Presidential candidate Senator John McCain (R-AZ) has put forth
an ambitious health care plan.The plan proposes:
- Replacing the current income tax exclusion for
employer-sponsored health insurance with refundable tax
- Enabling individuals and families to purchase health insurance
across state lines; and
- Providing federal assistance to states to cover hard-to-insure
populations through high-risk pools under a new Guaranteed Access
Analyzing proposals based on campaign documents and media
accounts is inherently difficult, as they lack the level of detail
necessary for a rigorous econometric analysis. Nonetheless, several
organizations have done so, using a variety of assumptions and
methodologies. Most notable are The Lewin Group, Health
Systems Innovations Network, The Urban Institute-Brookings Institution
Tax Policy Center, and academic research published in
The best independent research shows that the McCain plan would
cover roughly half of the 45 million uninsured through an expansion
of private coverage and cost-savings would be achieved by reforming
perverse incentives in the health sector. However, as proposed, the
plan would require considerable increases in federal
Coverage. According to the Lewin Group, the McCain
plan would reduce the number of uninsured by 21.1 million people in
2010 if fully implemented in that year. The plan would bring about
significant shifts in sources of coverage. While 9.4 million people
would lose employer coverage, 23.9 million would enroll in
non-group coverage and 5.8 million would enroll in new
high-risk pools. Public coverage would decrease by 5.4
million as people transitioned into private insurance. Altogether,
according to Lewin, private coverage would increase by 26.5 million
Lewin applied a type of model known as a
micro-simulation. Health Systems Innovations Network (HSI)
conducted an analysis (funded by the McCain campaign) that used
this type of model as well. HSI found that the McCain
plan would reduce the uninsured by 27.5 million. In contrast to
Lewin, HSI found that enrollment in employer coverage would
actually rise, not fall, under the McCain plan.
Studies from the Tax Policy Center (TPC), as well as those
published in Health Affairs, applied a different type of
model known as an elasticity-based approach.
The results were dramatically different. The TPC estimated that the
McCain plan would reduce the number of uninsured by 1.3 million in
2009. In that year, 3.3 million people would lose employer coverage
while 4.7 million would enroll in private non-group coverage.
The TPC did not incorporate key components of the McCain plan
that would impact coverage, such as enrollment in new high-risk
pools. Nor did the TPC model account for savings
potential from such measures as the ability of insurers to sell
plans across state lines, which would make insurance more
affordable. These are significant omissions. The Congressional
Budget Office, for example, estimates that state health insurance
regulations increase premiums an average of 13 percent. A
recent academic study found that allowing for interstate commerce
in health insurance alone could reduce the uninsured by
approximately 12 million.
Thomas Buchmueller of the University of Michigan and his
colleagues published a widely cited analysis in Health
Affairs estimating that elimination of the income
tax exclusion for employer-sponsored insurance would cause 20
million Americans to lose such coverage. They also estimated that
about 21 million would take up non-group coverage, resulting in a
net increase in coverage of about 1 million people.
In order to arrive at these estimates, Buchmueller and
colleagues took elasticity projections from previous studies and
then made a "middle-range" assumption based on these earlier works.
Like the TPC, the authors did not take into account key components
of the McCain plan, including the ability to purchase insurance
across state lines that would have direct implications for
In projecting coverage estimates, the authors also left out a
significant effect of the McCain plan. As MIT economist Jonathan
Gruber explains, health insurance expenditures come entirely from
Both economic theory and a large body of economic evidence show
that there are no employer dollars: the money that employers
spend on insurance would otherwise just be spent on worker wages.
If MIT stopped offering insurance, over a several year period my
wages would rise by $10,000 to offset the lost insurance
In other words, under normal labor market conditions, workers
who lost employer coverage would see their wages rise, increasing
their financial capacity to buy health insurance. Buchmueller and
colleagues failed to account for these labor market dynamics.
Cost.According to the Lewin Group, under the
McCain plan, health care system-wide savings over the 2010-19
period would be about $432.6 billion. Over half of these savings
would result from converting the current income tax exclusion to a
tax credit--which would offer new incentives to find more
affordable coverage--and from allowing insurers to sell plans
across state lines. As Professor Mark Pauly of the University of
Pennsylvania explains, cost containment through tax reform--which
is central to McCain's plan--is more realistic than cost
containment through health care delivery reforms, such as the
greater use of health IT and preventive care, common to Obama and
The main problem is that these [common methods] are "if only"
savings, which can be achieved "if only" certain events would
occur, such as physicians' being willing to adopt health IT,
consumers being willing to accept changes in diet and exercise. ...
In contrast, cost savings from limiting the exclusion only require
the government to take action.
There is little evidence that there are known methods to cause
the "if only" behavior to occur...There is evidence that high and
growing premiums fueled by tax subsidies to the upper middle class
affect the premiums for all private insurance, and thus make it
unaffordable for lower-income people.
Lewin, HSI, and TPC all found that spending by the federal
government would, on net, have to increase significantly in order
to implement McCain's plan. Lewin projected that the McCain
proposal would increase federal spending by about $2.05 trillion
over the 2010-19 period. Most of the federal spending increase
would result from the tax credits being more generous than the
income tax exclusion they would be replacing--most people would
receive much more of a tax benefit from the tax credits than they
currently receive under the income tax exclusion. In fact, Lewin
projects an average savings of $1,411 per family under the McCain
plan. The credits would also make federal tax
breaks for health insurance less regressive and more equitable, in
sharp contrast to the current system, which strongly favors
higher-income groups. According to Lewin, the credits would
cost the government $4.15 trillion while the elimination of the
income tax exclusion would result in only $1.89 trillion in
Other estimates reached different conclusions. HSI projected a
one-year cost impact of $287 billion, while the Tax Policy Center
estimated that the McCain plan would cost $1.31 trillion over the
2009-18 period. However, as previously stated, the TPC
did not include savings measures in their modeling.
McCain's tax credit proposal is not budget neutral.
Nevertheless, several adjustments could move it closer to budget
neutrality, as the campaign states it would be. Lewin projected
that if the payroll tax exclusion (as well as the income tax
exclusion) for insurance benefits were eliminated, the net federal
cost over 2010-19 would decrease to $935 billion, but the total
reduction in the number of uninsured would also drop by 3.4
million. Another option would be to restructure the credits from a
flat to a progressive tax credit or voucher-type system, with more
assistance going to lower-income persons and less going to
upper-income persons. Like Obama, McCain has proposed
cost-saving efficiencies within Medicare and Medicaid to offset
federal expenditures while preserving promised levels of benefits
for individuals in the programs.
Expanding Coverage and Realigning
The McCain plan would reduce the number of uninsured and help
control costs, yet it would, as currently designed, require
considerable increases in federal expenditures. The coverage
expansion would be driven by enrollment in individual private plans
chosen by the consumer that could be taken from job to job.
Cost-savings measures would result from an effective realignment of
financial incentives. Primarily because the new tax credit would be
much larger than the existing tax break from the income tax
exclusion that it would be replacing, the plan would amount to a
significant tax reduction, particularly for the middle class. Costs
of the McCain plan could be controlled by replacing or capping the
federal payroll tax exclusion for health insurance or by changing
the structure of the tax credits, moving it toward budget
Greg D'Angelo is Policy
Analyst in the Center for Health Policy Studies and Paul L. Winfree is a Policy
Analyst in the Center for Data Analysis at The Heritage Foundation.
Jeet Guram, a Heritage health policy intern from the University of
South Carolina, contributed to the research in this paper.
McCain-Palin 2008, "The Truth about the McCain-Palin Health Care
Plan," at http://www.johnmccain.com/Informing/Issues/19ba2f1c
-c03f-4ac2-8cd5-5cf2edb527cf.htm (October 23, 2008); for
an analytical discussion of the McCain health plan, see Robert E.
Moffit, Ph.D., and Nina Owcharenko, "The McCain Health Plan: More
Power to Families," Heritage Foundation Backgrounder No.
2198, October 15, 2008, at www.heritage.org/research/healthcare/bg2198.cfm.
an analysis of the non-group market, see Mark V. Pauly and Bradley
Herring, "Risk Pooling and Regulation: Policy and Reality in
Today's Individual Health Insurance Market," Health Affairs,
Vol. 26, No. 3 (2007), pp. 770-779, at http://content.healthaffairs.org/cgi/reprint/26/3/770
(October 23, 2008); Mark V. Pauly and Robert D. Lieberthal, "How
Risky Is Individual Health Insurance?" Health Affairs, Vol.
27, No. 3 (2008), w242-w249, at http://content.healthaffairs.org/cgi/reprint/27/3/w242
(October 23, 2008).
Also, since the McCain plan would permit states to combine Medicaid
funds with the new tax credit in order to purchase private
insurance for program enrollees, 11.2 million people would drop
traditional Medicaid/SCHIP coverage and 12.0 million would enroll
in private coverage, bringing the net effect of the plan to a
decrease in the number of uninsured of 21.1 million people.
micro-simulation is based on a utility-maximizing model of how
individuals choose insurance plans, allowing for variation on a
range of variables, including price and income. This type of
modeling combines individual characteristics and behavior to
estimate how each person, or subgroup, within a population would
react to a policy change. However, micro-simulations face the
possibility of selection bias, as they make a series of assumptions
based on a small sub-population and then apply them to a larger
group. Lewin used their Health Benefit Simulation Model (HBSM), a
micro-simulation of the U.S. health care system developed by Lewin
in 1989 and continuously applied and refined ever since. Lewin's
work has been deemed "the gold standard of independent health-care
analysis." See "A Liberal Supermajority," The Wall Street
Journal, October 17, 2008, at http://online.wsj.com/article/SB122420205889842989.html
(October 23, 2008). For a detailed description of the HBSM, see the
Lewin Group, "Summary Description of the Health Benefits Simulation
Model (HBSM)," January 29, 2007, at /static/reportimages/C0F8E652DE7821F78863A19E775D77DB.pdf
(October 24, 2008).
An elasticity model applies the same measure of responsiveness (how
consumers respond to changes in variables, such as insurance cost)
to an entire population, but different groups within that
population may have different levels of responsiveness to changes
in the variable(s) of interest. A micro-simulation allows for
variation among different individuals and groups. Like a
micro-simulation, an elasticity-based approach also faces the
possibility of selection bias, as the population to which the
elasticity is applied may vary systematically from the population
within which it is established. For example, there may be
significant differences between consumers in the non-group market
today and individuals who would lose group coverage and enter this
market under a policy change.
E-mail communication with Surachai Khitatrakun, an author of the
Tax Policy Center report, on October 15, 2008.
Stephen T. Parente et al., "Consumer Response to a National
Marketplace for Individual Insurance," Carlson School of
Management, University of Minnesota, June 28, 2008, at /static/reportimages/F9690BFFF0D90D97E780B092DA07E3DD.pdf
(October 23, 2008). Additionally, as John Goodman explains (in
response to the claim that the McCain plan would have no real
effect on the uninsured): "The authors are claiming that 40 million
people will turn down the opportunity to have at least $5,000 worth
of private insurance at no cost to themselves! Even if a $5,000
plan is less generous that what is normal in the group market, the
claim that 40 million people would choose to be uninsured instead
is prima facie not plausible." John Goodman, "Response to a
Critique of the McCain Health Care Plan," John Goodman's Health
Policy Blog, September 24, 2008, at http://www.john-goodman-blog.com/response
According to Lewin, the tax credits would cost $4.2 trillion, the
Medicaid/SCHIP opt-out would cost $151 billion, the Guaranteed
Access Plans would cost $235 billion, and there would be a total of
$2.5 trillion in offsets.
The conclusion that the McCain health care tax credits would be,
overall, more generous than the income tax exclusion they would be
replacing is a key point of agreement among Lewin, TPC, and HSI.
TPC estimates an average tax savings of $1,241, and HSI estimates
that less than 5 percent of Americans not in public insurance
programs would possibly face a tax increase. Also, see Anna Wilde
Matthews, "Health-Care Fixes: Plan vs. Plan," The Wall Street
Journal, October 23, 2008, at http://online.wsj.com/article/SB122470511751259445.html
(October 24, 2008).
Joint Committee on Taxation, Tax
Expenditures for Health Care, July 30, 2008, p. 5, at /static/reportimages/AB758D1AFD79AF63B4122F21505DF3E8.pdf
(October 23, 2008). See also Thomas M. Selden and Bradley M. Gray,
"Tax Subsidies for Employment-Related Health Insurance: Estimates
for 2006," Health Affairs, Vol. 25, No. 6 (November/December
2006), pp. 1568-1579, at http://conte
(October 23, 2008); John Shiels and Randall Haught, "The Cost of
Tax-Exempt Health Benefits in 2004," Health Affairs,
February 25, 2004, pp. W4-106-W4-112, at http://content.health
(October 13, 2008).
HSI estimated the one-year cost of the Guaranteed Access Plans to
be $19 billion, while TPC estimates the 10-year cost to be on the
order of$1 trillion.
As McCain's senior policy advisor Douglas Holtz-Eakin explains,
"It's about giving them [entitlement enrollees] the benefit package
that has been promised to them by law at lower cost." Laura
Meckler, "McCain Plans Federal Health Cuts," The Wall Street
Journal, October 6, 2008, at http://online.wsj.com/article/SB122315
505846605217.html?mod=relevancy (October 23, 2008).