McCain's poison pill

The online journal Health Affairs published an article Tuesday that explored the implications of McCain's health care plan. (In order to provide balance, they also included a critique of Obama's plan; unfortunately it was co-authored by one of McCain's advisers, making its analysis questionable.) McCain's plan has gotten little attention so far, probably because it sounds simple. However, its simplicity belies its far-reaching implications.

To understand McCain's plan, you have to understand a little about how the U.S. health insurance system works. I'll give a quick, somewhat simplified description for those of you who may not be completely familiar with it.

Health insurance plans in the U.S. can be broadly divided into two categories, group and nongroup.

• Group coverage is usually purchased by employers for their employees. The premiums are tax-deductible; often they're completely or partially paid by the employer as part of the job's benefit package. These plans usually provide automatic coverage for all of a company's full-time employees. No medical exam is required to qualify, but by taking in all the employees of a company they ensure the premiums paid by healthy workers will tend to offset the costs incurred by sick ones.
• Nongroup coverage is bought on the open market by individuals. These plans face a problem known as "adverse selection" — sick people are more likely to want to sign up for insurance than healthy people. For that reason, a medical exam is usually required to qualify. People who have a preexisting condition (for example, diabetes, pregnancy, or a history of depression) face higher premiums or outright exclusion. These plans also have higher administrative costs and generally offer less generous coverage than group plans.

McCain's health care proposal is quite straightforward. It attempts to level the playing field between these two types of plans by eliminating the tax deduction for employer-provided insurance, and replacing it with a tax credit of $2,500 for individuals and $5,000 for families. Unfortunately, this removes the incentive for employers to offer group plans, and increases the incentive for healthy individuals to opt out where possible. Many employers would likely respond by dropping group coverage altogether, forcing employees into the nongroup market. The healthiest would be cherry-picked by plans, while sicker individuals would find coverage unavailable or prohibitively expensive. The Health Affairs study estimates that initially the number of insured Americans would remain about the same, but with higher out-of-pocket costs due to nongroup polices' lesser coverage and higher deductibles. They predict that the number of uninsured individuals would climb quickly over time due to the declining value of the tax credit, which is not indexed to inflation. Two-thirds of people with chronic medical conditions might find that no affordable coverage is available to them at all.

Conservatives who support this plan should be careful what they wish for. While it creates the appearance of increasing choice and competition in the current private insurance market, it could easily break the current system so completely that people turn to the government for a solution.