While it is encouraging that President Bush made health care a theme of last night's State of the Union address—an issue of great importance to the new Congress and to the public—his proposal to offer tax deductions to those who buy health insurance would do little to cover the nation's nearly 47 million uninsured. It also falls far short of initiatives taking shape in states such as Massachusetts, California, and Pennsylvania.
Under the president's proposal, Americans with employer-provided health insurance would have the employer contribution counted as taxable income. But anyone with health coverage—whether provided by an employer or purchased individually—would have the first $7,500 of income excluded from income and payroll taxes or, in the case of families, the first $15,000 of income. Those purchasing coverage in the individual market would in effect be getting a new tax break, as would those whose employer contribution currently is less than the new standard deduction for health insurance.
At the same time, the Bush administration's proposal would increase taxes on workers whose employers contribute more to health insurance than the premium "cap" allows, such as those that serve a large number of older workers. The administration estimates this change in policy would translate into a tax increase for about 20 percent of employees; however, this could rise to more than half of employees by 2013, if increases in health insurance premiums continue to outpace general inflation. In addition, the president proposes diverting federal funds from public hospitals to state programs for the uninsured.
Although the Bush administration's plan would offer subsidies to people looking to buy insurance on the private market, it would fail to assist most of the uninsured. Insurance premiums would still be unaffordable for Americans with modest or low incomes. And the tax increase for employees would likely lead to the erosion of employer-sponsored health insurance over time.
Who Is Helped?
Exactly who would benefit from this plan? The biggest beneficiaries would be those currently purchasing coverage through the individual market. Almost 12 million adults are covered through individually purchased insurance, three-quarters of whom are working. Nearly half are between the ages 50 and 64. Forty percent have incomes over $50,000 a year—the group for whom the value of the tax deduction would be greatest. The president's proposal would reduce taxes for this group by about $2,500 for an individual or $5,000 for a family (assuming a 25% marginal income tax bracket and 7.65% Social Security and Medicare taxes). (Click on figures to open at full size.)
The proposal doesn't do anything to make individual coverage available or affordable for those with modest incomes or health problems. The Commonwealth Fund 2005 Biennial Health Insurance Survey found that one-fifth of people who had sought coverage in the individual health insurance market in the last three years were denied coverage because of health problems or were charged a higher premium. The survey also found that 70 percent of people with health problems or lower incomes who had sought coverage in the individual market found it very difficult or impossible to find a plan they could afford. Moreover, research has shown that few plans in the individual market, even plans with low deductibles and higher premiums, provide maternity benefits without a special rider. The President's proposal, unlike reform plans in California and Massachusetts, does not require insurers to cover everyone.
Would Not Solve America's Uninsured Problem
Nor would the president's proposal likely help those who are currently uninsured. According to the U.S. Treasury Department, some 3 to 5 million of the 47 million uninsured Americans could gain coverage. About 95 percent of the uninsured would not benefit substantially from the tax deductions. As described in a 2005 Commonwealth Fund report by Sherry Glied and her colleagues, more than 55 percent of the uninsured have such low incomes that they pay no taxes, while another 40 percent are in the 10 to 15 percent tax bracket.
This means that the uninsured simply don't have the discretionary income required to pick up the difference between the value of the tax incentive and the high premiums they face in the individual insurance market. That's why we have seen low participation rates in other plans that offer tax incentives. In other words, this group of Americans cannot afford insurance premiums—whether or not they receive a tax refund the following year.
The president has also signaled his intention to redirect funds that now help hospitals care for uninsured patients. He wants to give this money to states to cover the uninsured or assist them with major medical expenses. But not only are such funds insufficient to cover significant numbers of uninsured, taking them away from safety net hospitals would undermine their ability to provide money-losing services such as burn care, care for premature infants, and care for the uninsured.
A Blow to Employer Coverage
A major concern is that the president's plan would ultimately erode existing employer-sponsored coverage. Because the health insurance caps of $7,500 and $15,000 would be tied to general inflation, or the consumer price index (CPI)—which historically has risen at a slower rate than health insurance premiums—more and more people will wind up paying higher taxes over time. While only 20 percent of workers with employer coverage may be affected initially, if current trends continue over half could be affected by 2013.
For example, by 2009 the average annual employer contribution to family premiums will be about $10,400. Because health care spending is projected to increase at 7.5 percent a year, in 10 years employers would contribute approximately $21,500 to family premiums annually. By contrast, if the allowance of $15,000 for a family were indexed to growth with the CPI, and assuming a 2.8 percent annual increase, the cap would be $19,800 for a family in 2019. Thus, while the premium cap would affect about 20 percent of insured workers initially, it could affect more than half of workers over a decade and virtually all workers by 2030—which could lead many employers to cap their contribution to employee health benefits. Such cuts are most likely to be seen in declining industries, such as auto and steel, which disproportionately cover older workers with high health care costs. The premium cap would also affect those geographic areas of the country where premiums are highest.
Employees in small firms are also likely to be affected by the cap. A recent study by Jon Gabel and colleagues found that when premiums were adjusted for the amount of medical bills that a health plan would pay for, companies with less than 10 workers paid about 18 percent more than companies with 1,000 or more employees.
The president's plan could actually push people out of employer-sponsored insurance, which has relatively low administrative costs, and into high-overhead individual plans. Typically, the administrative costs of individual coverage consume an estimated 25 to 40 percent of each premium dollar, compared with 10 percent for group coverage. This means that premium dollars buy fewer benefits in the non-group market than they do in employer group markets. Likewise, the IRS will have to devote time and money to verifying coverage and dealing with cases where people have only part-year coverage or have multiple sources of coverage. Employers, meanwhile, will have to sort out per-employee costs for single coverage versus family coverage, the costs for different plans offered, and other issues.
Need for a Real Solution
Americans have called for a transformation of the health care system. President Bush's plan would not drive the U.S. health system to provide higher-quality, more efficient care, with fewer medical errors and less waste. Instead, it would foster growth in the individual health insurance market—but offer nothing to the majority of Americans living without health care coverage. Under this plan, these individuals and their families would continue to choose which of their prescribed medications they can afford, continue to visit the emergency room for routine care, and continue to fall deeper into medical debt. Rather than undermining good employer health insurance coverage that now exists, the nation should consider strategies that extend health insurance to all, and reward health care providers that implement best practices that yield safe, effective, and efficient care.
As always, I'm interested in your feedback. Please e-mail me at email@example.com.
February 2007Written with the assistance of Christine Haran, web editor.