Senator John McCain (R-AZ), the Republican presidential nominee,
has proposed an ambitious health care reform agenda. His plan
focuses on four key objectives: making health insurance innovative,
portable, and affordable; ensuring care for high-risk patients;
lowering health care costs; and confronting long-term care
challenges. These goals are meaningful, and
McCain's policy measures would advance greater personal choice and
control in the health care system.
The McCain health plan tackles the fundamental problem in the
current system: the tax treatment of health insurance. Equalizing
the tax treatment and financing of health care is the first step in
realigning the incentives in the system to provide consumers with
better quality care at lower cost. His plan also works to expand
coverage options for Americans by promoting competition in the
insurance market and partnering with states to develop solutions
for those who are hard to insure.
Finally, the McCain plan focuses on improving value and lowering
costs through delivery reforms. However, these delivery reforms
could prove counterproductive if they are implemented in ways
that undermine personal choice or lead to more government
control of personal health care decisions.
Key Reforms in the McCain Plan
The McCain health plan proposes three fundamental reforms
that would change the financing of health care and reform the
health insurance market to give families more control of personal
health care decisions:
- Equal tax treatment for health coverage. The Senator
would replace the special tax breaks for employer-based health
insurance with a universal system of health care tax credits
for the purchase of health insurance. These health care tax
credits of $5,000 for a family and $2,500 for an individual would
be indexed annually for inflation and would be available to
Americans regardless of income, employment, or tax liability.
Even prominent critics concede that such a tax change is a
principled and far-reaching proposal. This change alone would
lay the groundwork for unprecedented consumer choice and
competition in the health care sector.
- Health insurance competition on a national scale.
Currently, only federal workers and retirees in the Federal
Employees Health Benefits Program (FEHBP) benefit from competition
among private health insurance companies on a national scale. In
sharp contrast with almost every other sector of the economy,
competition across state lines in health insurance is virtually
nonexistent. The McCain health plan would change this by allowing
individuals and families to buy health plans domiciled and
regulated in other states. This would both expand personal options
for affordable coverage and force health insurance companies to
compete directly for consumers' dollars on an unprecedented
- Federal assistance to the states to cover vulnerable
populations. The Senator envisions a large role for state
innovation and experimentation in health care financing and
delivery, but he would provide safety-net funding to ensure
coverage of the most vulnerable populations: the
hard-to-insure and the uninsurable. McCain's Guaranteed Access Plan
would provide federal assistance to the states to secure access to
health insurance coverage through state high-risk pools or similar
arrangements. His plan would also encourage expanding coverage
options for Medicaid enrollees and veterans.
Beyond these major reforms of health care financing and
insurance, Senator McCain would also promote specific initiatives
to increase the value and reduce the cost of services that
individuals and families receive for their health care dollars.
These initiatives include promoting the use of health
information technology (IT), care coordination and
disease management for chronic diseases, transparency of price
and quality information, broad application of payment reforms for
doctors and hospitals in government health programs, greater use of
generic drugs, and use of alternative and less expensive medical
facilities for routine care, such as walk-in clinics. He also
supports enacting medical liability reform to reduce frivolous
lawsuits and defensive medicine in the medical profession.
However, it is unclear exactly how these delivery reforms would
be implemented and where he would draw the line between federal
action and private initiative. This is a legitimate concern.
These policies need to be clarified to ensure that they do not
expand the role of government or discourage innovation in the
private sector. Focusing on the primary goals of financing and
insurance reform would go a long way toward improving value
without additional government intervention.
Creating a Universal Tax Credit for
I propose to spread the tax subsidy
for health insurance more equitably. I would change it to a
refundable credit amounting to $5000 for all families and $2500 for
individuals purchasing health insurance-regardless of the source of
that coverage, regardless of how one purchases it, and regardless
of one's income. The tax credit would ensure that everyone has
access to the same level of financial support through the tax code
to obtain basic health insurance.
Under the McCain proposal, every family would receive a
$5,000 tax credit and every individual would receive $2,500 tax
credit to offset the costs of health insurance. This would largely
replace the current tax break for health insurance that is
obtainable only through employer-based coverage. It would
not change the employer's ability to deduct health insurance as
a cost of business. Any remaining balance of the credit could
be deposited into an "expanded" health savings account (HSA).
Roughly 80 percent of uninsured Americans are in working
families. To maximize the take-up of coverage under the McCain
plan, the refundable health care tax credit could be accompanied by
a system of automatic enrollment in health insurance, either at the
workplace or through a statewide health insurance exchange. States
could also be allowed to establish such a mechanism, provided an
individual is allowed reject, in writing, both enrollment in
health insurance coverage and the health care tax credit.
Senator McCain is the first presidential nominee of either major
party to prescribe a universal health care tax credit that would
provide access to private health insurance for American families.
His proposal builds on the broad intellectual consensus among
liberal and conservative economists and health policy
analysts, who have long argued that the federal tax treatment of
health insurance for employer-based coverage is both inefficient
Tax Exclusion vs. Refundable Tax Credit. Not
surprisingly, the existing federal tax treatment of health
insurance and proposals to reform it are sources of much popular
misunderstanding-confusing employer and employee tax
breaks-even among journalists who follow health policy.
The existing tax exclusion is a special tax break for
workers with employer-based health insurance. This means that the
value of the health care benefits received through employment is
excluded from taxation when calculating an individual's
liability forfederal income taxes and federal payroll taxes.
The tax exclusion for employment-based health insurance is
unlimited, in sharp contrast to other forms of compensation, such
as retirement benefits, tuition reimbursements, and child care.
This means that the larger the employer's health benefit package,
the more tax-free income employees receive. It also favors
higher-income workers over lower-income workers. Those who earn
more than $100,000 receive a tax benefit between $4,000 and $5,000,
while those who earn below $50,000 receive between $600 and $3,000
in tax benefits. Moreover, individuals without
employer-based health insurance receive no comparable tax break and
must use after-tax dollars to buy health insurance.
Replacing the exclusion with a universal tax credit would be
more equitable, both for those at lower income levels and for those
without employer-based coverage, and would make federal financing
of health care more transparent.
Expanding HSAs. Senator McCain would expand health
savings accounts, but his proposal is unclear as to the exact
changes that he is recommending. One sensible option would be
to end the current requirement that the HSA be linked to a
government-specified high-deductible insurance plan-a change
recommended by several health policy analysts.
Today, only individuals who have a federally qualified
high-deductible health plan can benefit from the tax-preferred
savings of an HSA. Individuals can contribute tax-free to an
HSA. Those funds carry over from year to year without tax penalty
and can be withdrawn without tax penalty to pay for qualified
Improving HSAs would reward individuals for choosing a
low-premium plan by allowing them to deposit the remaining amount
of their credit into a tax-preferred account to pay either for
health care expenditures that are not met through the premium or
for future costs, such as during retirement.
Fixing Federal Tax Policy on Health Insurance. The
Senator's proposal to change the tax treatment of health
insurance is the most critical and powerful reform in his health
As noted, liberal and conservative health policy analysts agree
that existing federal policy is deeply flawed. The current federal
- Unfair because it penalizes Americans who do not or
cannot obtain health insurance through their workplaces;
- Regressive because it disproportionately benefits
upper-income individuals and families while providing little or no
assistance to lower-income families;
- Economically inefficient because it undermines consumer
choice and competition in the health insurance markets and fuels
higher health care costs; and
- An obstacle to labor mobilitybecause it undercuts
portability of coverage in a highly mobile economy, thus
undermining both continuity of coverage and continuity of
The McCain health care tax proposal would address these problems
- Introducing universal fairness into federal tax
policy by giving individuals, regardless of work status,
the same tax break for purchasing health insurance and by ensuring
that lower-income individuals receive the full value of the credit
by making it "refundable";
- Changing the dynamics in the health care system to
control health care costs by encouraging individuals to secure
greater value for their health care dollars; and
- Linking health care tax breaks directly to the
individual rather than to the place of work, which would go a
long way toward facilitating worker mobility and portability of
Tax equity and transparency. While the current tax
treatment of health insurance provides unlimited tax
assistance to workers who purchase coverage through their
employers, it does nothing for workers and their families who do
not or cannot obtain health insurance through their employment. No
comparable tax relief is offered to workers outside the
workplace. Moreover, the tax exclusion is
regressive, benefiting individuals at higher income levels
substantially more than lower-income workers. Under the
McCain plan, individuals, regardless of work status, would
receive the same tax break for purchasing health insurance.
Some critics claim that this transition from a tax exclusion to
a tax credit-financing the credit by making health benefits taxable
compensation like wages-would amount to a tax increase. This is incorrect. In fact, the
proposed taxation of health benefits is simply a mechanism for
transitioning from one tax break (the exclusion) to another (the
credit). Under almost any scenario, the credit is a far more
equitable and transparent tax policy.
Tax experts, regardless of philosophical persuasion, point
out that the vast majority of Americans would be net winners with
such a transition. Economist Len Burman, a tax policy
specialist at the Urban Institute and Brookings Institution's Tax
Policy Center, estimates that "[f]amilies at all income levels
would pay lower taxes, at least on average.… On average, is
about a $1,200 tax cut in 2009."
A recent analysis by Republican congressional staff looked at
the impact of transitioning from the exclusion to a credit on
middle-class families. Assuming that the average annual value of
employer-based family group coverage is roughly $12,000 and that
those benefits were subject to income tax liability, a middle-class
family in the 25 percent tax bracket would have a tax liability of
$3,000 on those benefits. However, that family would be
automatically eligible for a $5,000 health care tax credit, thus
securing a $2,000 tax savings. A family in the 28 percent tax
bracket would have a tax liability on the same health benefits
package of $3,360, but the $5,000 credit would yield a tax
savings of $1,640.
Furthermore, the credit would help lower-income families. The
analysis also found that workers in the lowest tax bracket
would receive five times the tax benefits from a $5,000 family
health care tax credit than workers in the highest tax bracket
would receive. Even so, higher-income workers would still receive a
slightly better tax benefit than they receive under the
current system on the value (an estimated $12,000 annually) of the
average group health insurance coverage. The McCain tax
credit is also designed to be refundable, meaning that individuals
with little or no tax liability would still receive the full
amount of the credit.
Transparency is also an important element of reform. Economists
know that wages and benefits together comprise a worker's total
compensation and that the employer's provision of health benefits
offsets wages and other compensation. One measure to make this
transparent for employees, protecting workers from a loss of
compensation in any potential switch from an employment to a
non-employment health plan, is for employers to disclose to
their employees the value of the employees' health coverage and how
that provision reduces their wages and other compensation. In this
fashion, employees could secure appropriate wage increases or
other compensation benefits that would accompany any transition
from employer-based coverage.
Of course, replacing the tax exclusion with a fixed and fair
universal tax credit would introduce real transparency in the
financing of health care. All Americans would receive the same tax
break for buying health insurance. The tax benefits would no longer
be hidden, and individuals would no longer be excluded.
Improving Value.Urban Institute scholar C. Eugene
Steuerle argues that the existing tax exclusion encourages the
purchase of more expensive health care policies, which increases
the overall costs of health insurance. This makes coverage more
expensive, pricing some individuals and families out of coverage
and contributing to uninsurance.
Today, workers have few incentives to consider health care
costs, especially when they are under the erroneous but widely held
impression that their employer simply pays for their coverage and
that this coverage is somehow free to them. The
systemic consequences of this popular fiction are expensive.
The perverse incentives created by this opaque economic arrangement
are aggravated by the existing tax policy, which rewards those with
a more generous health care plan by providing them with more
Overall, current tax law drives up health care costs. As the
Congressional Budget Office (CBO) reports:
The current tax exclusion for the costs of employment-based
health insurance tends to cause more health spending to occur
through that type of insurance-and more spending on health in
general-than would otherwise be the case.
Replacing the open-ended exclusion with a fairer, fixed tax
break would make individuals more inclined to purchase insurance
that offers them the best value for the dollars spent, whether
through their employers or independently. This would introduce
a level of market efficiency that is largely absent today.
In fact, coverage in the non-group market, where individuals
purchase coverage without any comparable tax breaks, is less
expensive than employer-based coverage. In 2007, the average cost
of a family plan under employer-provided insurance was $12,106, while the average family policy in
the non-group market cost $5,799 and offered a broad range of
benefits. Today's tax policy effectively
subsidizes increases in annual health care costs that
routinely exceed the rates of inflation and wage growth.
The McCain proposal would also have the added benefit of
encouraging employers to compensate workers by increasing their
wages or other forms of compensation rather than by funneling more
money to them as health benefits. Replacing the
exclusion with a credit and linking it to the consumer price
index would help to moderate rising health care spending rather
than acting as a catalyst for even higher health care costs.
Today's increasing health care costs are not inevitable. If
consumers searched for value for their health care
dollars-something they generally do not do today-they would reverse
existing incentives that are driving up costs and would help
to keep overall health care spending at a more rational level. As
the Lewin Group, a national nonpartisan econometric health care
By making employer health benefits taxable, consumers will have
a new incentive to seek out lower-cost coverage. This would
stimulate increased price competition among insurers resulting
in increased enrollment in more efficient and lower
Breaking Job Lock.America has a highly mobile economy.
For example, in 2007, there were 54.6 million job changes: 31.1
million workers quit their positions, mostly to change jobs; 19.7
million were laid off or fired; and 3.9 million left because of
disability, death, or retirement. According to the
Department of Labor, the average person born between 1957 and
1964 has already had 10.8 jobs.
The McCain plan would accommodate the mobility of a highly
advanced economy, increasing productivity and particularly
enhancing the ability of small businesses to grow and expand.
Individuals would have a level playing field- undistorted by the
tax code-to choose whether to select a health policy from their
workplaces or from other sources.
Today, leaving a job or changing jobs means leaving behind
the health insurance provided at the place of work. Individuals who
wish to take a better job, change careers, or leave the workforce
to raise a family or to retire early take substantial risks. They
may find themselves going without coverage, purchasing
non-group insurance with substantial tax penalties, or giving up a
well-developed relationship with a physician or medical
specialist. This health insurance obstacle to labor mobility is
sometimes called "job lock."
Under the McCain plan, which links tax breaks directly to
individuals instead of to their place of work, individuals would no
longer feel obligated to stay with their employers simply because
they need to keep their employer-based health insurance. If the
worker lost a job, changed jobs, or retired early, he or she could
buy an insurance policy and offset its cost with the McCain health
care tax credit.
Delinking the current tax structure from employer-based health
insurance would not necessarily end employer-based insurance.
Under the McCain plan, employers would still be able to deduct the
cost of offering health insurance, and that employer-based health
insurance would remain an attractive option for workers for a
variety of reasons. The Lewin Group estimates that 6.4
million people would gain coverage through their employers under
the McCain plan.
Political Obstacles to Reform
Health care experts are in broad agreement on the inequities in
the current tax treatment of health insurance. Yet that
intellectual consensus has not translated into a similarly broad
political consensus on Capitol Hill.
Health policy analysts of different philosophical persuasions
who have long championed similar changes in the federal tax code
recognize the political difficulties of such a reform. Jason
Furman, a health policy specialist at the Brookings Institution,
has written extensively on the shortcomings of the federal tax
treatment of health insurance and the trade-offs inherent under
various reform proposals. He concludes that "policymakers would
have to balance the benefits of a potentially better system
against the risks of disrupting what works now." However,
what "works now" does not work for millions of uninsured
Changing federal tax policy governing health insurance is real
change, unlike the conventional health reform proposals that would
largely preserve, expand, and further regulate the status quo.
Politically, such fundamental change is quite different from
merely accepting existing government and third-party payment
arrangements as a given and filling in the gaps with more
government funding and government programs.
Such serious and profound change would transfer control of
health care dollars from third-party payers to individuals and
families. In other words, it would introduce personal choice and
genuine competition into the huge health care sector, where
free-market forces are virtually absent, routinely disparaged,
generally feared, and strongly resisted.
Compelling Health Insurance Companies
I would also allow individuals to
choose to purchase health insurance across state lines, when
they can find more affordable and attractive products elsewhere
that they prefer. Opening up the health insurance market to more
vigorous nationwide competition, as we have done over the last
decade in banking, would provide more choices of innovative
products less burdened by the worst excesses of state-based
Senator McCain's plan would allow
individuals to buy a health plan for themselves and their
families outside of the boundaries of their state's
regulation. Essentially, this would allow individuals to
decide which state-regulated market best meets their personal
needs. This would make health insurance like virtually every
other good and service in the national economy and introduce a
level of consumer-driven competition that does not exist
Analysis.Health insurance markets, with rare and
notable exceptions, are not driven by the free-market
forces of consumer choice and competition. Unlike other insurance
markets and markets for almost every other commodity or service in
the national economy, most individuals cannot buy health insurance
outside of their state-regulated market. This limits their ability
to shop for health coverage that best meets their specific needs
because such plans may not be available in their states.
Health costs differ dramatically from state to state because of
a variety of factors, including demographics, prevailing
wages, and patterns of medical practice. State laws, rules, and
regulations also affect the cost and availability of coverage in
each state. In some states, legislators and regulators impose
onerous and expensive requirements on health plans and
benefits, such as mandates for specific health benefits and
guaranteed issue with community rating. Insurance
overregulation and the near absence of competition can severely
limit individuals' coverage options and result in higher premiums,
pricing many people out of the health insurance market.
Senator McCain's proposal would not, as some critics erroneously
suggest, totally deregulate the market. Instead, it would
allow individuals to choose among the various state regulatory
structures when they buy their coverage, dramatically
expanding the number of insurance options available to them.
This would foster interstate competition while preserving each
state's regulatory authority.
In many respects, the McCain policy is similar to legislation
sponsored by Representative John Shadegg (R-AZ) and Senator Jim
DeMint (R-SC). Their proposal would create new
federal rules, but states would remain primarily responsible for
regulating health insurance.
Besides expanding the health insurance options for millions of
Americans, such a reform would broaden and intensify competition
among health plans and medical providers. If a state's existing
array of health insurance plans proved less competitive in
providing value for consumers' dollars, state legislators and
regulators would have an incentive to conduct a serious review of
their health insurance regulations-an incentive largely absent from
the current system. The end result would strike a
balance between states' regulation of insurance and
preservation of flexibility for insurers to innovate, giving
consumers better choices.
Such a competitive policy would also reduce the number of
uninsured. Researchers at the University of Minnesota recently
simulated how such a market change would affect the take-up rates
of persons buying health insurance. In each scenario, the
market change reduced the number of uninsured. In the best
scenario, the number of uninsured was reduced by 17 million. The researchers concluded:
A national market would lead to substantial additional health
care access which should lead to health improvements among the
vulnerable populations who currently find health insurance
unaffordable. In addition, development of a national market
requires no additional federal resources other than support for
legislation to permit the development of such a change to the
U.S. health insurance market.
Opening the health insurance markets to interstate
competition combined with expanding the tax treatment of health
insurance would reduce the total number of uninsured in America
even more dramatically.
Direct Help for the Hard Cases
I wouldimprove the non-employer, individual insurance
market by building on existing Health Insurance Portability and
Accountability Act (HIPAA) protections for people with pre-existing
conditions and by expanding support for guaranteed access plan
(GAP) coverage in the states that would insure them if they are
denied private coverage or only offered coverage at very high
Under McCain's Guaranteed Access Plan (GAP), the federal
government would work with governors and provide federal assistance
to develop models for states to ensure that individuals who
experience difficulty obtaining coverage would have access to
health insurance. One model envisioned under this approach would be
a type of high-risk pool, in which a state or states would provide
insurance with reasonable premiums to uninsurable individuals.
In the recent analysis by the Lewin Group, the GAP provisions would
cost an estimated $235.4 billion over 10 years.
The McCain plan also envisions expanding private coverage
options available to Medicaid enrollees and veterans, who
frequently have difficulty accessing the care that they need.
Analysis.The McCain proposal has the virtue of
proportionality. It targets the specific problem of the
hard-to-insure and the uninsurable without severely altering or
undermining the health coverage options for everyone else.
Estimates vary, but the number of Americans who are considered
uninsurable is in fact quite small.
Conscientious state legislators often grapple with how to deal
with these hard cases. These vulnerable populations consist mostly
of poor or sick individuals who do not or cannot obtain health
insurance because they are excluded from the market by underwriting
or pre-existing conditions or because they are ineligible for
Senator McCain envisions a major and continuing role for
state governments in expanding health care access and innovating in
the delivery of health care services, particularly to vulnerable
populations. Any federal assistance to the states should give
them a high degree of flexibility in designing and implementing a
guaranteed access program. While many states use high-risk pools to
address the needs of the hard-to-insure, the interests of the
uninsured would be best served by allowing states to experiment
with various models. This would give states an opportunity to learn
from each other in pursuing coverage strategies.
Any attempt to deal with the hard-to-insure should be done in a
cost-effective fashion. States can provide coverage for difficult
cases in a variety of ways that also can control health care costs
and limit taxpayer exposure. For example, states could
mainstream hard-to-insure persons into the statewide health
insurance markets at standard rates through a statewide
risk-transfer pool, financed entirely by the insurers themselves.
Their costs could be absorbed and redistributed to affected
insurers through this pool, operating as a "back end"
As developed by Heritage Foundation analysts, the state
risk-transfer pool would "simply be a mechanism for evening out
disparities among private plans by shifting a portion of the
excess costs incurred by plans with above-average shares of
expensive claims or patients to plans with below-average shares." In this version of the statewide
risk-transfer pool, the premium financing of risks ceded to the
pool by the insurers would be private, with little or no
financial exposure for the taxpayer.
Finally, reforming public health programs, as suggested by
Senator McCain, to expand options for Medicaid enrollees and
veterans is important. Opening access to private health insurance
and integrating consumer-directed models would give these
vulnerable populations more control of their personal health care
Federalism. Identifying the key role that states play in
health care reform is an important component of the McCain
plan. The Senator recognizes that one-size-fits-all federal
solutions cannot meet the unique needs of all Americans. He also
recognizes that, although health reform requires a strong
national dimension, different states will take different
Welfare reform provides a useful model. Experimentation by
states provided federal policymakers with a better
understanding of the federal obstacles to reform and the value of
tailoring solutions to unique state conditions to meet broad
federal goals. Given that no perfect federal solution exists,
federalism offers a promising alternative. Heritage Foundation
and Brookings Institution analysts have outlined a way to engage
the states and advance health reform in a divided political
A Conventional Policy for Prescription
Senator McCain would open the U.S. market for safe drug
importation and accelerate the use of generic drugs to lower the
prices of prescription drugs.
Analysis. The Senator's drug importation proposal
raises the same objections as similar proposals recently debated in
America leads the world in drug development, and Americans
benefit by having access to these life-saving drugs. However,
Americans also shoulder a significant portion of the costs
associated with developing these new drugs. Many foreign
governments impose price controls on drugs, shifting
development costs onto American consumers.
The basic idea behind drug importation is to allow American
consumers to import artificially low-cost drugs from
price-controlled countries. While this sounds attractive, this
concept has several inherent flaws.
First, it signals U.S. support for price-controlled
markets, which could deter development of new drugs.
Second, drug importation depends on a safe
distribution system. The Secretaries of Health and Human
Services under Presidents Bill Clinton and George W. Bush could not
guarantee the safety of imported drugs.
Third, even if the federal government could
guarantee safety and was willing to allocate significant
resources to address safety concerns, there would be few cost
savings. The CBO estimates that drug importation would save less
than 1 percent in overall U.S. drug spending.
In short, this policy may be politically appealing, but its
likely results are less than clear.
Furthermore, the debate on prescription drugs has changed in
recent years. Drug importation was more pressing when a substantial
number of senior citizens-roughly one out of four-did not have
access to prescription drug coverage. This changed dramatically
after enactment of the Medicare Modernization Act of 2003,
which created a universal entitlement to prescription drugs in the
Medicare program and provided a generous subsidy to low-income
seniors. This makes drug coverage available to and far more
affordable for seniors.
Since enactment of the Medicare drug benefit, projected average
drug premiums have generally declined, although they are expected
to increase in 2009. For 2009, the average monthly premium for the
basic Medicare drug benefit is projected to cost $28 per month, far
lower than the original projections of $37 per month.
Additionally, Medicare beneficiaries in most states will be
able to secure drug plans with premiums below $20 per month.
Beyond passage of the Medicare drug bill, there are stunning
discounts available in retail markets and private
initiatives to help individuals obtain prescription drugs.
Details of Senator McCain's proposal to speed up access to
generic drugs are unclear. Use of generics has already increased
significantly: 68 percent of all prescriptions are filled with
The key issue in this case is the intersection of accelerated
access to generic drugs, existing patent law, and drug innovation.
If policy initiatives are not properly aligned, they can be
counterproductive. Washington policymakers need to tread lightly to
preserve a balance between expanding access to generic drugs and
protecting intellectual property rights, which are vital to drug
Improving Health Care Delivery
Senator McCain emphasizes the need to improve health care
delivery with the goal of securing better value for health care
dollars at lower cost. The McCain initiatives in this area
- Improving chronic disease care. Senator McCain would
emphasize prevention, early intervention, healthy habits, and new
treatment models. He favors a new public infrastructure and
expanded use of information technology in health care to provide
better quality at lower cost for chronic conditions.
- Supporting care coordination. The proposal would entail
a single payment for high-quality disease care as a way to make
doctors and other medical professionals more accountable and
responsive to patients for results.
- Increasing transparency. McCain would make information
on medical outcomes, quality of care, and costs and prices more
available to the public. In addition, his plan would facilitate
national standards for measuring treatments and outcomes.
- Expanding access to alternative care facilities. The
McCain plan envisions the federal government expanding access
by promoting retail outlet clinics and walk-in clinics.
- Using health information technology. Senator McCain
envisions rapid deployment of a health IT system based on federal
- Pursuing payment reforms. McCain would reform the
payment system used in Medicare and Medicaid and would compensate
providers for diagnosis, prevention, and care coordination.
- Enacting medical liability reform. McCain would have
Congress enact medical liability reform that eliminates frivolous
Analysis. The McCain plan would promote disease
management, care coordination, health information technology,
transparency, liability reform, and pay reforms in government
health programs for hospitals, doctors, and other medical
professionals. The entire thrust of these initiatives is to secure
higher value and better results for fewer dollars. These goals are
undeniably beneficial to patients and inherently laudable.
However, these increasingly popular reforms raise two
First, McCain is often unclear in explaining exactly how
these initiatives would be developed and implemented and what roles
government and the private sector would play. In other words, they
could be pursued and advanced in a way that is compatible with
robust and dynamic free-market reforms in financing and the health
insurance markets-which is clearly the objective of Senator
McCain's financial and coverage initiatives-or they could easily
become avenues for imposing increasingly prescriptive federal
regulation, duplicating existing state regulation, and further
undermining personal freedom in health care decisions.
Prominent economists have pointed out that realigning the
incentives of insurers, doctors, hospitals, and patients
through a restructured market is the best way to deliver value to
Second, how these health care delivery initiatives
would realize their attributed savings is unclear, largely because
of the uncertainty surrounding their implementation and
because of external factors that would determine their success
as cost-saving innovations. As Professor Mark Pauly, a health care
economist at the University of Pennsylvania, has observed:
The main problem is that these 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, the timely receipt
of preventive care, or full trust in primary care doctors who are
custodians of a medical home….
There is little evidence that there are known methods to cause
the "if only" behavior to occur, and to occur quickly on a large
enough scale to matter. Few of the innovations relate directly to
controlling the new technology that is driving spending growth, so
they cannot promise the kind of large and permanent reduction
in spending growth (not levels) that is needed for true cost
Finally, involving government in the implementation of
delivery reforms runs the serious risk of turning the
initiatives into government tools to lower costs by limiting access
to care and services, severely interfering with the care that
Disease Management and Care Coordination.The need to
improve quality and reduce costs for treating chronic conditions is
not in dispute. The question is how a McCain Administration would
achieve these goals.
How the payment of medical professionals would function under
care coordination is a key area that needs to be clarified. It is
reasonable to assume that these efforts on care coordination are
intended to be broader than just government-run health programs.
This is a matter of concern if it impedes the flexibility of
innovative private health plans.
In a health insurance market that is increasingly driven by
consumers' decisions, as envisioned under the McCain tax and
insurance proposals, private health insurers would have a
powerful economic incentive to keep patients healthy and costs
low. However, government interference in a reformed private
insurance market, which is already testing new models of care,
could discourage further innovation by insurers to find and
experiment with more advanced models that could improve the quality
of patient care and keep costs down.
For example, the Senator emphasizes promoting the availability
of smoking-cessation programs. Many private health insurance plans,
including those in the FEHBP, already have such programs. It is
unclear from his plan whether the McCain strategy would focus
on government-run programs or is a new federal benefit mandate on
private insurers, such as the proposed mental health parity
initiative. Without specifics, it is difficult to determine how
much decision-making with respect to care coordination would
remain a private-sector responsibility.
Transparency.For most Americans, the health care sector
of the economy is maddeningly opaque. Transparency, especially in
cost and quality, is a laudable goal. The key question in the
McCain plan is whether any proposed federal standard would
eliminate or supersede nongovernmental efforts. Ideally, consumers
should have access to multiple, competing sources of information on
price and quality. Most important, the information should be a
means for consumers, not government officials, to make better
health care decisions for themselves and their families.
Alternative Facilities.Althoughshort on details, the
McCain plan would promote retail outlet clinics and walk-in
clinics. It is difficult to imagine a useful federal role in this
area, particularly given the surge in the availability of such
clinics and the increasing numbers of consumers using them. Conceivably, his proposal could use
federal control of government health plans to steer patients
to these types of arrangements.
The government, however, should refrain from such efforts that
choose winners and losers in the health care marketplace. With
proper market incentives in a consumer-driven system, private
health plans would likely adopt reimbursement strategies to promote
such facilities. Economic demand driven by consumers, not
government officials, should determine the market for these
Health Information Technology. Health information
technology unquestionably holds great promise for improving
accuracy and safety in the delivery of medical goods and services,
improving efficiency in health care payment, and moderating health
care cost increases. Some analysts believe that IT could
revolutionize the health care system. However, the CBO warns, "By
itself, the adoption of more health IT is generally not sufficient
to produce significant cost savings."
The progress of health IT and the more widespread use of
personal health records would be less problematic if the underlying
economic incentives of health care were aligned more rationally
than they are today. If individuals rather than government
officials and corporate benefits managers were making the key
economic decisions about plans and securing savings from those
decisions, they would create a natural demand for higher efficiency
and greater use of IT in health care transactions.
As consumers, individuals could purchase coverage based on
the quality and effectiveness of medical services and
ancillary benefits such as the provision of a personal health
record. More consumers would demand that doctors and other
medical professionals communicate with them using 21st century
technology. In the banking and credit card industries, the use of
consumer-friendly information technology is routine and
evolving. Similar patterns of expansion and usage would evolve in a
consumer-driven health care system.
Payment Reforms. The McCain plan proposes payment reforms
in Medicare and Medicaid. While providers should put patients
first, the current payment system, particularly under Medicare
and Medicaid, rewards providers based on quantity rather than
If the Senator is pondering the broader application of
Medicare's proposed pay-for-performance scheme, which sets
government guidelines for medical practice, then he is proposing a
flawed solution. President Bush first introduced this concept
in connection with reforming Medicare payments to
However, as designed for Medicare, federal pay-for-performance
would result in doctors treating patients by using "cookbook
medicine," which would undermine high-quality personalized care and
weaken the doctor-patient relationship. Even if initially
limited to Medicare, this practice would likely spread because
private health insurers regrettably tend to copy the Medicare
Medical Liability Reform.Senator McCain offers no
specific medical liability reforms, but he does recognize that
frivolous lawsuits are a fundamental problem. Regrettably, he
suggests a federal solution, even though medical liability is
primarily a state responsibility.
The impact of high medical liability insurance on access to
critical services has already led many states to address the issue.
States can enact effective caps on damage awards and pursue a
variety of other remedies. Not only is this issue better suited to
state remedies, but inevitable variation among state responses will
provide an opportunity for states to learn from each other.
Costs, Savings, and Coverage Under the
Accurately assessing the effects on costs, savings, and coverage
is difficult because economists must often rely on assumptions.
However, several prominent economists have provided analysis
to help measure these policies.
The Lewin Group estimates that the McCain plan will cost $2.05
trillion over 10 years. Analysts at the Urban Institute and
Brookings Institution's Tax Policy Center estimate that the McCain
plan would cost $1.3 trillion over 10 years.
The Lewin Group also estimates that average family health
spending would decrease by $1,411 under the McCain plan.
There have also been various attempts to project the impact of
the McCain plan on expanding coverage. The Lewin Group
estimates that 21.1 million people would gain coverage under this
plan. Overall, the McCain plan would
increase the number of people with private coverage by 26.5
Senator McCain's vision for health care reform is underscored by
a principled commitment to personal freedom. He focuses on
reforming the system to empower individuals and families to make
health care decisions and to control their health care dollars.
At the cornerstone of his plan is reforming the tax treatment of
health insurance, long a fundamental obstacle to promoting a
more consumer-based health care system. The McCain plan would
replace the current tax exclusion for employer-based coverage
with a fairer, universal refundable tax credit that would enable
Americans to purchase health care coverage of their choosing. The
health care tax reform is coupled with a proposal enabling
individuals to purchase health insurance from any state in the
Union, dramatically expanding coverage options, and opening up
interstate competition in health insurance. Finally, the McCain
plan would establish a partnership with states to help address the
insurance needs of hard-to-insure individuals.
The McCain plan also proposes a variety of delivery
reforms, albeit with few details. It is critical that these reform
efforts not lead to greater government interference in or control
of the care and services available to Americans. Such efforts
should enhance the role of choice and competition, which is at the
heart of Senator McCain's policy agenda, not compromise the
doctor-patient relationship or undermine personal choice.
Robert E. Moffit, Ph.D.,
is Director of and Nina
Owcharenko is a Senior Policy Analyst in the Center for Health
Policy Studies at The Heritage Foundation.
Read: The Obama
Health Care Plan: More Power to Washington
 "The McCain health care plan represents a
philosophical advance over many other health care proposals,
principally in its commitment to redistributing the current tax
exemption for employer-based health insurance." Linda J. Blumberg
and John Holahan, "An Analysis of the McCain Health Care Proposal,"
Urban Institute, Health Policy Center, 2008, p. 1, at http://www.urban.org/UploadedPDF/411755
_mccain_health_proposal.pdf (October 8, 2008).
 McCain, "Better Care at Lower Cost for
Every American," p. 30.
 McCain-Palin 2008, "Straight Talk on
Health System Reform."
 For a more detailed discussion of this
policy option, see Robert E. Moffit, "Choice and Consequences:
Transparent Alternatives to the Individual Insurance Mandate,"
Harvard Health Policy Review, Vol. 9, No. 1 (Spring 2008),
 State tax policies, with few exceptions,
mirror federal tax policy for health insurance.
 For example, see John C. Goodman, "Making
HSAs Better," National Center for Policy Analysis Brief
Analysis No. 510, June 30, 2005, at http://www.ncpa.org/pub/ba/ba518 (October
8, 2008); Michael F. Cannon, "Combining Tax Reform and Health
Reform with Large HSAs," Cato Institute Tax and Budget
Bulletin No. 23, May 2005, at /static/reportimages/7D451635B6AB1F71D74F30A6E2459F56.pdf
(October 8, 2008); and Nina Owcharenko, "Getting Health Savings
Accounts Right," Heritage Foundation WebMemo No. 1127, June
14, 2006, at http://www.heritage.org/Research/HealthCare/wm1127.cfm
(October 8, 2008).
 The only other tax break allows
individuals to deduct health care costs that exceed 7.5 percent of
their adjusted gross income and allows the self-employed to deduct
100 percent of premiums.
 Joint Committee on Taxation, Tax
Expenditures for Health Care. See also Thomas M. Selden and
Bradley M. Gray, "Tax Subsidies for Employment-Related Health
Insurance: Estimates for 2006," Health Affairs,
November/December 2006, p. 1573, and 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.healthaffairs.org/cgi/content/full/hlthaff.w4.106v1/DC1
(October 13, 2008).
 See Andy Chasin and Chris Condeluci,
"The Potential Benefits to the Middle Class from Health Care Tax
Reform," memorandum to Republican health care and tax staff,
September 11, 2008, p. 6.
 "There is considerable confusion (from
an economic perspective) among policymakers, employers, and workers
about how employer-sponsored insurance really works. The economic
analysis of employment-based benefits is as clear in economic
theory and empirical work as it is muddled in the public debate:
theory and econometric studies both say that workers pay for the
majority of health insurance costs, through lower money wages as
well as through explicit premiums." Mark Pauly, "Blending Better
Ingredients for Health Reform," Health Affairs Web
Exclusive, September 16, 2008, p. w484, at http://content.healthaffairs.org/cgi/content/full/hlthaff.27.6.w482/DC1
(October 8, 2008).
 For a discussion, see Sherk and
Owcharenko, "How Bush's Health Care Tax Plan Will Raise Wages."
 U.S Department of Labor, Bureau of
Labor Statistics, "Number of Jobs Held, Labor Market Activity, and
Earnings Growth Among the Youngest Baby Boomers," Economic News
Release, June 27, 2008.
 Employers' tax breaks would not be
affected by the McCain proposals. For a variety of reasons,
employers would still find value in offering and deducting the cost
of coverage for employees, regardless of the change in the tax
position of employee coverage. See Nina Owcharenko, "Addressing
Adverse Selection Concerns Under the President's Health Care
Proposal," Heritage Foundation WebMemo No. 1332, January 30,
2007, at http://www.heritage.org/Research/HealthCare/wm1332.cfm.
 For a discussion of this phenomenon,
see Jonathan Gruber, "Health Insurance and the Labor Market," in A.
J. Kuyler and Joseph P. Newhouse, eds., Handbook of Health
Economics, Vol. I (Amsterdam: Elsevier Science, 2000), pp.
 See Owcharenko, "Addressing Adverse
Selection Concerns Under the President's Health Care Proposal."
 Lewin Group, McCain and Obama Health
Care Policies, p. ES-2.
 The exception to this is the Health
Care for America Act (S. 334), introduced by Senators Ron Wyden
(D-OR) and Robert Bennett (R-UT). See Nina Owcharenko, "Lawmakers
Should Approach the Wyden-Bennett Bill with Caution," Heritage
Foundation WebMemo No. 1849, March 13, 2008, at http://www.heritage.org/research/healthcare/wm1849.cfm.
 Jason Furman, "Health Reform Through
Tax Reform: A Primer," Health Affairs, Vol. 27, No. 3
 McCain, "Better Care at Lower Cost for
Every American," p. 30.
 Walton Francis, "The Political Economy
of the Federal Employees Health Benefits Program," in Robert B.
Helms, ed., Health Policy Reform: Competition and Controls
(Washington, D.C.: AEI Press, 1983), pp. 269-307.
 Guaranteed issue requires insurers to
offer a product to every applicant. Community rating requires
insurers to charge the same price to all applicants. Combined,
these two regulations result in higher premiums for all, pricing
many individuals out of the market.
 Health Care Choice Act of 2005, H.R.
2355 and S.1015, 109th Cong.
 Stephen T. Parente, Roger Feldman, Jean
Abraham, and Yi Xu, "Consumer Response to a National Marketplace
for Individual Insurance," University of Minnesota, Carlson School
of Management, June 28, 2008, p. 8, at http://www.hsinetwork.com/National_Marketplace_7
-21-2008%20FINAL_Blind.pdf (October 8, 2008).
 In this instance, Parente et al.
simulated an interstate commerce provision combined with a standard
tax deductionand found a 70 percent reduction in the uninsured for
those earning less than $45,000. See ibid.,p. 10.
 McCain, "Better Care at Lower Cost for
Every American," p. 30.
 Lewin Group, McCain and Obama Health
Care Policies, p. 23.
 Estimates range from 2 million to 5
million. Thomas Miller, "Health Plan Scoring That Runs Out of
Bounds," Health Affairs Blog, September 25, 2008, at http://healthaffairs.org/blog/2008/09/25/
health-plan-scoring-that-runs-out-of-bounds (October 8,
2008), and Aliza Marcus, "Baby Kendra's $300,000 Bill Pains
Insurers, Inspires Candidates," Bloomberg News, May 7, 2008, at
pid=20601109&sid=a4BEIIi_OauQ (October 1, 2008).
 Henry J. Aaron and Stuart M. Butler, "A
Federalist Approach to Health Reform: The Worst Way, Except for All
the Others," Health Affairs, Vol. 27, No. 3 (May/June
 U.S. Department of Health and Human
Services, Task Force on Drug Importation, Report on Prescription
Drug Importation, December 2004, at /static/reportimages/03FF210B352AF55C1D885CCE95A19A1E.pdf
(October 5, 2008), and Panos Kanavos and Paul Holmes,
Pharmaceutical Parallel Trade in the UK, Civitas: Institute
for the Study of Civil Society (London), April 2005, at /static/reportimages/DAF98E45E2EC372B3714CD2F960F558E.pdf
(October 5, 2008).
 For example, Wal-Mart, Sam's Club, and
Target provide such discounts. See Levi J. Long, "Target Joins Move
to $4 Generics," Arizona Daily Star, October 20, 2006, at
(October 10, 2008).
 McCain-Palin 2008, "Straight Talk on
Health System Reform."
 See Regina Herzlinger, Who Killed
Health Care? America's $2 Trillion Problem and the Consumer-Driven
Cure (New York: McGraw Hill, 2007). See also Michael Porter and
Elizabeth Teisberg, Redefining Health Care: Creating Value-Based
Competition on Results (Boston: Harvard Business School Press,
 Pauly, "Blending Better Ingredients for
Health Care Reform."
 For an overview of the Medicare
pay-for-performance proposal, see Richard Dolinar and Luke
Leininger, "Pay for Performance or Compliance? A Second Opinion on
Medicare Reimbursement," Heritage Foundation Backgrounder
No. 1882, October 5, 2005, at http://www.heritage.org/research/healthcare/bg1882.cfm.
 "If the biggest payer in the world
sets out payment rules for all the providers, rules designed to
minimize the bill as much as possible, and then requires all the
providers to comply, by law, or go to jail, why wouldn't the
smaller payers take advantage of that? They would, and they do.
That does not make it good for the healthcare economy." Harry Cain,
"The Medicare Menace," Harvard Health Policy Review, Vol. 2,
No. 1 (Spring 2001), p. 19, at http://www.hcs.harvard.edu/~epihc/
 Lewin Group, McCain and Obama Health
Care Policies, p. ES-1.
 Len Burman, Surachai Khitatrakun, Greg
Leiserson, Jeff Rohaly, Eric Toder, and Bob Williams, "An Updated
Analysis of the 2008 Presidential Candidates' Tax Plans," Urban
Institute and Brookings Institution, Tax Policy Center, updated
September 12, 2008, p. 53, at http://www.taxpolicycenter.org/
UploadedPDF/411749_updated_candidates.pdf (October 10,
2008). Analysts with the Health Systems Innovations Network
estimate a cost of $287 billion annually. Roger Feldman, Lisa
Tomai, and Sally Duran, "Impact of Barack Obama 2008 Health Reform
Proposal," Health Systems Innovations Network, August 21, 2008, p.
1, at /static/reportimages/7D2747AF72D3F2799B4A2BCD04372778.pdf
(October 10, 2008).
 Lewin Group, McCain and Obama Health
Care Policies, p. 42.