The McCain Health Care Plan

National Review editor Rich Lowry offered his prescription for what ails the GOP and says various sensible things before turning his sites on the McCain health care plan. Unlike a lot of aspects of McCain’s campaign, Lowry likes this initiative — subjecting employer-provided benefits to taxes, then offsetting the giant tax hike with a tax credit that, over time, would come to be worth less-and-less relative to the cost of health care — praising it as “innovative, representing years of work by conservative policy wonks to develop an alternative both to the current employer-based system and to government-heavy liberal plans.”

Lowry thinks this plan was unfairly subjected to attacks (from this quarter among others) as a tax increase because “tax would have been more than offset in the vast majority of cases by the new credit.” Lowry thinks the plan wasn’t adequately defended because “McCain didn’t seem to have a firm grasp on his own plan, and the Obama campaign successfully distorted it as a huge new tax increase.” I actually think Lowry doesn’t have a firm grasp on the plan. The size of the credit would be scaled to the CPI, but health care costs grow faster than inflation, so over time there would be a tax increase. Indeed, as I’ll explain shortly, this was the point of the plan.

Interestingly, after he’s done with his discussion of health care, Lowry says that “At times, conservatives seemed bizarrely at odds with public sentiment.” In fact, I’d say the health care issue was one of those times.

Most Americans would define “the health care problem” as consisting of inadequate health insurance or fear of imminent inadequacy. Many Americans don’t have health insurance. Others have health insurance but it’s very minimal. Others have good coverage on paper, but are frustrated to discover in practice that their insurer will struggle mightily to get out of paying for things that the patient/customer feels should be covered. And yet others are simply worried that if this or that happens, or if they do this or that, they’ll find themselves in one of the previous categories. The animating impulse of the McCain plan was that this whole definition of the problem was wrong. Instead, the conservative view is that the government, by offering a large tax subsidy to employer-sponsored insurance, is creating a situation in which people have too much insurance. If there were less health insurance overall, the feeling goes, total health care expenditures would be lower and people would have more other stuff. What’s more, the right feels that this situation would create incentives for people to be more discriminating customers, so that the reductions would come disproportionately from the “waste” column of the medical expenditures table.

I think this view of the matter isn’t entirely wrong. But the crude outline of the McCain plan suffered from a lot of defects. Most notably, I would say, an indifference to distributional issues and to the value of preventive care. This paper from Jason Furman (or see Ezra Klein’s shorter and somewhat clearer account of the paper) who, in virtue of McCain losing, will now be in a position to do something about it, contains some very smart thinking about how to apply the truth of this insight in a non-disastrous way. But instead of addressing the main substantive defects of his plan, what Team McCain did was try to address what they saw as the main political vulnerability of the plan — the charge that it was a tax increase. They did this through the tax credit.

In practice, however, all that did was phase the increase in more slowly — ultimately, if your plan is to remove a tax subsidy for something, you’ve got to remove the subsidy. Indeed, I would say that McCain’s real problem in this regard was simply that his tax plan was so hugely regressive that absent the credit most middle- and working-class families would have seen a net tax increase. If he’d had a less regressive tax policy (as, indeed, he had in 2001-2003) he maybe could have squared the circle in an easier way. But that still would have left him with an extremely crude health care proposal that would have been pretty sharply at odds with what most voters are looking for in a health plan.