Health Care Plans Part 1 - McCain

One of the bigger issues in any presidential election is health insurance. We've heard talk of nationalizing health care like Canada to continuing the status quo. Both candidates for President have ambitious plans and hopefully this will help you understand what it is actually being proposed.

As a starting point it is helpful to understand the current law. Under current law if you receive health insurance from your employer you do not have to count this as income and your employer gets to deduct the amount paid in premiums. Employers are not compelled to offer health insurance and employees are not compelled to take health insurance.

McCain's plan changes that approach drastically. If you receive health insurance from your employer it would now be considered taxable income. So if you are part of a family that has a $12,000 policy and were in the 25% tax bracket your taxes would go up by $3,000. Employers would still be able to deduct the costs of premiums.

The tax deduction lost would be replaced with a tax credit. A tax credit is a dollar for dollar reduction in taxes whereas a deduction only reduces taxes by the amount of your deduction multiplied by your marginal tax bracket. A single person would receive a credit of $2,500 and a family would receive a credit of $5,000. So using my example above (which is a pretty normal example) the family would be $2,000 ahead.

The strength of this plan is it puts the insurance decision largely in the hands of the individual as in the vast majority of the cases the credit received by the individual would be more then the deduction they currently receive. The only people who would lose out on this from a tax perspective would be families who are in the 33% or higher tax bracket. It also addresses a discrimination issue in the tax code today. If you have employer insurance you pay no tax on that benefit, however if you insure yourself you get no deduction or benefit. So the tax credit certainly will help those who get no assistance with their current healthcare.

The weakness of the plan is the potential that employers will use this to stop offering health insurance. That is a real possibility and the $5,000 credit is not enough to go out and purchase a reasonable plan for a family. That said, when an employer makes a decision on how much you will be paid it's not unrealistic to think that they offer a lower wage in exchange for health benefits. In other words, I would expect wages to rise if a Company were to cut health insurance assuming they want to be competitive in attracting employees.

The plan is certainly focused on creating more of a free market for insurance whereby you can customize your insurance based on your specific needs.

Could McCain pass something like this? I think it is more passable than Obama's plan simply because it comes at very little cost to the government and it does not mandate insurance.