I’ve been struggling with the McCain Health Care proposal. I can’t seem to get the math to work out in any sort of way that this makes any modicum of sense. However, I think I figured out a set of assumptions that at least make the story self-consistent. Let’s take the family case where you’d be entitled to a $5k tax credit, and the typical company throws in $9k (before taxes) to your health plan. We’ll also say your contribution to the health plan is $3k (before taxes). Let’s also assume that your combined Fed/State tax rate is 25%.

So currently, you pay $3k/yr for health insurance with no tax implication.

Under McCain, you now have an additional $12k in taxable income. That’s $3k in taxes, but you get a $5k credit, so you’re really getting $2k in your pocket. Well, not really in your pocket. You have to put it into a health savings account to be used for paying other out of pocket health related costs. Since healthy people rarely have these kinds of out of pocket expenses, the only way this is an advantage is if you can roll-over the savings year-on-year and use it maybe decades down the road. But most of these accounts are annual at present, and managing long term accounts would be a beaurocratic headache. Further, as the premiums go up in future years, unless the $5k is adjusted, that extra cash will be swallowed and probably more. So at best this is a wash.

Now it’s possible that some portion of young healthy people who do not currently have health insurance will be able to get an insurance plan for the $5k (or $2.5k for individuals). Under McCain’s plan, insurance companies could find ways to slice and dice the population to offer cheap insurance to healthy low-risk people. But the flip side of that is that higher-risk people would pay higher premiums than they do now. The whole point of insurance is to spread risk across a large diverse group. His plan actually seems to discourage that. He says he will work with states to establish standards and such to minimize the impacts of the high-risk population, but given his love of the free market and deregulation, it’s not clear those efforts will bear much fruit. As one who’s rapidly aging into a higher risk group, this implication gives me more than a little pause. But in the spirit of explaining the math, I think this is where the plan presumes to insure people who lack a health plan now.

But all of this pales next to the assumption I think is the most brain dead. McCain’s stated goal here (and actually Obama’s and Hillary’s as well) is to get health insurance uncoupled from employers. This coupling is arguably an artifact of the post WWII tax exemption for health expenses, an exemption McCain is proposing to eliminate in an effort to get people to shop nationally for insurance.

However, the feasibility of this is entirely contingent on companies giving you the $9k they currently pay for your coverage as a salary increase. The assumption is that companies will do this because it will be the only way to keep employees. After all, other companies will now be offering higher salaries, so competition will force their hands. But no rational person can possibly think it will play out this way.

First off, company paid benefits have been in decline for decades, salaries are flat at best, and unemployment is up. People need their jobs, and most are not in a position to have companies compete for them. Quite the opposite, most of us find that we are competing with each other for the available jobs. I predict the majority of companies will not simply hand over the cash. Nor will they simply eliminate it as a benefit. Rather, they will increase employee contributions year on year (as they are doing now), until eventually the company paid portion is small or non-existent. The result being that in the end, you’ll have your $5k available to purchase your $12k policy. Good luck with that.

Secondly, even if companies cough up the cash, people living at the edges will not likely spend the money on health insurance. They might well squander it on food, gas, and mortgage payments. If they do buy insurance, it will be a discount policy at a cheaper rate. One that likely provides less coverage than they have today.

The net result here is undoubtedly an increase in people who are uninsured or underinsured. Further, those that maintain their insurance will do so at greater cost to their family budgets. While I think the goal of decoupling health care from employers is laudable, this is not useful progress. Especially in the current economic climate, the underlying assumptions are untenable. This plan would be an unmitigated disaster.

But maybe I’m still missing something. If you think my math is still off, feel free to set me straight in the comments.