The Bush Health Plan: The Good, The Bad, and The Ugly

President Bush outlined his health insurance reform proposal this week. Frankly, it reminds me of the title from an old western, The Good, The Bad, and The Ugly.

While politicians talk of the health care problem, the biggest health-related problem in the U.S. is with health insurance. The U.S. Census Bureau estimates that there are now 46.6 million Americans without health insurance, 8.3 million of them children. These uninsured individuals are less likely than the insured to seek the health care services they need. And even when they do seek treatment they incur costs that are often shifted onto everyone else. Surely we can do better.

It is no surprise then, that President Bush attempted to tackle the issue this week. Essentially, the President wants to institute tax incentives to encourage people to purchase individual health insurance policies. The President proposes to give a family of four a $15,000 tax deduction for the purchase of private health insurance (regardless of how much is actually spent). In exchange, all premium payments would count as taxable income (whether those premiums are paid by the employer or the employee). While the plan is not completely without merit, it has too many flaws to result in any progress.

The Good: The President recognizes (more so than most Democrats) that any meaningful reform must make it easier for families to purchase insurance outside of employer-sponsored plans as these plans present too many obstacles for families struggling to purchase insurance. First, health insurance is much less expensive when purchased in large group plans. This means that large employers are able to offer better insurance products to their employees than smaller employers—placing small businesses at a competitive disadvantage to their larger foes. Second, with employer-sponsored insurance plans the benefits are tied to the workers’ jobs. If a worker ever wanted to change jobs they must also change their insurance—a factor that can impede worker mobility. Thus, relying less upon employer-sponsored plans promises to make health insurance more affordable and more portable.

The President’s plan encourages such behavior by ensuring that all such purchases are treated equally under U.S. tax law. Currently, this is not the case as firms receive a tax deduction whenever they pay some of the health insurance costs of their employees, yet individuals do not receive any similar tax deduction whenever they purchase individual health plans. Under the President’s proposal all health insurance purchases would receive an identical tax deduction ($15,000 for families, $7,500 for singles)—a deduction for which only individuals are eligible. Firms would lose the ability to deduct health insurance payments.

The Bad: By eliminating the tax deduction that firms receive from offering insurance, fewer firms will likely offer such group health plans—leading more people to purchase individual health plans. However, a 2001 report from the Kaiser Family Foundation found that individual health insurance plans are much more expensive for older workers and workers with pre-existing health problems. Thus, as more workers are forced to shift into these individual health insurance plans, the number of uninsured Americans in these groups will likely grow.

The Ugly: But the biggest problem with the Bush Plan is that it will raise taxes for many middle-class families. Under the current law, every penny that families spend purchasing health insurance is deductible when purchased through an employer. Furthermore, many workers are able to participate in flexible spending plans that allow them to pay for health care expenses with “pre-tax” dollars—effectively making those expenditures deductible as well. Under the President’s plan, though every family qualifies for the same $15,000 tax deduction for purchasing insurance. Families that spend more than $15,000 per year on health insurance premiums (again including both the money contributed by the employer and employee) would be only able to deduct the first $15,000 from their taxes; all else would be taxable. This will increase the tax payments for these families.

The Bush Administration recognizes that some families will face a tax increase and that more and more families would face it each year (this tax increase is how the President proposes the government pay for the tax cuts others will receive). Since it is more costly to purchase coverage for a family with children than for childless couples, the families with children are more likely to surpass the $15,000 limit and more likely to face this tax increase.


We can do better than this. I propose the following guidelines:
· We should ensure that everyone has access to a group health plan so that they can purchase insurance at the most affordable rates. This can be done by establishing statewide group health plans.
· We should ensure that everyone has a truly portable insurance plan so that workers can change jobs without changing insurance. The statewide plans would be completely portable since they are not linked to a person’s place of employment.
· We should ensure that every penny spent purchasing these health insurance plans is deductible.
· We should offer refundable tax credits to families purchasing insurance for their children so that every child will be able to receive the health care they require.

While I certainly have an idea of how to satisfy these criteria, I understand that there may be other ideas that are just as effective. Unfortunately, the President’s plan does not make the cut. But if Congress would enact such a reform as I propose, all Americans would enjoy health insurance that is more available, more affordable, and more portable than we have ever seen before. And that would be progress.