Father Sam Explains It All

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“Father” as in “my dad.” Attentive readers may recall that Samuel H. Cox is a famous actuary. After listening to a McCain staffer tell a colleague how much better off he’d be under McCain’s health care plan than he is now with a joint union “flex plan,” I realized that I had been basically assuming that McCain’s plan was stupid, but I didn’t know why. So I asked the nearest expert available. (Turns out he’s not!) His response is after the jump, but, first, full disclosure:

Yes, you can post it but I want to explain my expertise, just so you know. I am a Fellow of the Society of Actuaries, and so I have passed professional exams on health systems. I have not been doing actuarial work in the health area for a long time. (Actually, the last I remember is individual health insurance policy development at Pan American Life – when we lived in New Orleans.) I am still interested in health care issues, but, for example, I would decline if asked to give expert witness testimony in the health practice area. You can say I am an actuary, but not a health actuary.

Also, McCain once bought him lunch so obviously he can’t be trusted.

from Sam Cox

to Ana Marie Cox

date Thu, Oct 9, 2008 at 9:55 AM

subject Re: McCain health care plan

I read his proposal in the American Academy of Actuaries magazine, Contingencies. It will not work, in my opinion, even if he could get a Democratic Congress to go along (it would not).

Most Americans with health insurance get it through an employer and those folks are relatively happy with it. Employers are not happy with it generally and would like to get away from providing it. The government allows companies to deduct health care expenses from income and does not count the cost of health benefits as income to the employee. In effect it is away of paying employees tax free income, as long as it goes to heath care. (Originally this was a way to work around the WWII freeze on ordinary wages.) McCain’s proposal does way with this setup, making the heath care benefit taxable income. On average that is $12,000 per year for a family of four. If a family continues in an employer program it will pay an additional tax. If they are in the 25% bracket (say $75000 income) then they pay an additional $3000 in taxes. An individual in an employer plan with health benefits of about $6000 so will pay an additional $1500 in taxes.

McCain’s proposal gives individuals a $2500 tax credit so the net for an individual is a tax credit of $1000. For a family with two persons filing, they get a tax credit of $5000, so get a net $2000 credit they can use to off set other taxes. (Actually it is not clear on this; maybe you do not get an offset.) So far is looks good for those who that already have health care through an employer. However, the costs are escalating faster than overall price inflation, so unless the tax credits are indexed to heath care costs, the advantage will disappear in a few years. While this aspect looks good now (for those who have and can continue with employer coverage), that may change without indexing. The proposal says nothing about indexing.

A family with no employer health care pays an average of more than $12000 per year for insurance because individual plans are more expensive (or go without and experience about the same out of pocket heath expenses on average with a lot more variance). They get the tax credit too, so a family gets a $5000 but it still costs them $7000 per year. This may bring coverage into reach for some families, but certainly not all.

Only about 60% of employers provide health care coverage. McCain’s program removes the incentive for employers to provide it so I expect a lot of them will stop providing it. More Americans will be on their own, those with preexisting conditions will not get insurance. And it provides no incentive for employers to start covering employees. For small businesses, the situation is worse – only about 45% provide health benefits.

Another important aspect of McCain’s plan is to deregulate health insurance. Now the states regulate it and provide consumer protection, solvency and other regulations. McCain says he will deregulate as“we have done over the last decade in banking.” We see now how that turned out. It will be a huge mess.

I don’t think McCain understands insurance or insurance regulation. This is just false: “Health insurance is simply a financial device that shifts around the apparent costs of the nation’s overall health care bill among various payers.” Above all, insurance is a mechanism for managing risk. It also provides for economy of scale too but the primary function is to reduce the risk to an individual or family of catastrophic heath care costs. It is a very serious problem and McCain’s proposal ignores it. No other developed nation treats its citizens this way, forcing them to bear the risk of catastrophic heath care costs.

There is no reason to believe McCain’s propoals will solve the problems of rising health costs or lack of coverage. Indeed, I think it will aggrevate these serious problems.

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