Bush Wants to Level Health Care Playing Field

Ultimately, the Bush Administration thinks that the contemplated behavioral changes will mean that, “within the medium-term,” health expenditures could be lowered by about half a percentage point of gross domestic product.

It does that by providing a flat, standard deduction for anybody who purchases any kind of health insurance, no matter how much the health insurance costs and no matter where they get it – $15,000 for people purchasing a family policy, and $7,500 for people purchasing single policies.   In a press briefing, Katherine Baicker, Council of Economic Advisors, said, “If your policy costs $5,000, you still get $15,000 of compensation tax-free. If your policy costs $20,000, you still get $15,000 of compensation tax-free” (assuming the family example).   The White House says that, at present, an insurance policy on the individual market or the non-group market costs about $5,200.   Of course, the trade-off is that the coverage currently provided via employers would be treated as taxable income.   There would be no impact on the employer’s tax treatment for these benefits; they would simply be reported as income to the individual employee.

Aberrant Behaviors

The Administration claims that the current system has led to some aberrant behavior, that there is a “really strong incentive,” according to Baicker, “to get more generous employer policies to cover all the health care they might want to consume.”   That, in turn, results in generous first-dollar coverage in the employer market as the “norm,” rather than insurance policies such as auto or home owners, according to the Baicker.   The bottom line: Those workplace insurance plans apparently are leading those who have them to spend more (even though it doesn’t cost them more than a small co-pay), and spend differently, on health care than they would otherwise.  

As for how the proposal would impact that behavior, Baicker said that “Immediately, it will affect quantities that people consume because they’ll be changing their mix of compensation and their choice of health-care plan. It will affect prices through provider competition.”   Administration officials said that “This would give people a chance as they’re negotiating contracts with their employers to take more of their compensation in the form of wages and less in the form of health benefits.”   In the long run, Baicker said, that will affect the development of more cost-effective health technology – which she described as the “real bang for the buck.”

The big winners under the proposal, according to the Administration, are people currently buying insurance on their own - they'll now get a big tax deduction - and those who currently aren't buying insurance - who now ostensibly have a financial incentive to do so (you have to buy some kind of insurance under the proposal to qualify for the deduction).  

Also likely to benefit under the proposal are those who are currently obtaining coverage under a workplace program that is valued at less than the standard deduction.   The Bush Administration claims that 80% of the policies offered in the employer market will fall in that category.  

Calling for Change

The remaining 20% of the policies - which Baicker ballparked at 30 million people - would, in fact, see their taxes increase "if people didn't change their behavior at all," she cautioned.   They would be taxed on the extra amount above the standard deduction.   She reminded reporters that they "have some time between now and then to change their compensation packages."

An issue that could be of concern to many: Deputy Press Secretary Tony Fratto noted that the proposed deduction would be indexed to inflation, not projected health-care costs.   That could mean, in the absence of behavioral changes - which the Administration is clearly counting on - that "people would be finding their premiums higher than the $15,000 over time."   The Administration also appears to be counting on the inflation-indexing of the deduction to help apply pressure to health-care costs that have consistently outpaced inflation.  

Fratto denied that there was a bias on the part of the Administration towards trying to get people off of employer-provided health care.   "Flat-out no. In no way," he emphasized.   "What we have are people receiving employer-provided benefits that are subsidized through the tax code, and those on the other side of the room here who are receiving no benefits," he explained.   "And the effort is to try to provide a standard, equitable share of the benefit."