't matter how lousy or overpriced you think the service is - you have no power to change to a different vendor.

That would change if individuals chose their own plans.  Individual choice would put pressure on big insurance companies, pressure on overpriced drugs, pressure on unionized nurses, and - yes - pressure on bureaucrats who create regulations that run up the costs of care.  When you're paying for it, you want to know what exactly you are paying for; and when America sees the detailed invoice, they won't like it one bit.

Political Jujitsu

We expect political candidates to attack each other.  We don't expect them to agree.

John McCain, if he is wise, might endorse Obama's ads with an explanation: Yes, absolutely we want to destroy the employer-based health care system.  Wouldn't you rather choose it yourself?  Wouldn't you prefer not to automatically lose your health-care when you lose your job?

Don't we like to buy everything else at our own discretion instead of just making do with what's provided by our betters?  Doesn't competition always lower prices and allow more people to afford what they previously could not?  Isn't that why teachers unions oppose competition?  Been to Wal-Mart lately?

The Wall Street Journal summed it up rather nicely:

On health reform, Mr. McCain is fundamentally right. As one prominent economist has noted, "Health insurance is not something that is made better by tying it to employment." That economist was Obama adviser David Cutler.

The hour is late; but there's still time.  Americans want better, more affordable health care.  McCain needs to show how his plan will give it to them.

Petrarch is a contributing editor for Scragged.  Read other articles by Petrarch or other articles on Economics.
Reader Comments
Here, here! Let the consumers drive the medical prices in the market. They will certainly regulate it better than the insurance companies can. In order to get to this place, our behemoth bureaucracy we call government has got to crash and burn. We will certainly not legislate our way into this position.
October 14, 2008 8:38 AM
The problem is that the American people don't seem to be able to look beyond their next paycheck anymore. The same mindset that brought about the "mortgage crisis" and the current economic mess will prevent people from seeing anything you're talking about here.
October 17, 2008 11:58 AM
Our brain-dead government has utterly distorted the market for health care. Bureaucratic delays and onerous rules have held back many, many cures; these delays have caused many people to die unnecessarily.

People get the government they deserve. If Americans let our government destroy our culture of medical innovation in the name of fairness or political expediency, they'll deserve what they get.
October 17, 2008 12:19 PM
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