John McCain's Health Care Plan

In all of the economic events of the recent days, a key topic for discussion has been put on a back-burner. Yes I am talking about health care. Both of the current presidential candidates want to reform the costly and highly inefficient American health care system. Of the two candidates, John McCain is proposing a completely radical approach to how individuals get health care coverage in this country.

Most Americans get their health insurance through their employer. Employees pay certain portion of the premium and the remaining tab is picked up by the employer which is substantial. According to a recent Kasier Foundation Study, employer contribution for the health insurance premium for a family is about $9300, while the employee contributes about $3300 towards the premium. See exhibit A for details on the breakdown.



Now coming to John McCain's radical proposal. According to John McCains health care plan, he wants the employer contribution (which is about $9300 for an average family) to be taxed as income. Remember this benefits are currently not taxed at all. In order to offset the stick of taxing the employer contribution, as a carrot, his plan offers a $5000 tax credit per family, which can be used to buy additional health insurance if needed.

Here is my question. If your employer contribution is taxed every month wouldn't your employer be withholding additional money from your paycheck to cover these taxes thus reducing your take home pay significantly depending on how much your employer contribution is. And if you are somebody who is living pay check to pay check every month, this reduction is monthly/weekly pay can make a significant difference. So wouldn't these individuals, even though knowing that they will get $5000 back at the end of the year, try to opt out of the employer based insurance all together to make ends meet?. Granted, these individuals can shop around for cheaper health insurance in the market. But what are the chances of of finding a cheaper option, as a individual compared to a group rate from your employer, which pays the same benefits. Pretty slim I would guess. Wouldn't this add to the number of uninsured?

All in all I think it is bad idea to tax the employer contribution of your health care premium.

Also read Bob Herbert's column on the same topic in the NY Times.