“On two occasions I have been asked [by members of Parliament!], ‘Pray, Mr. Babbage, if you put into the machine wrong figures, will the right answers come out?’ I am not able rightly to apprehend the kind of confusion of ideas that could provoke such a question.”

As he reiterated in the first presidential debate, John McCain wants to give every American family a $5,000 healthcare tax credit and then have them purchase the healthcare insurance that is “right for them.” Let’s examine the ramifications of this approach, should it be implemented.

For purposes of this analysis, I’m going to assume a family of four who is in the 28% Federal tax bracket and who currently has healthcare insurance through one of the parents’ employers for which the family pays $150 per month and the employer pays $300 per month. Individual figures will differ, but these are not atypical.

Under McCain’s plan, the family will receive a $5,000 tax credit to purchase healthcare insurance for one year. As long as the employer continues to provide healthcare insurance at the same rate, the family is in good shape because the tax credit will fully cover the $1,800 yearly coverage the family is currently paying as their portion of the healthcare insurance. (We should probably assume the family will not be able to realize the $3,200 difference as additional tax refund since the entire credit is targeted to healthcare.)

Now, under McCain’s plan, the employer will no longer be able to use the $3,600 the company pays each year as a tax deduction. So, if we assume the company has an effective tax rate of 30%, the company will see an increase in taxes of $1,080 for each employee. This is a significant incentive for the company to abandon its program of providing healthcare benefits to the employee. And, after all, the employee now has $6,800 to purchase their own healthcare insurance (the $5,000 from the tax credit and the $1,800 they formerly paid as their portion of the company-provided healthcare plan).

So, the family begins shopping for healthcare insurance and finds the following:

1. Purchasing healthcare individually puts them in a different group than the “group” healthcare program in which their company was entitled to participate.
2. Individual health care policies are not available to anyone with a pre-existing condition unless a significant additional premium is paid, and often not even then.
3. Individual health care policies are subject to cancellation if the family places too many claims, or even one high-priced claim.
4. The average cost of individual healthcare policies is around $12,000 for a family of four.
5. Benefits under these individual healthcare policies typically have higher deductibles, higher co-pays and lower maximums than the group policies in which companies participate.

Finally, since the family take-home pay is now increased by the $1,800 per year they are no longer paying for company-provided healthcare, this $1,800 is taxable. So the family’s increase in take-home pay is actually only $1,296, leaving them with $6,296 to apply toward the $12,000 cost of an individual healthcare policy.

The net “benefit” of John McCain’s healthcare reform is that our family of four now has to pay a net of $5,704 out of their pocket to purchase individual healthcare that probably has worse benefits than they have today.

Does the American voter see anything wrong with this picture?