Young vs. old, healthy vs. sick

This week’s most important debate wasn’t the meandering town hall duel between Barack Obama and John McCain. That encounter was understandably scored by polls and most pundits as a win for Obama, who seemed steadier than an over-caffeinated McCain. But lackluster questions and a constrictive format meant it did little to clarify the decision facing voters.

Far more instructive was the argument Obama instigated with McCain last week over healthcare. In speeches, Obama accurately framed the central contrast between the nominees’ approaches. The bedrock goal of Obama’s plan is to reinforce the sharing of risk and cost between healthy and sick, young and old. By contrast, McCain, hoping to expand choice, would erode risk-sharing and accept sharper distinctions between the healthy and sick in both the availability and cost of coverage. One plan prizes solidarity; the other, autonomy.

Most Americans now receive their health insurance at work. That system promotes risk-sharing because employers don’t vary the premiums based on a worker’s age or health: The old and sick are subsidized by the young and healthy, who are then subsidized as they age.

McCain would upend that system. Today, employers can deduct as a business expense the contributions they make to a worker’s health insurance premiums. Workers, though, are not taxed on the value of their employer’s contribution. That “exclusion” provides a powerful tax incentive for work-based coverage. McCain would end the exclusion so that workers pay taxes on their employer’s contribution. Instead, he would provide a tax credit ($2,500 for individuals and $5,000 for families) that workers could apply to the cost of health insurance. In an ad, the Obama campaign described that trade as “the largest middle-class tax increase in history.”

That’s flat wrong. For all but the highest earners with the most expensive insurance plans, the credit would more than offset the additional taxes that workers would face from ending the exclusion, the nonpartisan Tax Policy Center calculates. The real problem with McCain’s idea is that, without the economic incentive provided by the exclusion, more employers might stop offering coverage. And even employers who want to continue could find it difficult because younger workers would be likely to use their credit to buy stripped-down, cheaper coverage on their own. That would leave employers covering only older and sicker workers, which could quickly swell premiums to unaffordable levels. That concern prompted the U.S. Chamber of Commerce and the Business Roundtable to criticize McCain’s plan in a New York Times article Tuesday.

McCain’s camp insists that his proposal would not undermine employer-based coverage. But few experts agree. Several studies have projected that his plan would move about 20 million people from employer-based coverage to the individual insurance market. And in that market, older or sicker consumers face much higher costs than the healthy -- if they can buy coverage at all.

McCain would further deregulate the individual market by allowing any policy approved in any state to be sold in every state. He says that would provide more choices, but it also would undercut state laws requiring insurers to cover specific treatments, such as breast cancer screening. An insurer could locate in the one state that does not require it to fund mammograms (Utah) and sell in all 50 states. Even more worrisome, notes health economist Jonathan Gruber, is that insurance companies offering more comprehensive policies would face the same risk as employers -- losing healthy young workers to cut-rate plans from the least-regulated states. That would further unravel risk-sharing and increase prices for the sick.

Obama’s goals couldn’t differ more. Through incentives for (and mandates on) employers, the expansion of government programs and new nationwide rules for insurers (such as requiring them to cover all applicants, regardless of their health), he wants to insure more Americans through large pools that promote risk-sharing.

McCain’s approach would save people money when they are young but expose them to greater financial and health risks as they age. It repudiates the essence of insurance, which aims to spread risk not only across the population but across an individual’s lifetime. Obama is wrong to portray McCain’s plan as a tax hike, and his alternative raises its own questions, especially about cost. But Obama does not exaggerate when he says that his rival is offering a “radical” new vision of how Americans can safeguard their health.