Paying for your health care

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By Pat Regnier, Money Magazine assistant managing editor

Everybody agrees on the basic flaw in the American health-care system: Lose your job, lose your coverage. Both McCain and Obama promise to loosen that tight link between jobs and health care, but they go about it in radically different ways.

In a nutshell, Obama wants to expand the number of people covered by health insurance in the form most of us still know it - that is, policies with relatively low deductibles and broad coverage.

McCain thinks he can make insurance more accessible and more portable from job to job by creating incentives for people to buy cheaper policies with higher out-of-pocket costs.

On its face, McCain's plan looks like the more modest one because it's mostly about fiddling with the tax code. But it might actually do more to change how you pay for your health care than the Obama plan would.

Right now, the premium your employer pays for your health insurance is basically a form of tax-free compensation for you. If you have to buy insurance on your own, you don't get that break. (Affluent families get more out of this tax benefit than poor ones do, making it the kind of regressive tax subsidy liberals usually bemoan.)

McCain would scrap this unlimited exemption for employer insurance and instead offer a $5,000-a-family tax credit to help pay for any kind of insurance, whether or not you buy it through work.

Here's why that's a huge change: Take the unlimited tax subsidy out of the picture and some employers could well decide to switch to cheaper, less generous policies. Others might stop offering coverage altogether and just offer workers more cash. Employers would still have some incentive to offer insurance because McCain would keep premiums exempt from payroll taxes.

Even so, the number of people with employer insurance could fall by 20 million by 2018, according to a preliminary analysis by the TPC. That number would be offset by 21 million getting coverage themselves with help from the tax credit.

But overall, we're talking about a tiny dent in the number of uninsured, far less than the 20 million to 30 million the McCain campaign cites. In part that's because McCain's tax credit would be indexed to inflation, not health-care costs, which have been rising 2.5 percentage points faster. If that trend continued, your tax credit would buy less and less coverage each year.

Holtz-Eakin says such criticisms ignore the ways McCain's new incentives could transform the health-care market. One key assumption of the plan is that you'll become more conscious of your medical spending if you pay more out of pocket, reducing overall health-care costs.

Another is that insurers who expect to cover you for life - not just while you're at a certain job - will invest more in preventive care. "We're already spending enormous amounts, and it's widely agreed that there are tremendous : opportunities for efficiencies," says Holtz-Eakin. "So you could get the same quality and spend less."

If you have a pre-existing condition, there's another wrinkle in McCain's plan to think about. Right now, if your employer dropped coverage, you might have a very hard time buying coverage on your own. You're simply a lousy risk. McCain proposes to fix that by creating special state-run insurance programs for high-risk enrollees.

But some analysts think McCain isn't putting up enough cash to pay for this safety net. "It's dramatically underfunded," says Jonathan Oberlander, who teaches health policy at the University of North Carolina.

Obama's plan would be more likely to keep you in the policy you already have. With the exception of small firms, employers would either have to provide you with insurance or cough up a tax penalty instead.

If you didn't get coverage, you'd go into a completely new system: a national "insurance exchange" that would allow you to choose from a variety of policies, including one plan run by the government.

This insurance wouldn't be free, as it is in the universal program that Great Britain has. But the government may subsidize your premium, depending on your income. The plans in the exchange would have to cover all comers at the same price.

Since adults could still decide not to buy coverage for themselves, Obama's proposal doesn't quite add up to universal care. The TPC estimates that it would reduce the number of uninsured by 34 million in 2018, still leaving a projected 33 million uncovered.

If your big fear is simply losing coverage, Obama's plan is the safer bet. But his approach has risks of its own. For one thing, it forces companies to pay a fixed amount of their compensation in the form of health insurance or taxes. In some cases that rigid cost might be enough to dissuade them from hiring in the first place.

But an even bigger problem is the potential impact on the federal budget. Thanks to fast-rising health-care costs, the Medicare program is already on course to blow up the budget in a few decades. Obama's plan would just add to that exposure, unless he can seriously control cost growth both in his new system and in Medicare.

Furman argues that this is perfectly doable. "Ultimately, what we assume is that we can lower the cost of health care by about 8%," he says. "There are a lot of experts out there who think you could lower it by 30% without hurting anyone's health. So we're very conservative."

But perhaps the most important axiom in health-care-policy circles is that one person's wasteful spending is another person's income. Doctors, hospitals, insurers and pharmaceutical companies can be expected to fight cuts in their income at every turn.

"It's not like there's a line on your medical bill called 'waste' that you can just subtract," says Stuart Butler, an economist at the Heritage Foundation.

Health-care reform is probably the toughest nut to crack in Washington. And in 2009, odds are that Congress will still be too busy digesting the effect of the current financial crisis to make any big moves.

Len Nichols, a health economist at the New America Foundation, says both McCain and Obama are more likely in their first year to seek a "kumbaya" moment of bipartisan compromise on something like coverage for children.

So when you're deciding between Obama and McCain, you're not really voting for an actual plan here. You're voting on where to start the conversation.

Given what we've seen in Washington the past few weeks, even that conversation would count as a minor miracle.

--This story has been updated from a piece that originally appeared in the November issue of Money Magazine. To top of page

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