Posted by: Randy Allgaier | January 24, 2007

The President’s Health Care Plan- BEWARE, The Devil is in the detail!


In his State of the Union address, President Bush proposed major changes in tax incentives for health insurance and health care. His plan would eliminate most current tax exclusions and deductions for health insurance premiums and out-of-pocket costs and in their place substitute a separate standard deduction in the federal income tax for all taxpayers who obtain qualifying health insurance. This special deduction would also apply to earnings subject to payroll taxes. The plan’s intent is to increase the tax incentive to purchase some form of insurance while eliminating the current system’s bias in favor of insurance provided through employers and reducing the current tax incentives for over-consumption of health care services (and thus under-consumption of other valued goods like food and shelter).

In some respects, the plan is very innovative and a cursory glance makes it look like a step in the right direction but while the plan would improve the market for health insurance, an analysis by the Brookings Institution and the Urban Institute concludes, elements could actually reduce insurance coverage, particularly for low-income families and people in poor health.

The president’s plan effectively turns the tax subsidy for health insurance into a kind of voucher. It would increase the amount of tax relief that subsidizes acquisition of health insurance while eliminating the tax advantages for increased consumption of health care over all other goods. The proposal will almost certainly encourage some people who currently lack insurance, particularly middle-income families, to get it. And the core of the new proposal is not biased towards the provision of favored forms of insurance (e.g., high deductible policies) over other forms  of insurance that could reduce spending (e.g., managed care or plans with higher co-payments).  

However, as under current law, the subsidy will be more valuable for high-income people than for those with lower incomes who most need help. In fact, low-income households with no income tax liability would get virtually no help, as is true under the current structure. These limitations could easily be addressed by converting the proposed standard deduction into a flat credit or even a sliding-scale credit that is larger for low-income families.  

Because the standard deduction would be available to all who obtained qualifying insurance, whether through an employer or as an individual, the proposal would level the playing field between employer-sponsored insurance and insurance purchased in the individual market. The plan would lead some employers, especially small and medium-sized businesses, to stop offering health insurance to their employees, exacerbating a trend that is already well underway. Even if such employers increase wages by the amount of the firm’s previous contribution, this would fragment risk pooling and insurance, forcing some higher-risk people, especially those with low incomes, into the ranks of the uninsured. Mitigating or remedying these problems would require some combination of expanded public programs, new pooling arrangements, fundamental reform of the individual market, or additional tax subsidies for small employers that offer health insurance.

The administration does propose to provide states with incentives to address the problems in the non-group market, but those promises may not be backed by adequate funding to deal with the serious challenges facing those in the non-group market. Moreover, the tax changes would go into effect regardless of whether or when states adopted the complementary changes to the non-group market.

Congress must look at some of the innovations within the President’s proposal, keep the positive aspects, fix the problems inherent in the proposal and meaningfully flesh out some of the generalities. And most of the proposal was presented in sweeping generalities.   The devil is always in the detail and the President’s record is not one that should trust the big statements.   

Health care coverage is one of the biggest domestic issues facing this country.  It is unlikely that a single payer system will ever move forward due to the inordinate influence of health insurance companies and the pharmaceutical industry.  Finding ways to work meaningfully with states that are looking to address the preponderance of uninsured Americans (e.g. Massachusetts and potentially California) and looking for ways that will help lower income and middle income families is vital.  Let’s hope that President Bush will work with the Democratic Congress on this and that he and Republican members of Congress will not, as is all too usual, cave to the special interests of the drug companies and insurance companies.

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