Thursday, May 08, 2008

Does McCain Understand His Proposal?

I see in the papers that presidential candidate Senator John McCain is proposing a tax credit that would give individuals an incentive to purchase health insurance directly rather than through their employers. The stated goal is “to foster competition and drive down prices.”

I have tried to figure out what competition would be fostered and how it would drive down prices.

One way for insurance companies to get their premiums down would be by negotiating lower rates with providers. That can’t be it since insurance companies already compete at this level.

So McCain must think that the competition will be among companies competing to sell their health insurance policies to individual subscribers.

Those companies compete now in selling their policies to employers. But it is more costly to sell health insurance policies one at a time and to collect premiums on them individually than it is to sell them in large batches to employers who do the collecting.

So how is it that prices will be driven down? Unless insurance companies can somehow avoid insuring people who need lots of care, the only possibility I can see is for them to reduce benefits, such as by increasing the co-pays and deductibles.

At that point, the price of insurance may have gone down some, but overall costs will have gone up. That would be offset only if having consumers pay more of the cost causes them to reduce their use of health services by enough to cover the higher operating costs involved in insuring individuals rather than groups.

I doubt Senator McCain will be explaining that this is how his proposal will “drive down prices.”

Actually, I suspect he doesn’t understand it himself.

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