The October Surprise health care quote…

In defending the McCain health plan, top McCain advisor Doug Holtz-Eakin may have said too much about the plan, giving CNN’s Tami Luhby a quote that reveals the key problem with the McCain health plan.

Changing the tax treatment wouldn’t hurt the employer-sponsored system and would allow more of the uninsured to buy their own coverage, they say. Also, his advisers say a McCain administration would keep an eye on the credit to make sure it didn’t lag behind the cost of coverage, while also working to lower the rate of medical inflation.

Younger, healthier workers likely wouldn’t abandon their company-sponsored plans, said Douglas Holtz-Eakin, McCain’s senior economic policy adviser.

“Why would they leave?” said Holtz-Eakin. “What they are getting from their employer is way better than what they could get with the credit.”

Senator Obama is now highlighting the comment as an “October Surprise” on the campaign trail, as reported by Noam Scheiber at The New Republic. (The McCain campaign’s response is here, at Time.com’s The Page)

The quote is right. If we discourage employer-based health coverage by removing the current tax advantages, some employers will drop coverage (there’s been an ongoing trend of employers scaling back coverage & reducing eligibility, even without a change in the tax incentives.) This will leave their workers to fend for themselves in the individual market, where coverage is more expensive and less efficient.

The McCain tax credit will not make up the difference of either the employer’s contribution to health care, or the benefits and negotiating power of group purchasing.

In short, what people get from their employer is “way better” than what they will get with a credit to buy on the individual market–whether in terms of out-of-pockets costs, benefits, or all-around value. (Here’s Jon Gabel’s study on the California HealthCare Foundation website to provide the appropriate apples-to-apples comparison.)

McCain’s plan actively seeks to push people from group to individual coverage, which seems to wrong way to go. And apparently, his advisors seems to know this. This is one of the major differences between the McCain and Obama health plans.

ADDENDUM #1:

There’s an additional “adverse selection” argument, which is that some workers might be tempted to leave their employer-based health coverage to buy in the individual market (which is less expensive for younger, healthier workers). If too many do, this will leave older, sicker workers in their group plans, causing the the employers’ premiums to go up, leading to a “death spiral,” causing the employer to drop coverage.

If this was only about removing the tax benefits from employer-based coverage, Holtz-Eakin would be right, although not to credit of the McCain plan. Even still, an employer would have to offer pretty skimpy benefits (high deductibles, a large share-of-premium, annual caps) for somebody to think they can do better on the individual market.

Some critics of health reforms (from SB2 to AB x1 1 to the Obama plan) suggest that purchasing pools would be negatively impacted by adverse selection, making them cost more, as opposed to being able to negotiate down the cost of health care using its bargaining power. And that’s been the case for some voluntary small business purchasing pools. But it’s a different story for subsidized pools, where even the youngest, healthiest person will stay in the employer group to get the implicit employer subsidy. As a result, the employer group then has the negotiating leverage to negotiate for all their workers, and the insurer has a much harder time just trying to cherry-pick only the customers they want.

The tax credit would have to be significant (and expensive) to allow for this; and so the policymakers would have a perverse incentive to make the credit less attractive. So the McCain plan is less vulnerable to this issue, but only by creating a much more obvious problem: giving many workers worse health coverage than they have now.

ADDENDUM #2:

Karen Tumulty at Time.com’s Swampland take the argument another step, and suggests that young, healthy people will just become uninsured. She’s right, but for the wrong reason. She suggested that young people would “choose” to go uninsured, as Gov. Romney suggested. As I wrote in her comments section:

Twentysomethings are a disproportionate piece of the uninsured, but it’s not because they don’t “want” coverage. It’s that they are more likely to be low-income, more likely not to be offered employer-based coverage, and less likely to qualify for public programs (which usually require being a parent, as well as very low-income

Much of the differential in insurance coverage in age groups is accounted for if you hold for income and job-type. Think of the young person just starting their career, or working for McDonald’s or Wal-Mart.

In other words, young people will become more uninsured under the McCain plan because they are more likely to be the entry level or lower-income workers impacted first as employers further drop coverage. Some might buy coverage with the tax credit, but many won’t be able to afford the difference, some would be denied for pre-existing conditions, and some would find that what they could buy with the tax credit (a $5,000 deductible plan, say) doesn’t make sense for a young person with no assets, who would go into bankruptcy before the coverage kicks in.

Let’s not blame the victims. The plan is still bad, just in a different way.

Health Access California promotes quality, affordable health care for all Californians.

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