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 A Fork in the Road 
Obama, McCain, and Health Care
by Michael Tanner
 MichaelTannerisaseniorfellowattheCatoInstituteandcoauthor of 
Healthy Competition: What’s HoldingBack Health Care and How to Free It
.
No. 104
Healthcarereformwillbeoneofthetopissuesof the 2008 presidential election. In the face of widespread public demand for changes in theU.S.healthcaresystem,bothBarackObamaand John McCain have offered detailed proposals forreform.Senator Obama’s approach relies heavily ongovernment mandates, regulations, and subsi-dies. He would mandate that employers providehealth care coverage for their workers and thatparents purchase health insurance for their chil-dren. He would significantly increase regulationof the insurance industry, establishing a stan-dard minimum benefits package, and requiringinsurers to accept all applicants regardless of theirhealth.Hewouldofferavarietyofnewandexpanded subsidies to middle- and low-income Americans.In contrast, John McCain emphasizes con-sumer choice and greater competition in thehealth care industry. He would move away fromourcurrentemployment-basedinsurancesystemby replacing the current tax exclusion foremployer-provided insurance with a refundabletax credit for individuals. At the same time hewouldsharplyderegulatetheinsuranceindustry toincreasecompetition.SenatorMcCain’sproposalisfarfromperfect,but from a free-market perspective, it appearssuperiortoSenatorObama’splan.Obama’splan,with its heavy reliance on government, leads tothe same problems that bedevil universal healthcare systems all over the world: limited patientchoices and rationed care. McCain’s proposal ismuchmoreconsumercenteredandtapsintothebestaspectsofthefreemarket.
 July 29, 2008
Executive Summary
Cato Institute•1000 Massachusetts Avenue, N.W.•Washington, D.C. 20001•(202) 842-0200
 
Introduction
Our health care system is broken:expensive,inefficient,andpoorlyadapt-ed to an economy no longer built onlifetime employment—a system thatexposes Americans to insecurity andpossibledestitution.—Sen. Barack Obama 
1
Controlling health care costs will takefundamentalchange.Nothingshortof acompletereformofthecultureofourhealth care system and the way we pay for it will suffice.—Sen. John McCain
2
There is no doubt that voters see healthcare reform as a major election issue, withpolls generally showing it trailing only theeconomy and the war in Iraq among voterconcerns.
3
This interest stems from an overwhelmingdissatisfaction with the current state of thehealth care system. According to a November2007 Gallup Poll, fully 56 percent of Ameri-cans believe that our health care system hasmajorproblems,andanother17percentseeitas being “in crisis.”
4
 Virtually every aspect of the health care system comes in for criticism.Not surprisingly, given the amount of atten-tion paid to the uninsured, “access to care” isseenasthebiggestproblem,with“cost”aclosesecond.
5
But even the quality of health care,longastrongsuitoftheU.S.system,comesinfor criticism, with 45 percent of voters believ-ing that the quality of care is “poor” or “only fair.”
6
Thus,itisnotsurprisingthatbothBarackObama and John McCain have offered de-tailed proposals for health care reform.
7
Inthe broadest sense, both seek similar things.Both would increase the number of insured Americans (though both would fall short of universal coverage), and both seek to reducethe cost of health insurance and overallhealth care spending. In fact, both make costcontrolthehighestpriorityoftheirplans.However, the candidates differ signifi-cantly in how to achieve their goals. SenatorObama generally turns to the governmentfor answers. His plan relies heavily on gov-ernment mandates, regulations, and subsi-dies. On the other hand, with a few conspic-uous lapses, Senator McCain leans towardderegulation and free market approaches tohealth care reform.Theresultsofthesepoliciesarelikelytobe very different for the American health caresystem. As Harvard University health profes-sor Robert Blendon puts it, “It is one of thebiggest philosophical debates we’ve had in a long time.”
8
 Voters this year will have a very clear choice.
Barack Obama
Senator Obama has said that if he weredesigning a health care system from scratch,his preference would be for a single-payer sys-tem“managedlikeCanada’s.”
9
However,givenboth the infrastructure of the existing systemand the political opposition to a single-payersystem, he has proposed a less radical ap-proach while hoping that “it may be that weenduptransitioningtosuchasystem.”
10
Obama’s proposal is based on the conceptof “managed competition.” Originally devel-oped by Stanford University economist AlainEnthoven, among others, managed competi-tion leaves the provision of health care in pri- vate hands, but within an artificial market-placerununderstrictgovernmentcontrolandregulation.
11
Insurers would operate muchlike public utilities. Risk management orunderwriting would be prohibited, and thegovernmentwouldhaveatleastsomesayoverservices provided and premiums. This is thesame concept that formed the basis for the1993Clintonhealthcareplan,MittRomney’s2006 Massachusetts legislation, and Hillary Clinton’s2008campaignproposal.Obama also appears to break somewhatwith recent Democratic orthodoxy on healthcarereformbymakingthereductionofhealthcarecostsatleastascentraltohisproposalsas
2
Fully56percentof Americansbelievethatourhealthcaresystemhasmajorproblems,andanother17percentseeitasbeing“incrisis.”
 
achieving universal coverage. Coverage andcosts are, of course, inextricably linked. Butmost Democrats, including Obama’s primary opponents,werefocusedalmostexclusivelyonthe question of how to provide health insur-ance to those without it. That was the battlecry of Sen. Hillary Clinton, who promised toprovide “health insurance for every single American.”
12
In contrast, Obama, while continuing tocall his proposal a “universal health careplan,”hasfocusedmoreonacombinationof regulations, cost cutting, and subsidies toreducebothoverallhealthcarespendingandthe price of insurance. He even appears will-ing to concede that universal coverage is notimmediately achievable, and his own plandoes not aim for 100 percent coverage.Evenso,Obamaclearlyseeksgreatergovern-ment control over the U.S. health care system.Inhisbook,the
 AudacityofHope
,hearguesthat“themarketalonecannotsolveourhealthcarewoes—in part because the market has provenincapable of creating large enough insurancepoolstokeepcoststoindividualsaffordable,inpart because health care is not like other prod-ucts or services (when your child gets sick, youdon’tgoshoppingforthebestbargain).”
13
 As a result, he has been actively hostile tomarket-basedreformssuchasHealthSavings Accounts, which he dismisses as being basedon the idea that people have “an irrationaldesire to purchase more than they need.”
14
“The “freedom to choose,” he argues, “mag-nifiestheunevenrisksandrewardsoftoday’swinner-take-all economy.”
15
Not Quite Universal Coverage
ThroughouttheDemocraticprimaries,oneofthekeypointsofcontentionbetweenBarakObama and Hillary Clinton was the questionofanindividualmandate.
16
Clintonsupporteda requirement that every American buy healthinsurance, whereas Obama eschewed a man-dateforadults.Hewould,though,requirethatparentspurchase insuranceto covertheirchil-dren(generouslydefinedasuptoage25).
17
Obama argues that a mandate is unneces-sary since Americans would buy health insur-ance on their own if it were affordable. “My beliefis thereasonthat peopledon’t have it isnot because they don’t want it, but becausetheycan’taffordit,”hesays.
18
Mostofhispro-posals are focused on making health insur-ance more affordable, either by reducing thecost of the insurance itself or subsidizing itspurchase.Hewouldrequireallemployerstoprovidetheir workers with insurance through a “play-or-pay” mandate. Employers who donot provide “meaningful coverage” for theirworkers would be required to pay a penalty equaltosomepercentageoftheirpayrollintoanationalfundthatwouldprovideinsuranceto those uncovered workers.
19
Obama’s cam-paign materials do not specify how muchthatpenalty(whichiseffectivelyatax)wouldbe. However, similar proposals have rangedfrom 4 to 7 percent of payroll.
20
Obama also leaves undefined the term“meaningfulcoverage,”althoughelsewherehesuggests that all insurance plans should offerbenefitsatleastasgenerousasthoseprovidedthrough the Federal Employees Health Bene-fitProgram.Finally, Obama does not appear to makeclear distinctions based on the size of theemployer, although in one speech he did say that his mandate would apply to “all but thesmallest businesses.”
21
Elsewhere he suggeststhat“verysmallbusinessesandstartups”wouldbeexempt.
22
Campaignofficialshavesaidunof-ficially that the exemption would apply to“some number less than 15” employees.
23
Itseems likely, therefore, that many of whatwouldnormallybeconsideredsmallbusinesseswould fall under the mandate. This is signifi-cant because small businesses are far less likely toofferinsurancetoday.Roughly45percentof uninsuredworkersareemployedbycompanieswith25orfewerworkers.
24
Thereareseveralproblemswithanemploy-er mandate. First, while it might be politically appealing to claim that business will bear thenew tax burden, nearly all economists wouldsee it quite differently. The amount of com-pensation that a worker receives is a functionofhisorherproductivity.Theemployerisgen-
3
Obama appearsto breaksomewhat withrecentDemocraticorthodoxy by making thereduction of health care costsat least as centralto his proposalsas achievinguniversalcoverage.
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