A New Conversation about Health Reform

Mr. Bush has taken a different approach than most of the others. Instead of new mandates and expanding public programs to achieve universal coverage, he would start by creating new incentives for millions of people to buy more affordable private health insurance.

While the leadership in Congress says the plan is dead on arrival, analysts from both sides of the aisle agree it offers a fresh approach.

Mr. Bush would give families the opportunity to own health insurance that is portable from job to job, and he would free up some of their tax money to help them buy the coverage. The White House estimates his plan also would give a tax cut to 100 million working Americans, without any new long-term costs to the federal treasury.

The centerpiece of Mr. Bush's plan is a new standard deduction for health insurance. It would be available to any taxpayer, employed or not, who buys qualifying health insurance.

Families would get a new $15,000 standard tax deduction -- $7,500 for individuals. Here?s a basic example:

o Let's say your family earns $60,000. You would subtract the new standard deduction for health insurance of $15,000 and now would pay taxes on only $45,000.

 

You would save $4,545 in taxes. (That includes $2,250 of income tax savings and $2,295 in savings from payroll taxes for Social Security and Medicare.)

 

Let's also say you have been buying a $6,000 health insurance policy on your own. That family policy now would have a net cost to you of less than $1,500, or about $120 a month.

You need not itemize and will get the full deduction even if the policy you buy costs less, as long as its meets certain minimum requirements for catastrophic coverage.

Those with lower incomes can save money, even if they don?t own income taxes:

o A family of four earning $35,000 a year and claiming the child tax credit generally owes no income taxes. But if you claim the new $15,000 standard deduction for health insurance that Mr. Bush is proposing, you would save $2,295 in Medicare and Social Security taxes, new money to help buy health insurance.

But for most of the insured, this would not be enough.

As a result, the president wants to free up billions of dollars in existing federal payments to the states that they could use to provide additional subsidies for the uninsured to buy insurance -- including refundable tax credits or vouchers. The states also would be required to set up new purchasing pool arrangements that offer more affordable coverage.

For those who get health insurance at work, employers now must count the value of the worker's policy as taxable income. But many are worried that this would mean a tax increase for workers with "gold-plated" policies. If your health insurance policy is worth more than $15,000 a year (and some executive and labor union policies are), then you would have to pay taxes on the difference. If you have a $20,000 policy, for example, then $5,000 of it would be subject to taxes.

But capping the unlimited tax break for these rich policies would give you a big incentive to negotiate a policy that stays under the $15,000 limit (a number which would be adjusted for general price inflation every year) to avoid paying any new taxes.

While people are scrambling to see how this new policy affects them, several things are clear:

o The White House estimates three to five million uninsured Americans would buy health insurance with the income and payroll tax savings they will receive from the new standard deduction. This would be a measurable drop in the number of uninsured, with no new costs to the treasury. (Other estimates put a higher price on the president's plan but also assume several times as many of the uninsured get coverage.)

 

o The new tax deduction would eliminate one of the major hidden forces driving up health cost -- the unlimited tax break for job-based health insurance -- and level the playing field so that everyone would have an equal opportunity to get a tax break for buying insurance.

The debate over health reform is getting more clearly defined: Some believe that the solution lies in expanding public programs, while others believe that the free market has the potential to get health insurance costs down and to provide people with greater access to more affordable choices. It's an important conversation, and with solid proposals on both sides, the debate now begins.

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Grace-Marie Turner is president of the Galen Institute, a non-profit public policy organization that specializes in health and tax policy.