Health proposals could spur big change

Analysts say plans from McCain and Obama might speed the demise of employer-sponsored insurance

WASHINGTON -- Whether the next president is Barack Obama or John McCain, this much is assured: Each man is offering a health-care overhaul that, if successfully implemented, might hasten the end of Americans getting health insurance through their employers.

Neither candidate overtly proposes to end employer-provided health care. Yet each candidate is promising a significant move away from it.

"I think both plans propose a radical change," said Paul Fronstin, director of health care research for the Employee Benefit Research Institute, a nonpartisan group.

McCain seeks to use the tax code to promote fairness and greater access, while Obama seeks to cover the growing number of uninsured Americans with a government-run program that would compete with the private sector. Both proposals aim to address the problem of uninsured Americans -- 45.7 million last year -- a number that has increased sharply from 38.4 million in 2000.

Each candidate has been loose with facts and numbers in attacking the costs of the other's plan, but health-care experts view McCain's plan as the more dramatic of the two, because it would tinker more with employer-provided insurance.

History is important to understanding why.

For more than 60 years, most working Americans have gotten health insurance through their employers. The practice dates to World War II, when federally imposed wage caps led employers to compete for workers through benefits such as health care. The system is unique to the U.S. among developed countries. Last year, employers provided health coverage to more than 162 million Americans.

In the 1950s, the Internal Revenue Service encouraged employer-based insurance by allowing companies a tax deduction for providing it. Since then, employees' contribution to their health care has been an invisible tax break, because those contributions come out of their paychecks before their income is taxed. More than 62 percent of working-age Americans receive health insurance this way.

Yet there is no tax break for at least 17 million Americans, many self-employed, who purchase their own health insurance.

Taxing benefits

To level the playing field and get more Americans insured, McCain proposes to tax health-care benefits. He would offset this tax by providing all working-age Americans a refundable tax credit of $2,500 for individuals and $5,000 for families. Employers could opt out of providing employees coverage, or they could continue to do so and still receive a tax deduction.

"Tying the tax break for health insurance to the workplace worked for three, four even five decades. It is not working today in this incredibly mobile work force, where four in 10 change jobs each year," said Grace-Marie Turner, who runs the Galen Institute, a research group that promotes the kind of consumer-driven health care now championed by McCain.

Health insurance experts think that McCain's plan could lead young, single and healthy workers to opt out of employer-provided insurance because they could save money by purchasing high-deductible plans that cost less in an open market.

This, in turn, would increase the pool of older, less healthy workers in employer-provided health plans -- thus raising the costs of insuring them for their companies, which under McCain's plan could opt out of providing insurance. The plan therefore threatens to hasten the demise of employer-based insurance.

Fronstin said that, while employers won't abandon it overnight, they will over time. "If they no longer think it is competitive in the labor market to offer health benefits, they'll do something else."