Some Fear That Consumers Wouldn't Fare Well in Open Market
By Christopher Lee and Lori Montgomery
Washington Post Staff Writers
Thursday, January 25, 2007; A10
Economists are still sorting out the implications of the broad health-care proposals President Bush unveiled this week, but already some clear winners and losers are emerging.
Families with generous employer-sponsored coverage would be worse off, while those who buy insurance on the individual market, or whose health plan costs less than $15,000 annually, would come out ahead. But some of the winners will probably become losers over time, analysts said.
Moreover, while Bush's plan would alter a historic imbalance in the tax code that favors generally better-off consumers who get insurance through their jobs, it also could undermine coverage for some sicker, older people and erode the employer-sponsored system that still provides coverage to more than half of all Americans.
Some experts questioned whether the plan would have any impact on holding down spiraling health costs or extending health coverage to some of the 47 million people in the nation who have none.
"It's not solving the uninsured problem and it's not solving the cost problem, so it's not really advancing what we need to have happen," said Karen Davis, president of the Commonwealth Fund, a nonprofit health policy research organization. "What it does is favor individual insurance. . . . The question is, should you try to undermine employer coverage? Employer coverage has lower administrative costs and it covers everybody in a firm, not just those who are healthy enough to pass a medical exam."
Bush would treat the contributions that employers make to their employees' coverage as taxable income, no longer exempting from payroll and income taxes the money workers use to buy health insurance.
Instead, the president would create a new tax break for everyone who buys health insurance, regardless of where they get it. The government would allow each family to deduct $15,000 a year from its taxable income to offset the cost of its policy; individuals would be allowed to deduct $7,500.
Democrats on Capitol Hill have panned the plan.
"The president's proposals are an opportunity missed," Sen. Edward M. Kennedy (D-Mass.) said. "They will not improve access to good coverage and won't help working families afford the spiraling cost of health care."
Under the plan, which would take effect in 2009, winners would vastly outnumber the losers -- at least at first.
Families that spend less than $15,000 on their health coverage (either on their own or with an employer's contribution) would come out ahead, because the new deduction would apply to all of the money spent on premiums. A family that spends, $13,000 a year on health insurance could claim the full deduction. The administration says about 100 million people with employer-sponsored coverage would see their tax bills go down.
Other winners include the 17 million people who buy health insurance on the individual market, who would for the first time enjoy a tax break on the money they use to pay health premiums.
On the losing side are consumers with more expensive policies, especially those financed by employers, who would have to pay taxes on the money used to pay premiums exceeding $15,000. About 30 million people with employer coverage would see their tax bills go up in the first year, the administration says.
"You've got a Republican president willing to take from the rich and redistribute to the poor, which, symbolically, is a really big deal," said Thomas A. Scully, a former head of the Centers for Medicare and Medicaid Services under Bush. "It's breaking the ice to where the real source of revenue is and redistributing it from overinsured people to poor people. . . . The concept is a huge step in the right direction."
Advocates said the proposals would hold down health-care costs by motivating people to seek plans that cost $15,000 or less, and would help put basic insurance within reach of about 5 million of the uninsured. Still more people would gain coverage with the help of another Bush proposal to redirect some federal health money to new grants to assist states in finding innovative ways to cover the uninsured.
"It gives everyone a strong incentive to search for less-costly health care," said Mark B. McClellan, a health economist and former Bush adviser.
Other experts said the proposals were interesting but flawed.
The $15,000 deduction would increase annually with inflation, but health-care premiums typically rise faster. The administration estimates that in 2009, 80 percent of policies will fall under the $15,000 deduction.
After 10 years, though, only about 60 percent will, so more people would be hit by the tax, according to an analysis by the Tax Policy Center, a project of the Brookings Institution and the Urban Institute. The administration's own figures show the government losing as much as $40 billion in tax revenue in the first year but breaking even over a decade as more revenue rolls in.
Wealthier families who benefit from the deduction would get a much greater value than less-affluent families. The $15,000 deduction would be worth $5,250 to a family taxed at 35 percent but only $1,500 to one taxed in the 10 percent bracket. Moreover, more than half of the uninsured are too poor to owe any taxes and would see no benefit, according to an analysis by the conservative Tax Foundation. A more effective strategy, some said, would be to offer the poor tax credits to pay for health insurance, a strategy that Health and Human Services Secretary Mike Leavitt said yesterday the administration has considered.
Others fear the plan would prompt more employers to drop health coverage and offer employees an immediate increase in wages to buy coverage on the individual market. But those plans tend to be more expensive, less comprehensive and harder to get for consumers who are already sick.
"We're tilting the playing field toward this very flawed market," said Robert D. Reischauer, president of the Urban Institute.
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