A Project of The Annenberg Public Policy Center

McCain’s $5,000 Promise

His new ad only tells half the story of what his health proposal could mean for U.S. workers.


Summary

McCain says in a new TV ad: “Let’s give every American family a $5,000 refundable tax credit” to buy health insurance.

Sounds good. But McCain failed to mention how existing employer-sponsored health benefits would be affected.

  • Workers would be taxed on the value of any employer-paid health benefits, partially offsetting the $5,000 credit for those now covered by such plans.
  • Experts say a tax credit plan like this would likely cause companies to reduce or eliminate health benefits for their employees.

The aim of the McCain plan is to reduce health care costs through increased competition, by encouraging individuals to shop around for health insurance and medical care. There are many who favor such an approach, and we take no position on it one way or the other. But McCain’s simplistic ad misleads viewers by promising to give “every American family” a $5,000 benefit while failing to mention what he would also take away.

Analysis

Sen. John McCain’s ad was released April 29 and will air in Iowa.

[TET ]John McCain 2008 Ad: “Health Care Action”

John McCain: The problem with health care in America is not the quality of health care, it’s the availability and the affordability. And that has to do with the dramatic increase in the cost of health care.

Let’s give every American family a $5,000 refundable tax credit so that they can go out across state lines and get the insurance policy that suits them best.

I can characterize my approach on health care by choice and competition, affordability and availability.

We need community health centers. We need walk-in clinics. We understand that emergency room care is the most expensive in America. There’s many, many solutions to this problem. I think we can address them. The fundamental problem is not the quality of health care; it’s the cost of health care. So health care must be made affordable and available.

I’m John McCain and I approve this message. [/TET]

Who Benefits?

In the ad, he says the problem with health care is not the quality, but the cost. As a remedy, he promises “every American family a $5,000 refundable tax credit” so families can purchase their own insurance policies. (Individuals would receive $2,500.) The federal government would send the money directly to insurance providers.

Those with employer-sponsored coverage, however, also might want to know that under McCain’s plan, they will pay taxes on the value of health care benefits they receive from their employers. It’s not that families will receive a windfall of $5,000, but that the credit will more or less offset the increased taxes they’ll pay.

Who saves money and who loses under the plan, depends on the tax bracket an individual or family is in and what their health coverage costs. Kenneth E. Thorpe, a former Clinton administration health expert who now is a professor at Emory University, says there would be “a lot of redistribution – a lot of winners and losers” under a McCain plan. Lower-income individuals could do better if they have health care through their employer. They’d pay a lower tax rate on those benefits than higher income workers. “Some people will pay more and some will pay less,” Thorpe says.

Those who would benefit most from McCain’s tax credit are those who already buy their own private plans and don’t receive tax benefits. Those who are uninsured may find the tax credit provides enough financial incentive to sign up for health care policies. The average annual premium costs for a family with employer-sponsored insurance (including both the employee’s and employer’s contribution) was $12,106 in 2007, and it was $4,479 for a single person, according to the Kaiser Family Foundation. Annual premiums for nongroup coverage (i.e., individually purchased plans) vary widely, currently ranging from $1,163 to $5,090 for singles, and $2,325 to $9,201 for family coverage. McCain says he will work with states to set up pools to cover those who have been denied insurance. One idea he suggests is to create nonprofit entities that would contract with insurers to cover high-risk people.

Some years in the future, the tax credit may not be substantial enough to make up for the increase in taxes. “Over time, an increasing number of workers will end up paying [more] in higher taxes … than they will receive in federal assistance through the tax credits,” Thorpe told us. “This occurs because the average premiums for employer-sponsored health insurance increase much faster than the health tax credits.” (The McCain campaign says the credit will be indexed to the Consumer Price Index.)

What Happens to My Health Plan?

In a speech in Tampa this week, McCain also said that those with employer-sponsored policies could keep them and that their policies “would be largely untouched and unchanged.” But experts generally agree that such a plan would have a major impact on employer-sponsored health care.

The current tax system encourages companies to offer insurance, and indeed, 61 percent of the nonelderly population in the U.S. had insurance through their jobs in 2006, according to the Kaiser Family Foundation. (Only 5 percent, 13 million people, bought their own insurance.) McCain’s plan to tax workers on the value of their employer-provided health care plans and provide tax credits would encourage some employers, mainly small businesses, to drop health benefits, say experts, and the proposal could eventually eliminate job-based insurance altogether.

Paul Fronstin, director of the health research and education program at the Employee Benefit Research Institute, a nonprofit organization that analyzes benefit programs, says a tax credit plan like McCain’s likely would mean the end of employer-sponsored health care. “The question is how does it play out and over what period of time. … It’s not something that you would see overnight.”

Fronstin, whose institute is supported by businesses, unions, foundations and insurers, among other organizations, says “older, less healthy people are generally losers” as the system changes, and young and healthy people would generally be the winners. “I think what’s going to happen is you’re going to have insurance companies designing plans that are essentially free to people because they are below or at the tax credit,” he tells FactCheck.org. “And healthy people are going to find that attractive.” As those people drop their employer-sponsored coverage, “you see the beginning of the erosion of the risk pool. … Less healthy people are left [in the employer-sponsored pool] and so the costs go up,” which drives more healthy people out. Eventually, Fronstin says, employers will question why they’re offering health care if most employees don’t see it as a benefit. “That’s what I see as the tipping point of employer-sponsored coverage.”

Another independent expert we consulted said that tax credits would “definitely” lead to a reduction in employer-sponsored coverage, but such benefits wouldn’t disappear completely. John Sheils, senior vice president of The Lewin Group, which analyzes health care plans for both political parties, told us that the group plans offered by employers could still be cheaper than what’s on the individual market – meaning not all the young and healthy people would scrap job-based plans. “I think you get an adjustment early on, and then I think it would level off,” he says. An assessment The Lewin Group conducted of a similar tax credit plan found a net loss of employer-sponsored coverage for about 10 million persons, Sheils says. He has not analyzed McCain’s specific proposal, however.

Emory’s Thorpe told us in an e-mail that McCain’s plan “would result in fewer individuals covered through employer-based plans over time. The extent of the reduction would be greater in small firms (that face administrative costs similar to those workers will find in the individual market) and lower for larger firms with higher administrative costs.” He echoed Fronstin’s comments that “the proposal also provides incentives for younger, healthier workers to migrate to the individual market resulting in higher premiums for older, more chronically ill workers that continue to receive coverage through their employer.”

A tax expert also says credits would “tend to undermine” employer-offered coverage. Leonard E. Burman, director of the nonpartisan Tax Policy Center and head of the Treasury Department’s tax policy office during the last two years of the Clinton administration, said in testimony before the House Budget Committee in October 2007 that tax-credit proposals then under consideration likely would lead to employees at smaller firms losing their benefits. “Many firms, particularly larger ones, would still offer insurance because of the combination of convenience, administrative cost savings, and pooling afforded by large groups of people subject to relatively little adverse selection,” said Burman in his prepared remarks. “But firms currently near the margin between retaining and dropping insurance would be likely to drop.”

The experts we consulted are making predictions, of course, and some, like McCain, argue that tax credits won’t lead many employers to drop health care plans. Nina Owcharenko, an analyst at The Heritage Foundation, which has long supported tax credit proposals, says employers would still have incentive to offer health care in order to attract the best of the workforce, and people are accustomed to getting their health care through their jobs. “So it’s not something that’s going to die down tomorrow,” she says. Owcharenko also says McCain’s plan would lead to people having portable coverage they could take with them from job to job. Those with “portable” coverage would, of course, no longer be covered by their employer.

Fronstin says large employers in particular are “hesitant” about such proposals. “They’re concerned about, then what happens. If you destroy the risk pool, how does the government get back into fixing what it may have destroyed? And how much is that going to cost, and how much control would we have over it?”

We make no judgments as to whether a heavily employer-sponsored system or one with more privately insured individuals is better or worse. But we do note that McCain, in his ad, neglected to tell workers how their taxes would be affected by his proposal. And his pronouncement that employer-based plans would be “largely untouched” is optimistic, at best, and at odds with what all but one health expert told us.

–by Lori Robertson, with Viveca Novak

Correction, May 1: Our story originally said that under McCain’s plan, employers would no longer be able to deduct as a business expense the cost of providing health insurance for their workers. That’s not correct. We initially misunderstood this point from the campaign.

Sources

McCain, John. Remarks as prepared for delivery in Tampa, Florida, 29 April 2008.

Straight Talk on Health System Reform.” JohnMcCain.com, accessed 30 April 2008.

The Henry J. Kaiser Family Foundation. “The Uninsured: A Primer,” Oct. 2007.

The Henry J. Kaiser Family Foundation. “How Non-Group Health Coverage Varies With Income,” 4 Feb. 2008.

The Henry J. Kaiser Family Foundation. “Employee Health Benefits, 2007 Summary of Findings,” 2007.

Fronstin, Paul and Dallas Salisbury. “Health Insurance and Taxes: Can Changing the Tax Treatment of Health Insurance Fix Our Health Care System?” Employee Benefit Research Institute. Issue Brief No. 309, Sept. 2007.

Burman, Leonard E, Tax Policy Center. Statement before the House Committee on the Budget, “Tax Code and Health Insurance Coverage,” 18 Oct. 2007.

Owcharenko, Nina. “Addressing Adverse Selection Concerns Under the President’s Health Care Proposal.” The Heritage Foundation, 30 Jan. 2007.