Health Care Plan Debate Heats Up, But Whose Costs More?

Bertha Coombs
CNBC Reporter

Health care has returned as a central issue in the final weeks of the presidential campaign. One reason may be a recent Kaiser Foundation poll, which found health care is now the second most important issue behind the economy for undecided voters. Another: the candidates are using health care to spotlight their accusations on tax policy.

Mark Lennihan / AP

The Obama campaign has attacked Senator John McCain’s health care plan in advertisements and on the campaign stump as a tax hike on the millions of Americans who now receive health benefits through their employers.

"For the first time in history, you will be taxing people's health care benefits," Senator Barack Obama charged during the final debate."

Senator McCain’s rebuttal: 95 percent of Americans will save money under his plan because the tax increase on benefits would be offset by the refundable health care tax credit that is at the heart of his plan. "They will receive not only their present benefit," he argues, but the tax credit will put many families ahead when "you add $5,000 onto that."

Who’s Right?

"Politics and complex policy are a dangerous mix," writes Galen Institute President Grace-Marie Turner in a recent e-mail. Turner, a health care consultant who has advised the McCain campaign, calculates that the Republican presidential nominee’s $5,000 refundable tax credit for families would offset the tax on the typical $12,000 employer benefit plan at every income tax bracket. (See side-by-side plan comparison.)

Tax Credit Math

Let’s use Joe the Plumber as an example of someone in the 15 percent income tax bracket who receives a $12,000 employer health plan. Under the McCain proposal, Joe would be taxed $1800 on his benefits (25 percent of $12,000). McCain's $5,000 refundable tax credit would actually leave Joe $3200 ahead on tax basis.

If Joe earns more, the tax credit is less generous: 

McCain Health Plan Individual Tax Impact

Income Tax Bracket	15%	25%	35%
Tax on Benefit	- $1,800	- $3,000	-$4,200
Health Tax Credit	+ $5,000	+ $5,000	+ $5,000
Cost/Savings	$3200	$2000	$800

Ron Fontanetta, a Principal with benefit consultants Towers Perrin, says for 2009, the average employer-sponsored plan will cost closer to $14,000, potentially making the tax credit less generous for higher income employees, and for those with richer plans.

What about out-of-pocket costs? Fontanetta says employers typically make workers pick up about 20 percent of their health plan costs through deductibles and co-pays. Employees can now set aside up to $5000 annually to pay for those with pre-tax dollars, by directing funds to an HRA (Health Reimbursement Account) or FSA (Flexible Savings Account).

The McCain plan would maintain that tax advantage on FSAs and HRAs says Douglas Holtz-Eakin, the campaign’s senior policy advisor, adding even more value to the tax refundable credit.

McCain argues his plan would provide an incentive for individuals to reap an even greater tax advantage by reducing those out-out-of pocket costs and shop for a less expensive plan, something he’d facilitate by allowing individuals to buy insurance across state lines.

McCain charges Obama’s plan would effectively create a national medical entitlement program with very rich benefits, which would result in overall higher taxes.

Still, neither plan comes cheap.

The Big Tax Picture: Over $1 Trillion

AP Barack Obama

Tax Policy Center has calculated that the refundable tax credit and John McCain's overall health plan will increase the deficit by $1.3 trillion over the next ten years, while Barack Obama's plan providing subsidized access through an insurance exchange will boost the deficit by roughly $1.6 trillion in the next decade.

McCain’s plan, analysts say would cost less over time, because the tax credit would likely be indexed to inflation, while medical costs are likely to grow more quickly.

Both plans amount to ambitious fiscal policies at time when the next president will face massive economic challenges, which make many skeptical about the viability of both proposals. 

“You’re not going to solve the health care dilemma by shifting tax credits or offering everyone the same plan as the U.S. House and Senate, “says Bruce Josten, executive vice president for governmental affairs at the U.S. Chamber of Commerce.  Josten says the most important thing the next president should focus on is reigning in health care costs.

The Plan Cost Equation

The candidates say their cost-saving measures will help pay for their plans. Both McCain and Obama claim say they'll promote measures that include broader adoption of health information technology and electronic health records, greater emphasis on preventive care and implementation of best practices to bring down costs to the overall health system. Both pledge to cut costs from Medicare.

“Both of them are pretending that the health care savings that they're talking about will offset a lot of costs,” Says Maya McGuiness, president of The Committee for Responsible Federal Budget. “They've likely exaggerated the health care saving they'll realized."

McCain's plan puts the combined savings at about $85 Billion, while Obama puts the savings at just over $90 billion, according to calculations from the Committee for a Responsible Federal Budget.

But even with those calculations, the Committee puts the budget impact of McCain's policies starting off at a $17 billion deficit in the first year, while the Obama plan would start off $65 billion in the red.

Here’s how the Committee itemizes costs for both plans:

McCain Health Plan

Refundable Tax Credit	- $288 Billion
Taxing Employer Benefits	+ $201 Billion
Expand Health Savings Accounts	- $9 Billion
Establish Guaranteed Access Plan for High-Risk Pool	- $8 Billion
Higher Medicare Premiums for Wealthy	+ $42 Billion
Cut Medicare and Medical Costs	+ $43 Billion
TOTAL	- $17 Billion

Source: Committee for a Responsible Federal Budget

Obama Health Plan

Expand Health Care Coverage	- $115 Billion
Reduce Health Care Costs	+ $50 Billion
Close Medicare Part D Drug Coverage Gap	- $43 Billion
Reduce Medicare Costs	+ $43 Billion
TOTAL	- $65 Billion

Source: Committee for a Responsible Federal Budget

And yet, there’s one big health care issue notably not on the list on either plan, says Maya McGuiness: the ballooning Medicare deficit.

See more on where the candidates stand on:

• Taxes
• Economy
• Social Security
• Housing
• Trade
• Energy

CONTINUED : Side-by-side Plan Comparison

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