Medicare, Medicaid Spending Would Be Reduced to Offset Proposed Tax CreditJohn McCain would pay for his health plan with major reductions to Medicare and Medicaid, a top aide said, in a move that independent analysts estimate could result in cuts of $1.3 trillion over 10 years to the government programs.
The Republican presidential nominee has said little about the proposed cuts, but they are needed to keep his health-care plan "budget neutral," as he has promised. The McCain campaign hasn't given a specific figure for the cuts, but didn't dispute the analysts' estimate.
In the months since Sen. McCain introduced his health plan, statements made by his campaign have implied that the new tax credits he is proposing to help Americans buy health insurance would be paid for with other tax increases.
But Douglas Holtz-Eakin, Sen. McCain's senior policy adviser, said Sunday that the campaign has always planned to fund the tax credits, in part, with savings from Medicare and Medicaid. Those government health-care programs serve seniors, poor families and the disabled. Medicare spending for the fiscal year ended Sept. 30 is estimated at $457.5 billion.
Mr. Holtz-Eakin said the Medicare and Medicaid changes would improve the programs and eliminate fraud, but he didn't detail where the cuts would come from. "It's about giving them the benefit package that has been promised to them by law at lower cost," he said.
Both Sen. McCain and his Democratic rival, Sen. Barack Obama, have recently sought to refocus on health care. The issue once ranked at the top of voters' domestic concerns, but has in recent months been eclipsed by energy and the economy.
Sen. McCain charges that the Obama plan, which would create a government-run marketplace in which people could buy coverage, would lead to government-run health care. Sen. Obama charges that Sen. McCain's plan would leave many people unable to get insurance.
Sen. Obama's campaign turned up the volume in a major push on health care over the weekend with two days of attacks from the stump, four new television advertisements, a series of health-care events across the country and fliers to voters' homes in swing states.
Sen. Obama is focused on Sen. McCain's plan to offer a new tax credit of $2,500 per person and $5,000 per family toward insurance premiums. This would allow people to buy health coverage on the open market, where they may have more choices and might look for a better bargain.
In exchange, the government would begin taxing the value of health benefits people get through work. If an employer spends $10,000 to buy a worker health insurance, the worker would pay taxes on that money.
"It's a shell game," Sen. Obama told an outdoor rally of 28,000 people Sunday in Wilson, N.C. "Sen. McCain gives you a tax credit with one hand -- but raises your taxes with the other."
Sen. McCain's plan actually would lower taxes for most people. But that means the plan wouldn't pay for itself, because it cuts certain taxes more than it raises others.
The federal government imposes two taxes on wages, generally: an income tax, which funds the government's general operations, and the payroll tax, paid for by employers and employees, which funds Social Security and Medicare. If Sen. McCain were to apply both of these to the value of health benefits, he could fully pay for his new tax credits. That is what aides have in the past suggested he would do.
In April, when Sen. McCain gave a major speech about his health plan, Mr. Holtz-Eakin, the senior policy adviser, said the tax provisions alone were budget neutral -- meaning that health benefits would have to be subject to both income and payroll taxes.
Campaign officials have regularly implied since then that the tax plan was a wash. In the vice-presidential debate last week, Alaska Gov. Sarah Palin described Sen. McCain's proposed tax credits and said: "That's budget neutral. That doesn't cost the government anything, as opposed to Barack Obama's plan to mandate health-care coverage and have this universal, government-run program."
Mr. Holtz-Eakin said the campaign never intended to apply the payroll tax to health benefits. That means that most people would see a net tax cut, contrary to Sen. Obama's assertions. Only those with very rich benefits packages are likely to see a net increase in taxes. But it also means that Sen. McCain must fill a huge budget hole -- which the campaign says will come from cuts to Medicare and Medicaid.
The nonpartisan Tax Policy Center, a Washington think tank, estimates that the McCain plan would cost the government $1.3 trillion over 10 years. The plan would allow as many as five million more people to have insurance, it estimates.
Mr. Holtz-Eakin said the plan is accurately described as budget neutral because it assumes enough savings in Medicare and Medicaid spending to make up the difference. He said the savings would come from eliminating Medicare fraud and by reforming payment policies to lower the overall cost of care. He said the new tax credits will help some low-income people avoid joining Medicaid. The campaign also proposes increasing Medicare premiums for wealthier seniors.
Sen. Obama also would rely on some Medicare savings to pay for his health-care plan, which would offer subsidies to help consumers pay for premiums. The Tax Policy Center estimates that his plan would cost $1.6 trillion over 10 years and cover 34 million more people.
By: Laura Meckler
Wall Street Journal; October 6, 2008
