The View From Here . . .
By Bob Morgan, Jr.

Faced with low poll ratings, President Bush is attempting to turn the focus of attention somewhat from Iraq with a number of domestic initiatives, including health care. Specifically, the President's State of the Union address includes a proposal to reformulate the relationship between employer payments, taxes and deductibility of health care insurance.

Under current law, the cost of employer provided insurance is tax free to employees, no matter the cost of the insurance, while employers also get to deduct the cost of coverage. On the other hand, individuals who purchase their own health insurance frequently must pay for it on an after-tax basis, which can be a substantial detriment to affordability. Self employed persons can now deduct the cost of health care insurance, but must still pay payroll taxes on these amounts

In place of the present system, the President is proposing that families receive a standard deduction of $15,000 on the value of health insurance, while single people receive $7,500. (The amounts would likewise not be subject to payroll taxes.) On the other side of the coin, the value of health insurance would become taxable income. Thus, if a family had an employer-paid policy costing $13,000, it would receive a net deduction from income of $2,000, while a family with a policy costing $17,000 would have $2000 in additional taxable income. The proposal is designed to be revenue neutral.

A key rationale of the President's proposal is to restore the connection between the cost of health insurance and payment decisions, to encourage consumers to be cost conscious. White House advisers believe that the current system helps fuel health cost inflation by encouraging consumers, who may have little incentive to economize, to receive "gold-plated" policies rather than less expensive ones available through employers or by the purchase individual policies buttressed by health savings accounts. According to the White House, about 80% of taxpayers would receive a tax benefit from the proposal.

The proposal is certainly not without its critics. In a rather strident column, "Gold-Plated Indifference," The New York Times' Paul Krugman asserts that Mr. Bush has "no sense of what it's like to be uninsured."

Mr. Krugman complains that making premiums tax-deductible is almost worthless to low-bracket taxpayers and that individual coverage is frequently unavailable to people with pre-existing conditions. He also believes that pushing people from the employment based system, which he admits is "deeply flawed," into the individual insurance market would be "disaster on all fronts" since insurance companies would try to weed out high risk applicants.

Although the plan may not go anywhere in a Democratic-controlled Congress, the President may, despite Mr. Krugman's objections, be on to something. Health care inflation in recent years has been running well beyond the core rate and it seems very likely, as conservative think tanks have argued, that individual decisions (or non-decisions) on health spending are related to that increase. Moreover, the preexisting condition problem, while significant, is coming under control. Many states, for example, including New York, have open enrollment or guaranteed issue provisions that require insurers to write health policies for all individuals willing to purchase them, while others have high risk pools.

Certainly Mr. Bush's plan is not a panacea and many questions need to be fleshed out. (For example, how much is the deduction for a single person with a dependent?) Perhaps consideration could be given to a tax credit (dollar for dollar tax reduction) under some circumstances in lieu of a deduction. But the President deserves some credit for moving the debate forward.