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Bush moves to expand health insurance by revising tax code

WASHINGTON—President Bush's plan to amend the tax code to help provide health coverage for more Americans is drawing mixed reviews from health experts who say it moves in the right direction but could one day undermine the nation's employer-based health insurance system.

In Tuesday's State of the Union address, President Bush will propose that people who buy health insurance outside the workplace be given the same tax break as those who receive job-based coverage. Currently, employers can deduct whatever they spend for employee health benefits from their taxable income. Likewise, job-based health care benefits aren't counted as taxable income for employees.

The president's plan would, for the first time, give a flat, standard deduction of $7,500 for individuals and $15,000 for a family. Those whose coverage costs more—an estimated 35 million people—would pay taxes on the difference. Those paying less for insurance would still get the full deduction and the resulting break in taxes.

If implemented as planned in 2009, the White House estimates that 80 percent of Americans with employer-based coverage would pay lower taxes.

The tax breaks are designed to help more low-income people pay for health insurance, while forcing those with more generous coverage packages to pay some of the costs. The White House estimates that the proposal will be "budget neutral" over 10 years.

"The tax reform proposal that the president will put forward in the State of the Union levels the playing field between insurance coverage purchased inside the employer market and outside the employer market, and does it in a fairly innovative and creative way," said Julie Goon, special assistant to the president for economic policy.

In addition to the tax proposal, Bush will call for increased federal funds to help states craft their own plans for covering the uninsured.

Democrats, eager to explore their own remedies for the nation's nearly 47 million people without health insurance, were generally unimpressed.

Rep. Pete Stark, D-Calif., chairman of the Ways and Means Health Subcommittee, said the plan wouldn't help people purchase coverage because it is already too expensive.

"The president's so-called health care proposal won't help the uninsured, most of whom have limited incomes and are already in low tax brackets," said Stark. "But it will hurt middle-income Americans, whose employers will shift even more cost and risk to their employees."

Paul Fronstin, director of the health research and education programs at the nonpartisan Employee Benefit Research Institute, said the Bush proposal would "mean the end of employment-based coverage as we know it because it gives employers an incentive to drop coverage."

"If employees can go out and get private coverage with the same tax breaks as they'd get through employer-sponsored coverage, more companies will simply give them the money and let them find their own coverage because they view (health coverage) as a headache," Fronstin said.

In 2006, the average annual premium for single coverage was $4,242, while family coverage cost an average of $11,480, according to estimates by the Kaiser Family Foundation. Five million fewer workers received job-based coverage in 2006 than in 2000. And the percentage of firms that offer health benefits has fallen from 69 percent in 2000 to 61 percent this year.

That's stirred concerns that the job-based health insurance system, which covers nearly 175 million Americans, could unravel in the face of runaway costs.

Health economists have long argued that the current income tax exemption for job-based health coverage disproportionately benefits the affluent because the tax break increases with the amount spent for health care.

Since employers can write off all of their employee health care spending, they're more likely to offer "Cadillac coverage," with generous benefits and few restrictions on the use of care, said economist Paul Ginsburg, president of the Center for Studying Health System Change, a nonpartisan health research group in Washington.

"This type of insurance contributes to rapidly rising health care costs," Ginsburg said.

The president's proposal would reduce subsidies under the current system for high-income workers and increase those for lower-income workers.

"The president has correctly identified the problems in the health tax system and has proposed a solution that, in some respects, would move us forward," said Jason Furman, a senior fellow at The Brookings Institution.

But he added that more incentives are needed to help low-income people afford health care.

"I think you could build on this, but it needs a lot more work before it's ready for prime time," Furman said.

Ginsburg cited other potential obstacles. He said the proposed tax breaks will encourage people to have more patient-cost-sharing mechanisms in their plans—such as larger deductibles—in order to get their premiums down. Ginsburg also warned that sicker and older people who try to use the tax deduction for private coverage outside their jobs could be rejected or charged more by private companies due to health reasons.

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(c) 2007, McClatchy-Tribune Information Services.

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