The end of health care as we know it

CHICAGO — On Tuesday, President Bush used his bully pulpit to argue that the nation should be doing much more to cover the uninsured.

“A future of hope and opportunity requires that all our citizens have affordable and available health care,” he told Congress, which responded with hearty applause. It’s a new message from the White House. And it’s likely to have resonance as a reinvigorated debate on health reform gathers steam in Washington and the states.

“I think the president is jump-starting a national discussion over expanding health-care coverage,” said Karen Ignani, president of America’s Health Insurance Plans.

The president’s most important contribution is his focus on changing what health economists call “perverse incentives” in the tax code.

Currently, payroll and income taxes are waived for health insurance, unlike other forms of compensation. But only workers insured through their employers get these tax breaks.

Also, companies that spend more on health insurance get bigger tax breaks. As a result, “overly generous” policies that encourage “over-use of medical services” are common, said Michael Cannon, health policy director at the Cato Institute.

The president would change the incentives built into the tax code in three ways.

First, he’d eliminate the tax breaks for health insurance and treat it like any other form of compensation. That would make consumers more sensitive to costs, his advisers said.

Second, the president would create a tax deduction for health insurance, similar to the existing deduction for having a child. Families would get a deduction of $15,000 beginning in 2009; individuals would could deduct $7,500. Annual increases would be tied to inflation.

Consumers would get the full value of the deduction, no matter how much they actually spent. Spending in excess of the deduction’s amount would be taxed as ordinary compensation.

Over a 10-year period, the extra taxes would pay for the broader deductions.

About 30 million people who currently get health insurance through employers would end up paying these new taxes if they keep current coverage arrangements, according to the administration. Another 120 million workers with employer-based policies would not be affected; most would enjoy some extra tax advantages.

Third, Bush would make the deduction available to everyone, wherever they purchase health insurance.

Paul Fronstin, director of health research at the Employee Benefits Research Institute, envisions a series of serious consequences. More employers would stop offering health insurance and younger and healthier workers would opt out of company plans if they could get better deals elsewhere.

“This would be the end of employer-based health insurance as we know it,” Fronstin said.

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