Central to Sen McCain’s health reform initiative is his plan to eliminate the tax deduction for employer-paid health insurance, replacing it with a $5000/family $2500/individual tax credit to help individuals buy health insurance.
There’s nothing in McCain’s plan that would force employers to stop providing health insurance. The question is, would they drop coverage?
Because there’s no way to know, we have to look at what employers are saying about the plan – understanding that 71% of Americans with health insurance get their coverage thru their job.
The New York Times surveyed several employer coalitions/groups earlier this year; here’s what they learned.
- A recent survey of 187 corporate executives by the American Benefits Council and Miller & Chevalier, a consulting firm, found that three-fourths felt the repeal of the tax exclusion would have a “strong negative impact” on their workers. Only 4 percent said they would provide additional pay to fill any gaps.
- Business Roundtable, an association of leading chief executive officers, said his group instead supported extending the tax exclusion to those who bought coverage on their own.
- American Benefits Council, said concern that the tax credits would not keep up with inflation was a primary reason his 280 member companies “take a very dim view” of repealing the tax exclusion.
- “There are huge questions about the $5,000 per family being an insufficient amount in terms of being able to purchase the same coverage,” said Mr. Josten with the Chamber of Commerce.
- National Business Group on Health, a coalition of 300 companies, agreed that many workers would face a net loss.
Smaller employers are not fans of the McCain plan; 70% of those surveyed by the NFIB oppose the plan to eliminate the tax deduction.
Not exactly conclusive, but nonetheless revealing. More significant is the longer-term perspective – as McCain’s plan indexes the tax credit to inflation and not medical inflation, it will very likely not keep pace with trend. And that may be the bigger issue.
According to Paul Fronstin , a senior research associate at the Employee Benefit Research Institute “What you’ll see happening is average cost in the employer-market will go up and average cost in the individual market will go down,” Fronstin said. “You’ll start to get into a cycle where people at the margin start to leave employer coverage for individual coverage [emphasis added]. At some point, employers will start to ask: Why am I doing this if my workers don’t value it anymore? If I don’t need to do this to be competitive in the labor market, why should I do it?”
Fronstin’s point is all the more germane when the economy is in a recession and unemployment is rising. In a soft job market, employers will find it easier to drop coverage, and once it’s gone, it isn’t likely to return.
One signal that the McCain health plan may not be too popular was the recent ‘de-endorsement’ of the plan by Texas Sen John Cornyn (R).
What’s the net?
We don’t know if the McCain health plan would result in a rapid decline in employer-based coverage. But employers clearly don’t like the idea of losing the tax deductibility of health insurance premiums.
The objective is to cause employers to drop health care insurance provisions, which is shown by the responses of the survey you listed above. Most people would agree that the employer-based system of insurance-provision is egregiously unfair, forcing people to stay with low-paying uninteresting jobs just to maintain their health insurance. The system would be better structured if employees would have more take-home pay (since the employers can give the money directly to them rather than to the insurance company in premiums) so that they can afford to buy health insurance that will stay with them regardless if they change employment.
Peter — you may be correct about the objective, and the essential unfairness of the employer-based health system. But does anyone believe, especially in the current economy, that employers are going to “give the money directly” to employees? Isn’t it far more likely they’ll simply drop the coverage, leaving the employees to fend for themselves?
I would argue that the successful employer will use the increased money to hire and retain the most talented people in a certain market so that the business size increases, productivity increases (employees are happier), business revenue increases, et cetera. That is what is great about competition: the best employer gets the best employees, which gets the most revenue growth.
The reason people like employer-based health insurance is that they are hard-pressed to find good coverage that they can afford on an individual basis, particularly if there are any pre-existing conditions. Employers are far more likely to have decent coverage for everyday health concerns with lower deductibles AND they usually pay 75% of the premium – which is more than the tax credit proffered. (and don’t forget the cash-flow issue for premium payment). Until there is alternative, not expensive coverage for individuals and small employers to purchase, we will have a problem. As the economy implodes and employers get their increased premiums and ponder lay-offs, health coverage is going to take a hit. Those companies on the edge will drop it or cut their subsidy.
Meanwhile, there is a complete political disconnect between tax economists and insurance regulators and actuaries. You can’t just change tax policy – you have to change the insurance business as well – a tough political project that may be too expensive right out of the presidential box, whomever is elected. Congress will have to deal with it and the House Ways & Means and Senate Finance Committees may have to deal with the economy first. And by the time Congress deals with that, not much $$ will be left, as if there is any now! Look for S-chip expansion and not much else next year or so.
Bonnie
Peter – you comments make sense, but expecting the sucessful employer to use the money to retain the best employees sounds a lot like Alan Greenspan’s recent comments that he expected financial firms to police themselves rather than take unenumerated risks. I think most employers would just drop offering insurance if they lose the tax deduction.
I never thought of the ramifications of McCain’s proposal from an employers point of view, only saw that a middle aged man like me with several pre-existing conditions (high BP, cluster headaches) might find it tough to find health insurance on my own.
Have we not learned anything from the economic, banking, mortgage situation? unregulated individuals, like unregulated corporations, will do the easiest thing not the best or smartest thing…meaning individuals will take the extra money that Peter suggests companies will give to buy health insurance, and they will in fact take that money and buy a new BMW, or something else they cannot afford. Thus leaving themselves uninsured and vulnerable to uncovered injuries and illness. And what will that bring??? Not 47 million uninsured individuals, but 100 million. Bad idea leaving the choice of responsibility up to the individual. Sorry if that sounds like socialism, but the relaity is a scociety based on instant gratification cannot change over night
Ron,
The mortgage mess is due overwhelmingly to over-regulation of the banking and lending industry by the government, putting pressure on lenders to give money to risky individuals to buy homes, i.e. subprime mortgages. Please read about the Community Reinvestment Act.
Regarding giving employees more money which will lead to squandering of their hard-earned money… Do you think that the average person is so stupid that the government must step in like a nanny and tell him or her that he needs to spend x amount of money per month on groceries, y amount of money per month on rent, and z amount of money on car/health insurance? I think you have a very low opinion of the vast majority of this country.
Peter, if you don’t pay for groceries, you don’t eat. If you don’t pay the rent, you go on the street. If you don’t buy car insurance, you can’t drive (legally). If you don’t buy health insurance, you go to the emergency room and use up services paid for by those who do buy the health insurance. Simple fact. That is the way it works today, and I don’t see it changing just because someone gets more money (what used to be their medical benefit $$) from their employer.