Wednesday, September 17, 2008

Less Health Insurance

Bob Herbert has a good piece on McCain's health insurance policies, and you should read all of it. I have written about those policies earlier at the Nation site and that post is a good complement to what I'm going to write here.

Note that one of the biggies in McCain's proposed changes is to raise the price of health insurance. Yes, my dear reader, you read that right. The way this works in his program is as follows:

If you are lucky enough to have employer-offered health insurance your premia currently come out of pre-tax dollars, dollars on which you have not yet paid taxes. McCain wants the premia to come out of post-tax dollars, dollars on which you have already paid taxes.

Let's think of an example: Suppose that your current health insurance policy costs you 1000 dollars per month. You pay for it with 1000 dollars in pre-tax (or gross) income. If McCain had his way with you, the payment would come from your post-tax income which would be, say, 700 dollars (assuming a 30% tax rate). Clearly, you can't afford the same policy with these dollars, so you would have to chip in an extra 300 bucks from, say, your food budget.

Now, even McCain knows that voters wouldn't think this kind of a policy an improvement so what he would combine with it is a lump sum financial compensation which ideally would equal that extra 300 bucks you need. Ideally, because in practice it would only equal that sum to those who happen to be paying for the average policy right now. Others would either get a windfall gain or lose money. The latter group would include people who are paying a lot for their health insurance coverage. Some of those people are sicker than the average consumer so the policy would punish them for being sicker.

Why is McCain suggesting something like this? Well, partly he has been magically seduced by an economist who loves the world of Microeconomics 101, with its price effects and income effects. Partly he wants to make consumers really FEEL the pain of the costs of health insurance, to make all of us more alert and careful buyers of various health insurance policies. You know, we will all run around figuring out deductibles, co-payments, group vs. staff models, indemnities and so on. I'm sure all those terms are something you roll around in your mouth every morning before tooth brushing.

So we are back in that mythical world where unicorns swing off rainbows and free markets lower the health care costs for all, but only if there are no tax subsidies and nobody else worrying about the consumers except consumers themselves. Who are all busily comparing non-commensurate health insurance policies and carefully negotiating with various hospitals for the day when they might arrive somewhere unconscious and unable to shop around.

This would be hilarious if McCain hadn't himself admitted that he doesn't understand economics. Yet he would leave all consumers out there at the mercy of sellers whose business he can't understand.

What McCain's proposed changes boil down to is less health insurance and more uninsured people. Bob Herbert explains some parts of how that would work, but the major reason for it all is that McCain plans to make health insurance more expensive.