The Republican presidential nominee-in-waiting has proposed that everyone buying health insurance get a refundable tax credit, $2,500 for individuals and $5,000 for families. At the same time, he would treat employer contributions toward health insurance like income, meaning workers would have to pay income, but not payroll, taxes on it.
McCain's Democratic rival, Barack Obama, says the plan would "shred" the employer-based system that provides health insurance to about 158 million workers.
Most health analysts won't go that far, but both liberals and conservatives say McCain's approach would strengthen the individual and small-group insurance market. And by strengthening that market, it will pull in workers now covered through their jobs.
The workers most inclined to make that transition will be younger, healthier ones who most likely will be able to buy a policy on the individual market for less than their tax credit, said Paul Fronstin, a senior research associate at the Employee Benefit Research Institute, which studies employee benefits.
To the degree that happens, the employer-based market will become less healthy as sicker, older workers stay with their employer-based coverage while more of the healthier workers move to the individual market.
"What you'll see happening is average cost in the employer-market will go up and average cost in the individual market will go down," Fronstin said. "You'll start to get into a cycle where people at the margin start to leave employer coverage for individual coverage. At some point, employers will start to ask: Why am I doing this if my workers don't value it anymore? If I don't need to do this to be competitive in the labor market, why should I do it?"
Joseph Antos, who studies health care policy at the American Enterprise Institute, a conservative think tank, said it's predictable that McCain's proposal would move more people into the individual market because some workers could simply get a better deal there. Not only are the premiums typically cheaper for younger, healthier workers, but any difference between the tax credit and the premiums can be redirected into a health savings account.
"This stuff about shredding the employer market, that's just campaign rhetoric in the sense that nothing changes real quickly in this country," Antos said. "We're not going to see employers drop coverage en masse, and the reason is health insurance benefits remain an important tool for attracting good employees and retaining good employees."
Employers began offering health insurance as a benefit during World War II, when a labor shortage increased competition for workers. Wage controls limited employers' ability to offer higher salaries, so they offered benefits like insurance, pensions and longer vacations to attract the best employees. Health benefits were not a major expense initially, but they have become a significant part of payroll as health care costs have spiraled upward.
As much as Americans complain about the cost of health care, they like the fact that employers pick up most of their health insurance expenses. They also like that their share is taken from their paychecks on a pretax basis, and fear anything that could jeopardize that prized benefit.
A poll of employer-insured voters conducted by the Kaiser Family Foundation found that nearly two-thirds thought it would be harder to find a plan that matches their needs and handle administrative issues if they were buying insurance on their own. Eight in 10 said they thought it would be harder to get a good price for insurance or get coverage if they were sick.
Antos said large companies that compete vigorously for workers would keep the benefit. Individual losers could include those workers with high insurance premiums, such as company executives or union workers in the automobile industry. Winners would be younger people who find a basic policy without many bells and whistles appealing.
"It would be a mixed bag for the employer system. On the one hand, it's a much more generous tax subsidy than what currently exists for low- and middle-income workers," said Len Burman, co-director of the Tax Policy Center, a part of the Urban Institute and the Brookings Institution. "On the other hand, since you can get the credit outside work, some employers would probably drop coverage."
Burman said a family earning $60,000 with a typical employer-provided insurance policy that costs $12,100, of which the employer pays more than 70 percent, gets a tax subsidy amounting to about $3,400 under current tax law. Under McCain's proposal, that subsidy increases to $6,700, Burman said.
Dan Crippen, an adviser who helped McCain craft his health plan, rejects contentions that there would be any kind of rapid transition from the employer-based system. He said the benefit of the plan is that it would give people who change jobs frequently a policy they can take with them.
"We've talked to a lot of employers who have no interest in giving up their insurance now no matter what the system would be," Crippen said. "Frankly with the demographics coming into all of this, the retirement of my generation, our country is going to be hard up for workers and employers are going to once again be needing to attract workers, just like the onset of the employer-based system in World War II. That's what employers are telling us they will have to continue to do to attract workers."
