Obama vs. His Advisers on Health Care

Under the health care plan offered by Senator McCain, the tax deduction for employer provided health insurance would be dropped, and replaced with a $5000 tax credit for individuals. Writing for Forbes, Obama advisers Brad DeLong and David Cutler are unsurprisingly not fans of the McCain plan:

Republican presidential nominee John McCain believes that the central problem in health care is that people have too much insurance and, because of it, consume too much medical care. McCain seeks to reform the health care system by taxing and punishing businesses that offer employer-sponsored insurance. Once they are forced to drop coverage, he holds, their workers will find themselves in the non-group health insurance market, where they will buy less generous plans and go to the doctor less often. Modest tax credits would help some, but nowhere near all, of the uninsured afford coverage.

Not everyone, however, shares such a negative view of the plan’s major elements:

The most promising way to move forward in all three dimensions – coverage, cost, and long-run fiscal situation – is to replace the employer exclusion with a tax credit, a step that has been proposed many times before (e.g., Butler 1991 and Pauly and Hoff 2002). Firms would still be allowed to deduct the cost of their contributions to employee premiums, just as they can deduct wages and other expenses today for the purpose of calculating taxable income. But workers would now have to include employer contributions to health insurance in their earnings for the purpose of calculating taxes (precisely which taxes is discussed below). In exchange for, workers who purchased qualifying insurance would get a refundable tax credit. Qualifying insurance would be along the lines proposed by the President in his standard deduction for health insurance, including limits on out-of-pocket payments, coverage of a general range of medical care, and guaranteed renewability by the provider (Treasury 2008).

That was Jason Furman, Obama’s economic policy director. As the Wall Street Journal notes:

Mr. Furman used to portray the current system as regressive, inequitable and a subsidy for health plans that insulate consumers from the cost of their care, thus inflating health spending. When he was director of the Brooking Institution’s Hamilton Project, Mr. Furman outlined a health reform — again using tax credits — that took the “sensible approach” of “exposing individuals to the price of health care through greater cost sharing.”

When President Bush unveiled a health reform similar to Mr. McCain’s in 2007, Mr. Furman co-authored a Tax Policy Center paper that called it “innovative and a step in the right direction.”

Okay, so Obama’s top economic adviser favors some of the major elements of the McCain health plan. He’s got to be an anomaly, right? Well, not quite:

“Health insurance is not something that is made better by tying it to employment. As a result, essentially all economists believe that universal coverage should be done outside of employment.”

That passage comes from [David] Cutler’s 2004 book, “Your Money or Your Life,” which outlined a strategy for universal health care. Not surprisingly, Professor Cutler’s plan, like Mr. McCain’s, also applied subsidies such as “tax credits — people get a lower tax bill, or a refund from the government, to be used to purchase insurance.”

And here is a post from Brad DeLong’s blog, describing his ideal health plan. Like McCain, DeLong’s plan would contain “[n]o deduction for employer-paid health expenses.” DeLong would differ with McCain, however, in that instead of offering a tax credit, he would require 15% of a person’s income to go into an HSA (with another 5% going to the IRS as a tax increase), with government picking up the tab for medical expenses over that amount. As he explains it:

Why the 20%? Because I am very impressed by the use of technology to drive the cost reductions–which means the reductions in doctor and nurse time: the increases in the number of procedures that a given treatment unit can perform, and thus in the number of people whom we can, collectively, treat–in beneficial-but-optional areas like eye surgery and lenses. It does seem to matter that consumers are cost conscious and economize when they have financial skin in the game. This is the mother of all Health Savings Account proposals.

This isn’t the first time that Senator Obama’s campaign promises haven’t matched up with his adviser’s positions. One wonders, though, whether he has shifted his positions due to their advice nearly as much as they have shifted theirs in order to give it.

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  • David Nickol

    Under the health care plan offered by Senator McCain, the tax deduction for employer provided health insurance would be dropped, and replaced with a $5000 tax credit for individuals.


    By all accounts I have seen, the credit is $2500 for individuals. The $5000 credit would be for families.

    There’s something that I am not clear on. If a family is so poor that they pay no taxes, do they get a $5000 credit applicable to health insurance? That’s my understanding. Isn’t that the kind of thing that is “socialism” when Democrats propose it?

  • Dustin

    The more sensible explanation is that a candidate shouldn’t always be assumed to share every single opinion of every single adviser. Some people think it’s important to be surrounded by people who believe different things and will make a good case for their positions. Thus, you get free-traders like Goolsbee working for a candidate who, though by no means a Sherrod-Brown-style protectionist, nevertheless is skeptical of leveling every remaining trade barrier that still stands, recognizing there are other principles involved in trade negotiations (Obama’s remarks about Colombia in the last debate were very good examples).

    On the other hand, if you think a politician’s staff should resemble nothing so much as an echo chamber, then the Bush cabinet from 2005 to 2007 is the embodiment of sycophancy.

  • Dustin

    As for the Furman quote, the key difference between what he proposes and McCain’s plan is that McCain would seek to end the employer exemption. The point of the whole plan is to wipe out employer-based coverage by making it too expensive to provide, and pushing people with the tax credit onto the open market, where all the complications of insurance shopping come into play. Furman’s example, though, adds no additional costs to employers, but shifts the burden onto workers.

    Nevertheless, I agree that employment-based health care is antiquated, a relic of an industrial economy that no longer exists. It’s got to go, and McCain’s got the right idea in trying to engineer its extinction. Unfortunately, he plans to leave nothing in its wake, and leave health-care consumers completely vulnerable to predation. Holding down costs by discouraging those who need medical care from seeking it is just barbaric. It’s downright . . . libertarian. (My own views here have shifted considerable in recent months).

  • blackadderiv

    Isn’t that the kind of thing that is “socialism” when Democrats propose it?

    Yes, but only when Democrats propose it.

  • c matt

    Where the hell can a family of 4.1 get health coverage for $5,000 a year?

  • David Nickol

    The average annual premium for single coverage in 2008 is $4,704 and the average annual premium for family coverage is $12,680. These amounts are each about 5% higher than the premium amounts reported in 2007.

  • Zak

    David Nickol,
    Thanks for that information (not being sarcastic). I had been hoping to see such figures.

    At my company, a family would pay around $260 a paycheck for healthcare for the top level plan and $180 for the regular plan. That’s tax exempt. That works out to $6750 for the top level and $4680 for the bottom level. So if we assume the average plan is half-way in between, that’s mean’s the average family pays $5715 while they’re employer pays $6965. All this money is tax exempt.

    With McCain’s plan, the $5715 I’m spending and the $6750 my company spends will now be taxed. But I will receive a $5000 refundable tax credit. So unless my tax percentage on this $12,680 increase in income is

  • Zak

    sorry, didn’t finish my post.

    So unless the tax rate is 39% or above ($5000/$12,680), then I( won’t be paying more. Now, that % includes payroll taxes as well as income taxes, but still, in that light McCain’s program is progressive because the $5000 will be worth less to those paying higher tax rates.

    I’m not a healthcare economist, so maybe I’m understanding this wrong. If so, I hope someone points out my mistake. Because it seems to me McCain’s plan isn’t the foolishness that Obama portrays it as being.

  • Zak

    PS. My company’s only tax benefit from the health care previously was the payroll tax exemption, since they write off any employee compensation, whether it’s benefits or wages. But it’s true that now they will have to pay SS and Medicare taxes on the $6965 they’re spending, but that doesn’t seem like a huge amount.

    PPS. It seems like McCain’s plan ought to distinguish between households with two people and households with more than 2, since under his current plan, both would get the $5000 credit while the latter would have higher costs. On the other hand, his tax plan also increases the per-child credit from $3500 to $7000, so that would offset much of the problem, although I don’t think the child credits are refundable.

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