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While the current system linking health insurance coverage to employment no longer makes sense, President Bush's proposal to change the way health insurance coverage is treated under the tax code would leave many older and sicker Americans unable to find coverage, according to analysts speaking at a Feb. 9 panel discussion at The Brookings Institution. Analysts said Bush's proposal, contained in his fiscal year 2008 budget blueprint, would reward high-income Americans at the expense of the poor, and would do nothing to improve the non-group insurance market, they said. The plan also would do little to control rapidly rising health care costs, since a small slice of the public is responsible for the overwhelmingly majority of health care spending, they added. "This is a one-step plan, which if enacted, would cause the nation to step into a very deep hole," said Henry Aaron, a Brookings senior fellow. Standard Deduction Bush's plan would make health benefits over a certain threshold taxable. Under Bush's plan, families with health insurance would not pay income or payroll taxes on the first $15,000 in health insurance compensation, while singles would not pay income or payroll taxes on the first $7,500. The proposal would take effect in 2009. Katherine Baicker, a member of President Bush's Council of Economic Advisers, said the proposal would remove the "unfairness and inefficiency" from the health care system by providing a standard deduction for health care regardless of whether it was provided through an employer or bought in the private (non-group) market. The current tax system helps subsidize expensive health insurance policies with first-dollar coverage because employees pay no tax on them, Baicker said. This can lead to overuse of services, and increased health care spending, since workers are responsible for very little of their health care bills, she added. Under Bush's plan, workers without health care coverage would be encouraged to get it via tax code changes, Baicker said. For example, someone earning $60,000 a year without health coverage now is responsible for income and payroll taxes on the $60,000. Under the Bush plan, an individual at this income level would be taxed on only $45,000 in income if they got health insurance because of the $15,000 deduction for coverage, for a tax savings of $4,545, Baicker said. 'Enormous Incentive.' "This would be an enormous incentive to get health insurance," Baicker said. On the flip side, a worker earning $80,000 with a health policy worth $20,000 from his or her employer now pays taxes only on the $80,000 income. Under the Bush plan, this worker would pay taxes on the income and the value of the plan, minus the $15,000 deduction, and so ultimately would be taxed on $85,000 in income. About 80 percent of Americans would see their taxes go down under the plan, Baicker said. Employers' ability to deduct health insurance from their taxes would not change under the plan, Baicker said. Baicker said the tax plan is meant to dovetail with the administration's "Affordable Choices" proposal that would divert health care funds now used for safety-net hospitals and possibly other programs to instead help states provide coverage to the uninsured. The president's proposal also would benefit individuals by allowing them to purchase health coverage across state lines, expanding health information technology, and supporting health prevention and wellness efforts, Baicker said. 'Disastrous Mess.' Aaron said the proposal would cause employers to drop coverage and instead give workers money to purchase insurance in the private market. But Aaron said the non-group market "is a disastrous mess" because it does not adequately pool risk. As a result, older and sicker workers would have trouble getting affordable coverage, Aaron said. Bush could have solved this problem by allowing workers to buy coverage through Medicare or the Federal Employees Health Benefits Program, he added. Aaron also said the proposal contains an "upside down incentive" because it would provide the biggest tax savings to those with the highest incomes. A more appropriate action would be to provide a tax credit to low-income workers to help them get coverage, he said. Linda Blumberg, principal research associate at the Urban Institute, said the proposal would not slow the growth in health care costs because costs are being driven by the most expensive-to-treat patients in the system. To reduce costs, the health system must change how care is delivered and the intensity of services, she said. Employers already are reducing their health care benefits and increasing what workers must pay for care out of their own money, Blumberg said, and yet costs continue to rise. Blumberg also said the tax system should not be changed for health care until viable alternatives are in place for those who would find themselves in the private market. There is no guarantee states in many cases would step in to provide coverage, she added. The comments by Aaron and Blumberg were mirrored by Urban Institute senior fellow Len Burman, who said the Bush plan would cause small and medium size employers to drop coverage. The Bush plan "would be a lot more convincing" if the non-group market were fixed, he added. Baicker responded that employers are dropping coverage in any case, and the Bush plan would be akin to throwing "a life raft to those in the individual market." More information is available at http://www.brook.edu/comm/events/20070209.htm
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