Republicans and Democrats generally agree that the current employer-based healthcare insurance model is flawed. To fix it we must ask: How did we get here?

The answer, as usual, lies in the poor incentives created by government tinkering. Employer-provided health insurance is not subject to federal payroll or income taxes, whereas individual insurance must be paid for with after-tax, personal-income dollars. Due to this artificial tax gap, it is usually mutually beneficial for employers to give employees health benefits instead of bigger paychecks — hence today’s system.

Furthermore, the fact that our insurance market is segregated by state borders means that most insurance companies face limited competition and charge higher premiums than they would in a free market. This stacks the deck even further against individual insurance policies and those who need them, such as entrepreneurs, part-time workers, the temporarily jobless and many low-wage earners. John McCain has made eliminating this artificial division of our insurance markets a key proposal in his healthcare plan.

Instead of addressing this issue, Barack Obama’s plan calls for what Consumer Reports describes as making “Medicare-like” government-subsidized health insurance available to anyone. The Obama plan “aims to preserve the existing job-based system while extending coverage.”

First, the good news: Obama’s plan, like McCain’s, would bring coverage to many who are currently uninsured.

However, the subsidized program would artificially render private insurers uncompetitive and gradually squeeze them out of the market. This is a well-known phenomenon that Massachusetts Institute of Technology economics professor Jonathan Gruber confirmed with 2007 research on the State Children’s Health Insurance Program, in which he found that 60 percent of the program’s enrollees were migrating from private insurance coverage into a public system that is made competitive only through our tax dollars.

Such “crowding out” will result in a vicious cycle. As the insurance companies lose their competitiveness and their market share, Obama’s proposed plan will gradually take on more people until its costs make the budgetary outlays for the Iraq war and Wall Street look like a drop in the bucket. Taking into account the economic damage and resulting loss of tax revenue that Obama’s redistributive tax hikes will inevitably wreak, such a course looks even worse.

McCain’s plan is well thought out, and it is a shame that he has not made a vigorous case for it. By leveling the tax treatment of employer-provided and individual insurance and allowing individuals to buy insurance across state lines, his plan will address the root causes of our healthcare problem and extend coverage to many who lack it. It is a far more efficient solution than the alternative because it focuses on structural alterations in the government’s treatment of insurance instead of piling on another layer of subsidies and mandates.

The grim news from Wall Street has been heralded by rabid populists on the left and right who assert that government should run the show. There are two very strong reasons to dispute this claim — their names are Fannie and Freddie — but critiques of the free market cannot even be applied to the public-private mutant behemoth that is our health insurance system because there is no free market in health insurance. The heavy hand of government got us into this situation; Frank Lloyd Wright could have been talking about healthcare today when he said, “I believe totally in a capitalist system; I only wish that someone would try it.”

Reach columnist Russ Wung at opinion@dailyuw.com.