New Bush Health Plan Proposal to Be Announced in State of the Union Address

President Bush is about to announce an interesting health care proposal that would cap the tax benefits on the most generous health benefit plans––often held by higher paid executives and some labor unions and use the revenue to cut the number of uninsured.

Individuals, whether they got their health insurance from work or paid for it themselves, would get a standard deduction of $7,500 for an individual and $15,000 for a family. The new plan would also give this new standard tax deduction to everybody – employer or individual coverage – no matter how much they are paying for health insurance.

About 80% of taxpayers have health insurance that costs less than $7,500/$15,000 and would therefore get an extra windfall tax deduction for the amount their insurance cost is less than the maximum deduction. For example, if their family health insurance costs were average, an estimated $13,000 in 2007, they would get an extra $2,000 deduction (the amount is based on a dollar benchmark of $15,000, minus the actual premium of the taxpayer).

The proposal is expected to be revenue neutral over a ten year period.

He would take any new tax revenue collected from those with generous plans and use it to provide tax credits or deductions that would assist lower-income individuals in getting health insurance. That help could be in the form of federal assistance to state coverage pools, small business assistance, or direct subsidies to low-income people.

This is not an entirely new idea. Various permutations of completely or partially ending the tax preference on health insurance for employers or individuals, or both, and in turn using that money to subsidize individuals as a way to reduce the number of uninsured have been around for a good 20 years.

It is also an extension of his earlier ideas that have pushed the health care system toward one run by individuals rather than employers.

With the Democratic House this year adopting “pay-as-you-go” rules that require any new spending programs also have identified a revenue source (new taxes or spending cuts) it is notable that the President is thinking about targeting the “Cadillac” health care plans as a source of revenue to help pay for new low-income health insurance subsidies.

This is almost a Democratic idea!!

Using the notion of a more progressive tax system should resonate with the new Democratic Congress. Having said that, I doubt it will be popular with the old-line labor unions that have some of the most generous plans. Already, Democrats sound skeptical about the idea complaining it will undermine the employer-based heath insurance system even more.

That Democratic criticism rings hollow, however. Why waste tax preference money on these rich plans when some people have no health insurance?

But Democrats also worry that this is just another attempt to end the employer-based system in favor of one driven by individuals and heavily dependent upon the Republican-favored health savings account (HSA) approach.

I see two other problems.

First, the individual health insurance market is problematic. Getting individual coverage is much more expensive than group coverage and a person has to be healthy to get it. To make this really work we will need to solve that problem.

Second, health insurance premiums have been rising about 8% per year in recent years. Basic inflation has been about 3%. If that kind of gap continues, it won't be long before the average person has a "gold plated" health plan that is on the losing end of things.

Even with the concerns, this is a very constructive way for President Bush to begin working with the new Congress on the health care dilemma.

Let’s see if the Dems really want to make the effort to work with this President on health care.

This could be the first test of just how much both sides really want to work together!