President Bush has joined the health reform debate with a proposal of his own. The Bush approach is as intriguing as it is controversial.

First, the Administration seeks to reform the federal tax code to change the tax treatment of health insurance premiums and offer new tax deductions to help make coverage more affordable. Second, the White House wants to give states the ability to extend basic coverage to the uninsured by redirecting funds from uncompensated care pools.

Changes to Tax Deductibility of Health Insurance:

Today, most employees are not taxed on the value of employer-sponsored health insurance coverage. That is, the employer’s share is not taxed and any employee contribution is taken out of income before taxes.

Many health economists believe this pre-tax treatment of health insurance tends, over time, to distort the market by giving a tax incentive to take income in the form of health coverage and insulating most working Americans from the cost of medical care. They argue this contributes to health inflation and creates a costly and unfair playing field for Americans without access to group coverage.

The Bush Administration proposes several major changes to the tax treatment of health insurance premiums:

  • Starting in 2009, a new federal tax deduction for those who obtain health insurance on their own or through an employer.
  • The new deductions would start at $7,500 for individuals and $15,000 for families and increase annually by the general Consumer Price Index (CPI).
  • The new deductions would be available to all individuals and families who purchase health insurance, regardless of the value of their policies or whether they itemize deductions on their federal tax returns.
  • Americans with employer-sponsored health coverage worth more than the proposed allowable deductions would pay taxes on the difference. That is, for the first time the feds would tax the value of employer-sponsored coverage but only the portion above the deduction amount.

If the tax changes are enacted, the Bush Administration estimates that about three million individuals who are now uninsured will gain health coverage. Of Americans with employer-sponsored coverage, about 80 percent (roughly 100 million taxpayers) would see a reduction in taxes. For example, a family with an annual income of $60,000 would see tax savings of about $4,500 annually. The other 20 percent – about 30 million, mostly higher income individuals – would see modest increase in their federal tax bill.

From a federal perspective, the proposal is expected to be budget neutral over the first ten years. In the early years, the proposal would cost the federal government $30-40 billion a year. However, by 2013 the changes are expected to increase net federal revenues. This is because it is structured to redistribute dollars in the system, over time taxpayers will tend to gravitate to health plans falling below the deductible amounts, and tax revenues will increase as more compensation shifts from benefits to wages.

Affordable Choices Grants to States:

The second component of the President’s health reform package is called the Affordable Choices Initiative. Leveraging existing waiver authority and some likely legislative changes in Medicaid and Medicare, the Administration proposes to give states grants and new flexibility to offer basic, affordable health insurance coverage to the uninsured.

Specifically, the White House wants to allow states to redirect about $30 billion in dollars now used to help hospitals with uncompensated care. Both Medicaid and Medicare have disproportionate share hospital programs. While the methodologies differ, the federal Medicare program and state Medicaid programs use disproportionate share hospital (DSH) payments to send additional dollars to hospitals that serve a disproportionate number of uninsured patients.

Given the large number of states engaged in health reform initiatives and the presence of the large pools of dollars, the White House sees a unique opportunity to foster state-based coverage expansions and move dollars to subsidize health plans for the uninsured.

The Administration has also hinted at an interest in using savings that would result from new proposed federal rules to cap Medicaid payments to publicly owned providers. Right now, if the final rules are issued this summer as expected, many states and public hospitals will lose and the feds will pocket the savings for budget purposes.

However, because of the dollars involved and the pressure it places on many states and public providers, the proposed cap on Medicaid payments could be used to sweeten the Affordable Choices Initiative. For some states, it could become a case of “use it or lose it.” In addition to giving states and public hospitals an added incentive to come to the table and perhaps soften Congressional opposition, it would add several billion dollars to the pool of funds for state-based coverage expansions.

More Details Forthcoming:

More details on the tax deductibility proposal and the Affordable Choices grants are expected on Monday, February 5, when the White House releases President Bush’s proposed budget for FY 2008.

The tax deductibility proposal already faces stiff opposition from key Democrats in Congress. And hospital industry groups are lining up to oppose the Affordable Choices Grants. However, the two proposals certainly contribute to the debate and improve the chances of some major health reform legislation in 2007.