Bold New Policy

Before treating a patient, a physician starts with a good diagnosis. And that’s just what President Bush has done with his health reform proposals.

Rather than treating symptoms, he has offered a remedy for a root cause of the health sector’s high costs and consequent high uninsured rates.

“Changing the tax code is a vital and necessary step to making healthcare affordable for more Americans,” Mr. Bush said last night in his State of the Union address to Congress.

Exactly.

But rather than offer the Castor Oil that the policy community has been recommending for decades (and which I described in my newsletter last week), the president took the debate into an entirely new realm by prescribing a honey-coated therapy.

He is offering a plan that can mean a tax cut for 100 million working Americans, gives families the opportunity to own health insurance that is portable from job to job, and provides new resources for the uninsured to buy coverage. And all of this without any new long term costs to the federal treasury.

Here’s the plan: Mr. Bush proposes a new standard deduction for health insurance. It will be available to any taxpayer, employed or not, who buys qualifying health insurance.

The standard tax deduction would be worth $15,000 for families and $7,500 for individuals. You simply subtract the deduction from your gross income when you fill out your taxes. No need to itemize, and you get the full deduction, even if the policy you buy costs less, as long as its meets certain minimum requirements for catastrophic coverage.

But on the other side of the ledger, if you get health insurance at work, your employer now must include the value of your policy in your gross income. Here’s an example of how it would work:

  • Let’s say your family’s income is $60,000 and your wife gets family coverage through her job that is worth $10,000.

    That would mean your family’s new reported income would be $70,000.

    But, with the new standard deduction, you would subtract $15,000 from that and only pay taxes on $55,000. (It works just like the current dependent deduction.)

    That would mean you still have your family’s health insurance policy through your wife’s job, but your family would save about $1,500 in taxes because you would be paying taxes on a lower income — $55,000 instead of $60,000.

Okay, but what if you don’t get health insurance at work and you’ve been buying it on your own?

  • Your family income is still $60,000, but you have been paying $6,000 to buy health insurance.

    You would subtract the full standard deduction of $15,000 and now would only pay taxes on $45,000.

    You would save $4,545 in taxes. (That includes $2,250 of income tax savings and $2,295 in savings from payroll taxes for Social Security and Medicare.)

    And after the tax cut, that $6,000 policy you have been buying now has a net cost to you of less than $1,500, or about $120 a month instead of $500 a month.

So what about the person with the “gold-plated” policy? If his health insurance policy is worth more than $15,000 a year (and some executive and labor union policies are), then he would have to pay taxes on the difference. If he has a $20,000 policy, for example, then $5,000 would be subject to taxes.

But capping the unlimited tax break for these rich policies would give this executive a big incentive to negotiate a policy that stays under the $15,000 limit (a number which would be adjusted for general price inflation every year).

And what about the uninsured? The White House says the proposal would lower the average tax bill of a family without coverage by $3,350. This would mean $3,350 of their pay would be available to buy insurance instead of going to taxes. But for many, this still would not be enough.

So there is a second part to the president’s plan involving the states: HHS Secretary Mike Leavitt (former governor of Utah) is meeting with every governor to find out what his or her state needs to create “Affordable Choices” in health insurance.

Sec. Leavitt wants to help states make basic, affordable private health insurance policies available to their citizens. This could include, for example, grants in the form of vouchers or refundable tax credits to help low-income people purchase private health insurance.

The proposal took reporters and the policy community by surprise with its boldness. The president described his basic philosophy last night to enthusiastic applause on both sides of the aisle when he said, “?in all we do, we must remember that the best healthcare decisions are made not by government and insurance companies, but by patients and their doctors.”

This changes the whole conversation in the health policy debate. No longer are we simply talking about how much or how little to expand government programs. We now can have a new national debate over how to engage the power of consumers in transforming our health sector to become more efficient, more responsive to their needs, and more affordable.

In addressing the core problem of the dysfunctional tax treatment of health insurance, the president has won support from The Washington Post, and The Wall Street Journal, and experts from think tanks as traditionally divergent as the Urban Institute and The Heritage Foundation. (Heritage also offers a good and concise explanation of how the tax policy works.)

Does everyone like this? No, of course not. Congressional leaders have said the proposal is dead on arrival. It is such a new and creative idea that it will take time for people to analyze and digest the plan and its implications.

  • Many are fearful that it will accelerate the decline of employment-based health insurance by giving a tax break to individuals. But job-based coverage already is declining. This will give employers and employees a new negotiating tool to bargain for insurance that offers the best value.

  • Others say it doesn’t do enough for the uninsured and that tax credits rather than a tax deduction would be better. Using some of the “Affordable Choices” money, states can put new resources on the table to provide state-based tax credits, vouchers, or other new subsidies to the uninsured to supplement the federal tax break.

There are many more details than we can get into here and which will be addressed over time. But what’s the bottom line?

Based upon the concepts and information we have so far, the president’s plan can be a win/win/win/win/win:

  • It is a win for the uninsured because it offers millions more Americans the chance to buy health insurance with the tax savings they will receive from the new standard deduction and possible new state subsidies.

  • It is a win for states because they will have more flexibility with the new “Affordable Choices” state initiative to direct federal resources to meet the needs of citizens to get affordable health insurance.

  • It is a win for employees because they now have the opportunity to buy health insurance that they can own and take with them from job to job, and it gives them more control over decisions involving their health insurance and health care.

  • The health sector wins because this eliminates one of the major hidden forces driving up the cost of health insurance and gives the market new incentives to make that insurance more affordable.

  • Taxpayers win because 80 percent of them will receive a tax cut when they take the new $15,000 family deduction.

This idea sharpens the debate between those who believe that the answer to the problems in the health sector lies in much more government involvement through expansion of public programs, and those who believe that the free market can and does have much more potential to get health insurance costs down and provide people with greater access to coverage and more choices.

The president’s idea gives us the opportunity to have a clear debate, not only on policy but also on philosophy. Who should be in control of health care choices, government or consumers? It’s an important conversation, and the debate now begins.

Grace-Marie Turner

RECENT NEWS ARTICLES AND STUDIES:

  • Illegal health care
  • Arnold’s folly
  • Proposed state care plan comes with sticker shock: $380 a month
  • Reprise of ‘Hillary Care’
  • Free web site offers glimpse of Case’s new health group
  • Pernicious myths about public health insurance in France

ILLEGAL HEALTH CARE
Source: The Wall Street Journal, 01/23/07

The Massachusetts and California health plans, which both feature ‘pay or play’ mandates, “are probably illegal,” The Wall Street Journal writes in an editorial. The Fourth Circuit Court of Appeals ruled last week that Maryland’s “Fair Share” health legislation, also known as “the Wal-Mart tax,” violates the federal ERISA law that allows companies to have employee benefit plans that are uniform nationwide. This “could spell trouble for the California and Massachusetts schemes,” writes the Journal. “There were sound reasons that Congress decided to create a uniform national regulatory framework?Freeing employers from the administrative burden of having to comply with a multitude of state and local requirements leaves them with more money to spend on actual health care and other benefits,” writes the Journal. “It doesn’t speak well of Messrs. Schwarzenegger and Romney and their staffs that they didn’t seem to have given this well-known legislation much, if any, thought when crafting their reforms?We’re all for state policy experiments, but these ballyhooed health care reforms are policy blunders that won’t stand scrutiny in court, much less in the marketplace,” concludes the Journal.
Full text: online.wsj.com

ARNOLD’S FOLLY
Author: Sally C. Pipes
Source: National Review Online, 01/22/07

Governor Schwarzenegger’s health plan is a “heap of contradictions, mandates, and taxes,” writes Sally Pipes of the San Francisco-based Pacific Research Institute. The governor’s plan “is justified by soft notions that access to health care is dependent on insurance status, that people without insurance are less healthy because they lack insurance, that the uninsured shift costs to the insured through uncompensated care, and that the uninsured are, in part, free riding on the rest of us,” writes Pipes. “None of the problems justifies the proposed tax, spend, and regulate rampage that Arnold and others propose,” concludes Pipes. “There is no possible way this ends anyway but badly?Employers will be paying higher taxes, employees earning lower wages, Medicaid will be subsidizing more people, and 10 to 20 percent of Californians will still be officially counted as uninsured.”
Full text: www.pacificresearch.org

Governor Schwarzenegger’s proposal “is burdened with bad policies, particularly new taxes on doctors and hospitals and an unnecessary and costly employer mandate,” writes The Heritage Foundation. Although the plan “includes some promising provisions, such as improved tax rules for health savings accounts, help for low-income persons to buy private insurance, and, potentially, a statewide level playing field for health insurance?the proposal is a great leap forward for bigger government and increased bureaucratic decision-making and control.”
Full text: www.heritage.org

PROPOSED STATE CARE PLAN COMES WITH STICKER SHOCK: $380 A MONTH
Source: The Boston Globe, 01/20/07

A Massachusetts “state panel says a package filling the minimum requirements for coverage under the state’s new health insurance will cost $380 a month on average for an individual, almost twice what former Gov. Mitt Romney projected when he proposed universal coverage,” reports the Associated Press. “Romney had projected monthly costs at $200 when he first proposed universal coverage…[and] the panel had expected to get plans with a premium of about $260,” the AP reports. This is probably the least expensive plan the uninsured could buy, reports the AP — bad news for the 160,000 to 200,000 who do not qualify for the state-subsidized plans.
Full text: www.boston.com

REPRISE OF ‘HILLARY CARE’
Authors: Bob Cusack and Jeffrey Young
Source: The Hill, 01/23/07

“Former President Clinton has signaled privately that his wife, Sen. Hillary Rodham Clinton (D-N.Y.), will include aggressive healthcare proposals in her campaign for the White House,” reports The Hill. The former president’s statements, closed to the press and deemed off the record, were delivered during a Democratic Leadership Council conference held in Cambridge, Massachusetts. Former President Clinton’s remarks “have been interpreted as signaling that candidate Clinton could revive aspects of her 1993-94 approach that was vilified by Republicans and health-industry groups,” writes The Hill. According to one person in the room, President Clinton “aggressively attacked the ‘urban myths’ of his administration’s plan [and] rejected the widespread criticism that it was socialized medicine.” Sen. Clinton’s strategy will likely “turn healthcare, a political weakness, into a strength,” reports The Hill. “The difference is now for Sen. Clinton that she learned a lot from that experience,” said Donna Shalala former secretary of Health and Human Services under President Clinton. “The fact is that she’s learned a lot about tactics and a lot about getting things done.”
Full text: www.thehill.com

FREE WEB SITE OFFERS GLIMPSE OF CASE’S NEW HEALTH GROUP
Author: Annys Shin
Source: The Washington Post, 01/23/07

“Revolution Health Group, the year-old company started by America Online co-founder Steve Case, unveiled [this week] a preview of its free health Web site and debuted a concierge-style consumer service,” reports The Washington Post. RevolutionHealth.com will officially launch in April, but while the site is still under development, users can “search for condition-specific information, find a physician, check symptoms and trade comments with other users.” Case said the web site will work as an “AAA for health care” after its launch in April. Members will be able to “call to get help with insurance disputes, schedule appointments and get answers for health questions.” And membership is free in the first year.
Full text: www.washingtonpost.com

PERNICIOUS MYTHS ABOUT PUBLIC HEALTH INSURANCE IN FRANCE
Author: Valentin Petkantchin
Source: Institut Economique Molinari, 01/07

The French system of Social Security, with mandatory health insurance, “allegedly allows the insured to be equal in health and provides unlimited financing of all their health needs,” writes Valentin Petkantchin of the Belgian-based Institut Economique Molinari. “Both arguments turn out to be genuine myths,” writes Petkantchin. “The fact is that in the area of healthcare as in every other area of economic activity, resources are scarce and limited?Instead of satisfying all the health needs of the French population, the imposition of public insurance leads to arbitrary decisions by bureaucrats on behalf of the population,” he writes. “If we do not wish to suffer from the drawbacks of this public policy of cost containment and of rationing in the future?France should open the area of health insurance to competition and leave more scope to individual choice concerning health coverage for the insured, greater freedom of choice for patients and greater freedom of practice for health professionals.”
Full text (pdf): www.institutmolinari.org

UPCOMING EVENTS:

Health Information Technology and Rapid Learning
Burness Communications Health Affairs Briefing
Friday, January 26, 2007, 9:30 a.m. – 11:00 a.m.
Washington, DC

For additional details and registration information, go to: www.burnesscommunications.com.

Bridging the Divide: Medicare’s Role in Reducing Racial and Ethnic Disparities
Alliance for Health Reform Briefing
Monday, January 29, 2007, 12:15 p.m. – 2:00 p.m. (Lunch available at noon)
Washington, DC

For additional details and registration information, go to:www.allhealth.org.

Curing California Health Care: 5 Steps to Universal Choice in 2007
Silicon Valley Taxpayers’ Association Event
Wednesday, January 31, 2007, 6:30 p.m. – 9:30 p.m.
Campbell, CA

For additional details and registration information, go to: www.pacificresearch.org.

Health Policy Matters is a weekly newsletter containing summaries of timely and informative studies and articles on free-market health reform. It features research and writings by participants in the Health Policy Consensus Group, articles of interest from the health policy world, and announcements of coming events. Health Policy Matters is published by the Galen Institute, a not-for-profit public policy organization specializing in information and education on health policy. For more information about the newsletter and our organization, please visit our website at www.galen.org.

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The views expressed in this newsletter are the opinions of the authors and do not necessarily reflect the views of the Galen Institute or its directors.

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