Health care ad is right -- until the end

A new ad from Barack Obama attacks John McCain's health care plan.

"John McCain talks about a $5,000 tax credit for health care," an announcer says. "But here’s what he’s not telling you. McCain would make you pay income tax on your health insurance benefits. Taxing health benefits for the first time ever. And that tax credit? McCain’s own Web site said it goes straight to the insurance companies, not to you, leaving you on your own to pay McCain’s health insurance tax. Taxing health care instead of fixing it. We can’t afford John McCain."

The ad has a good bit of truth in it, but the notion that it leaves you "on your own" to pay a new tax on insurance is deceptive.

Let's back up a minute, though, to explain a few features of current health care policy and how McCain's proposal would change it.

Most Americans who have health insurance — about 71 percent — get it through their employer. Usually, the premiums are split so that the employer pays part and the employee pays part. Strictly speaking, the part that the employer pays is considered compensation and workers would owe taxes on it if there wasn't a tax exemption in federal law. The exemption makes employer-provided health insurance more attractive to both workers and employers.

McCain wants to improve the health care system by encouraging greater competition for health insurance. His idea is that people should be able to go out on the open market and buy their own health insurance, and not be pushed into an employer-provided insurance plan by tax incentives. So under McCain's plan, the tax exemption for employer provided health insurance would disappear, and people would get a tax credit of $2,500 per person ($5,000 for couples) to spend on any health insurance they wish. They might choose to use their employer's plan and use the tax credit to offset the new tax on the benefit, or they might go off and buy insurance on their own.

At times, the McCain campaign has touted the credit without mentioning the proposed repeal of the tax exemption on employer-provided insurance. (For an example, see the exchange on health care insurance between Sarah Palin and Joe Biden during the vice presidential debate on Oct. 3, 2008.)

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The ad reminds viewers — fairly, in our view — about the end of the tax exemption, an important part of the overall McCain plan. But then the ad says, "McCain’s own Web site said it goes straight to the insurance companies, not to you, leaving you on your own to pay McCain’s health insurance tax."

McCain's Web site does say that, but there's an excellent reason that the credit goes to the insurance companies. It's so people don't blow the tax credit on cigarettes and beer (or whatever else they'd like) instead of health insurance. Under McCain's plan, workers would pay taxes on the health exemption, but they would get $2,500 knocked off their health insurance bill. If workers come out ahead and there's money left over, that would go into a health spending account for them to spend on health-related incidentals.

It's a complex switcheroo, but there's ample evidence to show that the plan would be a wash for most workers. The McCain campaign says only workers with "gold-plated" health programs would do worse. An independent analysis from the nonpartisan Urban Institute confirms that: "In general, lower-income people with health insurance would receive benefits from the credit that would be well in excess of the value that they receive from today’s tax exemption. The gains are much smaller for higher-income people."

So the Obama ad gets its particulars correct, but ends with an unfair assertion. McCain's health plan does not leave you "on your own to pay McCain’s health insurance tax." We rate Obama's statement Barely True.