Two Ways to Extend Health Insurance

Tax breaks versus expanded public coverage are the options this presidential election.

By Kimberly Lankford, Contributing Editor

From Kiplinger's Personal Finance magazine, November 2008

Both candidates for president agree on one thing: The nation's health-care system is broken. But John McCain and Barack Obama disagree on how they'd repair it.

McCain's plan

McCain would offer tax breaks to encourage more people to buy health insurance. Currently, employees don't pay income taxes on the premiums they and their employers pay for health insurance. But people who buy individual policies generally can't deduct their premiums.

McCain would change the rules to give everyone a tax break. If your employer plan now costs $13,000 (about the average for family coverage), counting that amount as taxable income would cost you $3,250 in additional federal taxes. But families would get a refundable $5,000 tax credit ($2,500 for individuals) to help purchase insurance, either through an employer or an individual plan. The change could encourage more people to buy individual policies, which they could take with them even if they left their job. And as long as you keep an individual policy, your insurer generally cannot raise your rates because of your health.

The biggest question mark in McCain's plan is what would happen to people who already have health conditions and could be turned down by insurers. To fill that gap, McCain proposes to work with states to create a Guaranteed Access Plan, which would look a lot like the high-risk pools that already exist in 34 states to cover people who have been rejected by private insurers. Such a plan would require big government subsidies to keep premiums affordable.

McCain's plan would also let people cross state lines to buy coverage, which could increase competition. But it could also encourage people with health problems to flock to the few states where insurers can't reject people -- such as New York, New Jersey and Massachusetts -- while healthy individuals go elsewhere. And without healthy people in the risk pool, premiums could rise even higher.

Obama's plan

Obama would offer both private and public insurance options. People could keep their current coverage through their employer or on their own, buy new private coverage, or enroll in a public insurance plan that would be portable and provide benefits similar to plans currently available to federal employees. Small businesses and individuals could buy public or approved private coverage through a national Health Insurance Exchange.

Obama would expand Medicaid and the State Children's Health Insurance Program, and provide sub-sidies for lower-income people. He would require children to have health insurance, and most employers would have to provide either "meaningful coverage" (yet to be defined) or contribute a percentage of their payroll to the public plan. Small businesses would receive a refundable tax credit as an incentive to provide coverage.

In the most significant change, people could not be rejected or charged higher rates because of existing health conditions, regardless of whether they buy private or public insurance. That would be a big boon for individuals with medical problems, but it could have unintended consequences. "It doesn't give people an incentive to purchase coverage when they're healthy because they can just sign up for care when they think they're going to need it," says Cori Uccello, of the American Academy of Actuaries.

That's what has happened in New York and New Jersey. In those states, insurers can't reject anyone, but residents pay some of the highest premiums in the U.S.

Obama's plan will work only if the premiums end up being low enough to encourage healthy people to sign up for coverage, even if they aren't required to. That will depend on how much money the government is willing to spend on subsidies to help lower-income people.

Both candidates would cut costs by focusing on preventive care and changing the way doctors and hospitals are paid. But details of both proposals are still fuzzy, and so are their costs. The Tax Policy Center, sponsored by the Urban Institute and the Brookings Institution, puts the price tag for each at more than $1 trillion over ten years. Any plan will have to be negotiated in Congress. But depending on who is elected, the debate will start at a very different point.

NEXT: Where They Stand on Taxes

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