January 24, 2007

President Bush's Healthcare Plan

Carroll Andrew Morse

President Bush outlined a serious healthcare reform plan in last night's State of the Union. The President's plan is to replace the existing tax-exemption that applies only to money spent on employer-sponsored health insurance with a standard deduction that can be taken by any individual who purchases health insurance, regardless of employer or employment status.

1. Assuming the size of the deductions is reasonable, opposing this plan tantamount to saying "I oppose tax-breaks for individuals; tax-breaks should only be given to big corporations". And yet we will surely see this reaction from the usually anti-business left. In fact, we already do.

If libs can get past their knee-jerk "if Bush is for it, I'm against it" response to the entire universe, they will see that this plan addresses many of their complaints about Wal-Mart not providing insurance to enough of its employees. Under the Bush plan, for example, companies lose financial incentive to hire lots of part-time workers to avoid paying health benefits.

Arnold Kling of the Cato Institute systematically sums up and counters liberal reactions he has observed to the President's plan (h/t Instapundit)...

Since the President's plan was leaked, I have seen three complaints from the left.
  1. The tax break benefits the rich more than the poor.
  2. The tax break encourages people to leave employer-provided health plans and instead get health insurance on their own.
  3. The proposals encourage catastrophic health insurance rather than insulation.
In my view (2) and (3) are positive developments....As for (1), I fail to see the cause for alarm. Consider the status quo. An economist on the faculty at Princeton who receives generous health benefits from the University is able to enjoy them tax-free. So can the professor's secretary. But, as with all tax breaks, there is a vertical inequity -- the professor derives more benefit from the tax break than does the secretary. But today there is a horizontal inequity as well. A self-employed economist and a self-employed secretary get no tax break for obtaining comprehensive health insurance.

Now, if the President's proposal is enacted, the self-employed economist and the self-employed secretary will get a tax break....

My sense is that the hard left is going to dig in against the President's proposals. Too bad for the millions of people for whom health insurance is more expensive simply because where they work falls outside the corporate umbrella.

2. However, the biggest challenge to the President's proposal may not come from organized liberal shrieking, but from misunderstanding at America's apolitical center. Under the current system, employers do little more than choose the health plans that their employees will be allowed to spend their own salaries on. In spite of this, many individuals enrolled in employer-sponsored health plans are convinced that their employers are "giving" them something for nothing. When they hear about tax-code changes that will end the special status of employer based coverage, they will feel that the government is trying to take something away from them -- even though most will be able to to purchase same amount coverage with the same amount of money via an individual plan. Overcoming this perception will be one of the toughest challenges faced by Bush plan supporters.

3. To really make the Bush plan work, people must be allowed to buy insurance across state lines. Today's OpinionJournal article on the President's plan mentions that "the average employer-sponsored family plan runs about $11,500 annually". Even for someone in the top tax-bracket, a $15,000 deduction would pay for less than half of a $11,500 plan. But the $11,500 figure averages together nsurance costs in high-regulation, high-cost states (like Rhode Island) with insurance costs in low-regulation, low-cost states (like Idaho).

I poked around the "ehealthinsurance" website (as suggested by Anchor Rising commenter Emily Harding) and found that in some states, high-deductible insurance plans are available for a family of four in the range of $2,500 - $4,000. If people are given the freedom to escape from legislative mandates that drive the cost of insurance up, they should be able to find affordable coverage with the numbers the President is using.

4. Barack Obama was wrong in his post-SOTU interview with Charlie Gibson of ABC when he said there are no cost-controls in the President's plan (no link available). The cost-controls come from introducing transparency and choice into medical care, both of which are currently lacking in a system where an employer hands you a very complex health plan and tells you to "take it or leave it". Could Obama be confusing "cost controls" with "price controls"?

5. 'Tis not all praise I have for President Bush for proposing this plan. Here's my criticism: Why didn't he propose something like this when his party controlled both houses of Congress?

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While I support it conceptually, I'm not so sure that, if implemented, the growing pains that would be endured during the transition period would be bearable for middle-class families like my own.

You're correct in point three, but I'm not so confident that the "short term" will be so short. If my options are to get taxed on my $11,500 medical "benefit" or to flee from under the umbrella of employer to self-financed coverage (ie; "even if [I] can spend the same amount of money for the same amount coverage through an individual plan"] by paying the same amount myself, I'm going to have to suck it up and get taxed. There is no way I could afford to take that hit to my income. I suspect the same is true for many middle-class Americans.

Now, you address this a bit in point 4, but the problem is that there is no guarantee that the prices will come down quickly enough for it to be a no brainer to switch from employer based to self-paying. And that RI is a high cost state doesn't help, either (in fact, the $11,500 is about right for RI). Finally, I also have serious doubts that any such law would include such an interstate clause as would be necessary.

All that being said, I suppose there would be a "switching vanguard" that could start the ball rolling toward lower costs for which the more reluctant--or less able to take the hit--could eventually take advantage. In other words, those conservative wrt switching could benefit from the "risk takers."

I guess, in sum, that the problem is that the transition period really needs to be thought out so that there is basically no pain felt by the Average Joes. That's probably unrealistic, but there it is. Like I said, love the concept, but my wallet couldn't handle the change as the plan stands now.

Posted by: Marc Comtois at January 24, 2007 1:17 PM


But you don't get taxed extra, do you?

You get the $11,500 added to your taxable income, but you also get the new $15,000 deduction, for a net reduction of $3,500 in taxable income.

Don't you make out alright in this scenario?

Posted by: Andrew at January 24, 2007 1:48 PM

Aye, there's the rub. As an employee of a small business, I'm fairly certain that the "savings" that my employer will get (the $11,500) won't find it's way into my paycheck. I don't think I'm alone in anticipating that!

Thus, even if I get a really good, comprehensive plan for $8,000 on the market, that's $8,000 more that I'm paying out of pocket before all of the wonderful deductions (which probably wouldn't make up for the newfound shortfall).

Now, of course, I understand that I can negotiate with my employer, etc. But I still doubt that the aforementioned cost savings to salary bump ratio would translate to 1:1.

I'm willing to grant that it eventually may all equalize, but (again) it's the waiting part that will make it tough to swallow.

Posted by: Marc Comtois at January 24, 2007 3:04 PM

But aren't you assuming that your employer is going to immediately drop coverage if the Bush plan passes? Remember, under the Bush plan, employers can still offer the same group plans they do now; the only difference is the premiums will be taxed as income. There sholudn't be any reason for employers to be any more motivated to drop group insurance than they are today.

The Wyden plan, on the other hand, does call for replacing existing group plans with direct payments to employees. I'll see if I can find out what safeguards (if any) the Wydenites are proposing to make sure that all of the money being spent on group insurance plans finds its way back to employees.

Posted by: Andrew at January 24, 2007 3:52 PM

RE: Assumption - heh, believe me, it's a good one! Regardless, even if they don't, that's another $11,500 of "income" for me that wasn't taxable before, right?

RE: Wyden - I don't like the "compulsory" idea, but the Wyden plan sounds easier to deal with.

Then again, why not make it compulsory? No skin off the back of employers...they're paing it already, right? So just take them out as a middle man and get the workers to fend for themselves. I can handle that.

Again, I like the concept, but to boil it down: my only concern is that to "fix" health care I may end up essentially taking a pay cut--no matter for how short a period--that I can't afford to take.

Posted by: Marc Comtois at January 24, 2007 4:43 PM

You left out the deduction again! If your employer behaves honestly, and stays with the hypothetical $11,500 insurace plan already bing offered, it could be a $1,000 increase in your take-home pay (assuming somewhere around a 35% tax-rate on the difference between the $15,000 deduction and $11,500 in income).

I do agree that there needs to be some safeguards in the system to make sure benefit money doesn't mysteriously disappear during the transition period.

Posted by: Andrew at January 24, 2007 7:03 PM

I thought the deduction was only possible if you chose to self-finance your own health care, I didn't think it was an automatic just because you have health care. In re-reading the SOTU, the first is indeed what the President said ($15,000 deduction just for having health insurance). My bad! Here's the relevant portion of the actual proposal:

* The President's Proposal Would Replace The Current Tax System, Which Favors The Most Expensive Employer-Provided Plans. All families covered by a private family health insurance policy, whether purchased on their own or through their employer, will pay no income or payroll taxes on their first $15,000 of compensation. All individuals covered by any single private health insurance policy will pay no income or payroll taxes on their first $7,500 of compensation. o At the same time, health insurance would be considered taxable income. This is a change for those who now have health insurance through their jobs.
o Under current law, companies deduct health insurance costs and wages as legitimate business expenses. The President's proposal would not change this.

* Most Americans Who Purchase Health Insurance Through Their Employers Will See Their Tax Bills Go Down. The President's proposal will result in lower taxes for about 80 percent of employer-provided policies. More than 100 million Americans who now get health insurance through their job will see their tax bills go down, and their health insurance will therefore be more affordable. Those with more generous policies (20 percent) will have the option to adjust their compensation to have lower premiums and higher wages to offset the tax change.

So, if your health insurance cost is less than $15,000, you are OK. And, because employers can still use the health care deduction, there really is no incentive to drop it.

Posted by: Marc Comtois at January 25, 2007 8:28 AM

I just checked with the headquarters of the National Association of Health Underwriters and the Government Affairs staff said the President's healthcare proposal isn't expected to go far with this Congress.

They also said that all the details of the way it is supposed to work haven't been worked out yet.

Evidently one component of the proposal will require individuals and or employers to report what their contributions to their health insurance costs are on their tax returns to prove they have health insurance.

I'm told it will be similar to how the Health Savings Account (HSA) contributions now work. For example the maximum allowable contribution/deduction for an HSA plan is now $5600 for a family plan, or there abouts. You have to make that much of a contribution to get that much of a deduction.

With the President's proposal, the annual health insurance premiums the employee pays would have a bearing on the amount you'd be allowed to deduct and the ceilings seem to be set at the equivalent of whatever the tax savings comes out to if $15,000 would be deducted off of someone's adjusted gross income if they were paying for 100% of the cost of a family plan.

For example, someone making $60k per year having to pay for all of their insurance costs IF they were paying at least $4500 per year for a family plan and verified that they were, would save $4500 in taxes provided that that family was in a 30% tax bracket as they would not have to pay the 30% income tax on $15000 of income and the adjusted gross income would be reduced by $15000.

HOwever if the same family was only paying $3000 per year for a catastrophic plan,(which is very possible for a young family even as close by as Mystic, CT if you check ehealthinsurance.com's rates) they would only be able to save $3000.

If the family had a group family plan through an employer (with stupid co-pays that jacks up the cost of the insurance at least 30% and actually provides less protection) and the insurance premiums are $10,000 per year, let's say, and the employer pays half the cost leaving the other $5000 to be paid by the employee who through payroll deduction saves 30% or $1500, leaving a balance of $3500, that the employee pays, I think under the President's plan, the employee would save another $2250 since he is only paying for half of the plan.

The self-employed person would be able to still deduct the premiums as he always has (the full cost of $10k for the stupid co-pay plan if he had one) but in addition, take the additional maximum deduction of $4500 or 30% of $15,000.

I'm pretty sure it would work something like this.

Emily Harding

Posted by: Emily Harding at January 25, 2007 2:05 PM

It's all moot.

The prevailing Democrat philosophy is socialist, and they want socialized medicine similar to Canada's. Period.

(It may not be announced as being such, but between regulation and price controls but will be in fact - such as is already the case with Medicare / Medicaid.)

Also, the unions want it. It's far easier to organize entities that are government run - or which are dependent upon government reimbursements and so are in effect government controlled - and so the unions are salivating at the prospect of (official or undeclared) socialization of medicine because they can then lean of politicians to lean on hospital administrators to accept unionization without the affected employees ever even getting to actually vote on it.

Also, socialized medicine takes health care out as a bargaining matter, which the unions want because much potential wage increases are being sucked up by health insurance premiums (the workers will still pay for their health care, but the cost will be hidden in the higher tax rates that they were told would only apply to "the rich") ... just like in Canada, where the middle class is hit with 50% plus tax rates.

Posted by: Ragin' Rhode Islander at January 25, 2007 3:40 PM

" ...much potential wage increases ..."

For heaven's sake, how much is enough?

Posted by: SusanD at January 25, 2007 9:15 PM