Obama's more of the same

Obama's health-care distortions

By Gary Andres | Thursday, October 9, 2008

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OP-ED:

Sen. Barack Obama lambasted Sen. John McCain this past week on the issue of health care and taxes.

In stump speeches, new ads and in Tuesday's debate, the Democratic nominee admonishes: "But here's what he won't tell you: McCain would make you pay taxes on your health benefits, taxing your health care for the first time ever, raising costs for employers who offer health care so your coverage could be reduced or dropped completely." Yet Mr. Obama is leaving out a critical part of the McCain plan: a central detail that provides significant tax relief for the middle class, addresses deficiencies in America's health-care system, and means no change in tax expenses for employers providing health insurance.

Mr. McCain's health-care plan does indeed propose having employees pay tax on employer-provided health benefits, but that's only half of his idea. Let's say you're a middle-class family of four earning $80,000 per year, and your company provides a $12,000 health insurance plan (which is the same as what members of Congress receive through the Federal Employee Health Benefits Program, according to data prepared by the Senate Republican Policy Committee). Under Mr. McCain's proposal, this family would now pay income taxes on their $12,000 health insurance benefit, resulting in them owing $3,000 more in taxes if they were in the 25 percent bracket.

But here's the part Mr. Obama leaves out. Mr. McCain also proposes a $5,000 credit to offset any new tax liability. In the case of the family referenced above, they get a health-care plan, enough money to pay the additional $3,000 in taxes, plus an extra $2,000 in their pockets - not a bad deal for the middle class. So the Obama ads are both incomplete and misleading.

Mr. McCain's idea also underscores another needed reform - showing people that employers don't really pay for health benefits; workers do, in the form of lower take-home pay. Clarifying the question of who really finances health care will help realign incentives, reduce costs and spur needed reforms.

Experts agree that employees pay for their health care through lower wages. For example, in an article in the March Journal of the American Medical Association, titled "Who Really Pays for Health Care?" Ezekial J. Emanuel and Victor R. Fuchs write: Failure to understand that individuals and households actually foot the entire health care bill perpetuates the idea that people can get great health benefits paid for by someone else. It leads to perverse and counterproductive ideas regarding health-care reform.

Others, such as Peter Orszag, director of the Congressional Budget Office, concur. In recent testimony before the Senate Finance Committee, Mr. Orszag said: "The economic evidence is overwhelming, the theory is overwhelming, that when your firm pays for your health insurance you actually pay through reduced take home pay. The firm is not giving that to you for free. Your other wages … are reduced as a result. I don't think most workers realize that."

Messrs. Emanuel and Fuchs also demonstrate that over the past 30 years, health-care premiums increased by 300 percent and corporate profits grew by 200 percent after taxes. But during the same period, average hourly wages of workers decreased by 4 percent after adjustment for inflation. Why? Workers are footing their own health bill. They call it the "health care cost-wage trade off." Wages suffer as companies use the money to pay spiraling health-care costs.

So in addition to putting more money in middle-class families' pockets, Mr. McCain's idea helps improve transparency in the health-care system. The extra income shows who is really paying for health care. This, in turn, will expedite other needed changes in the system.

Once workers realize it's their own money not a "free" benefit from a benevolent employer, they will pay closer attention to how and why it is spent. This new information in turn will realign incentives. Instead of passively watching their wages erode, employees will encourage employers to shop for better deals and recognize that taking preventive steps to reduce health-care costs could boost their own take-home pay.

By willfully ignoring the second half of Mr. McCain's health-care plan, Mr. Obama opposes an idea that provides significant middle-class tax relief, and misses a chance to provide the kind of transparency needed to speed reform. For a candidate who bases his campaign on "change," Mr. Obama's distortions of the McCain health-care plan sound eerily familiar.

Gary Andres is vice chairman of Dutko Worldwide.

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