McCain's Proposal [updated]

Some things McCain has said and what they mean:

"Let's give families $5000 in tax credits so they can go across state lines and get the insurance policy that suits them best."

One part of McCain's plan is very confusing, and I am not entirely certain I understand it. Remember when I asked you to imagine that you were a HR manager and suggested that it might make sense for you to just pay the insurance premiums and pay your employees less? For most of us who are insured through work, that is what is happening to some degree. I get a pay check and it indicates that just under $200 has been deducted from it for my family's health insurance. But my employer pays 80% of my premium, which means that between us, over $900 a month is being paid in insurance premiums for me and my kids. Right now, that $200 comes out of my pay check before taxes (i.e. I don't pay income taxes on it), and the other $700+ doesn't even show up on the stub. McCain wants it all to be subject to income tax.

Then he wants to give tax credits of $2500 to individuals and $5000 to families. [Note: Sheri points out in the comments below that tax credits only help people who make enough money to pay taxes. Working people who don't pay any federal income tax, would receive no tax credit.]

For many people mean that the tax credit will just off-set the new tax burden. Some will come out ahead. Some will come out behind. (See factcheck.org for more explanation on this.)

What he wants it to do though is to encourage families to "go across state lines to buy the policy that suits them."

What does that "across state lines" part mean? Well, as Paul Krugman pointed out, it means doing to health care what has already been done to credit cards. Right now your state might have laws saying that health insurance companies have to pay for at least 3 days of hospital care after the birth of a baby. Your state might have restrictions on how risk can affect your premiums. It may require that the insurers who cover ED meds also cover birth control meds. Some other state however, may not.

Right now, if you buy insurance, the policy you buy has to conform to the laws of your state. Going across state lines means that you can buy a cheaper policy from a company in a state with fewer regulations.

And I see why some people would find that attractive, but think about credit cards. At one time credit card companies had to follow the laws in the state of the card holder. Different states had different guidelines about how high interest rates could go and under what conditions. Federal guidelines allowed us to "go across state lines" and get whatever cards we wanted. This resulted more people getting credit, which is arguably good. It also resulted in cards which offered very low "teaser" rates, followed by significantly higher rates and finally extremely high punitive rates. Similar things have happened with mortgages. Rules were relaxed to allow greater freedom of choice, which resulted in many people getting into situations in which they could not pay their debts.

When that happens on the small scale it is one thing, but when very many people start being unable to pay their debts, it affects all of us.

The same thing with health insurance. There is a real danger that people will not read all the fine print in the insurance policies they are buying (have you ever read an entire health insurance policy?!). Many people will purchase plans that are low cost and low coverage -- lower than they expected. A percentage of these people will end up with bills they can't pay, and, as I explained above, the costs of those bills will get passed on to others.

But wait...it gets worse.

McCain wants for you to be able to opt out of your employer's plan altogether and have your $2500 tax credit put into a health care savings account for you to use for your own health care expenses. Now this could be a great thing for the young and healthy, as long as they stay young and healthy. If things go well for them, they may save up a good deal of money. If things go poorly however, they will again have bills they cannot pay.

And because they opted out of the insurance system, left the shared risk pool, the rest of us will pay more for our premiums.

I know, this all got very complicated, didn't it? Let me give you what I think is the bottom line:

Insurance is supposed to be about shared risk. Higher rates of participation means lower premiums and fewer unpaid bills to be passed on. Whenever people opt out the opposite happens. To different degrees, Hillary Clinton and Barack Obama want to get more people participating in insurance. They want people both paying into the system and benefiting from it. McCain wants to increase freedom of individual choice and responsibility. This is the opposite of insurance, and, I believe, has the potential to make our health care situation much much worse.

It is also interesting to note that in the system that McCain is pushing, a 72 year old man with a history of melanoma would probably find any insurance to be prohibitive.

Update: here is a link to an article explaining how people with risks like McCain would get insurance under McCain's plan. This particular article, looks at Alaska, for which the prospects are extremely bad. (h/t Yglesias)