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State of the (healthcare) union

February 1, 2007
by Michael J. Stoil
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President Bush's 2007 State of the Union address, delivered last month, included a clear definition of societal responsibilities for healthcare financing. The President declared that “A future of hope and opportunity requires that all our citizens have affordable and available healthcare. When it comes to healthcare, government has an obligation to care for the elderly, the disabled, and poor children…For all other Americans, private health insurance is the best way to meet their needs.” In effect, President Bush implied that the federal government is not obliged to pay for the healthcare of the poor in general or for the care of veterans who are neither elderly nor disabled. In some ways, it is a very limited perspective on the public sector's healthcare responsibilities, although his remarks do suggest that government should be expected to provide long-term care for older Americans and other Americans with severe disabilities.

The President's stated commitment to government funding of healthcare for the elderly, the disabled, and low-income children was reflected in comments earlier in his speech on the three sources that fund the bulk of this care: Medicare, Medicaid, and Social Security. He declared that “Social Security and Medicare and Medicaid are commitments of conscience, and so it is our duty to keep them permanently sound.” He also warned that “we're failing in that duty. And this failure will one day leave our children with three bad options: huge tax increases, huge deficits, or huge and immediate cuts in benefits.” President Bush did not repeat specific proposals he has previously offered on these programs, but urged Congress to provide “good sense and goodwill” to fix the problem.

President Bush limited his description of new healthcare initiatives to proposals “to help more Americans afford their own insurance.” One of these is a tax deduction for health insurance that would operate like the standard deduction for dependents. Under this proposal, he explained, “Families with health insurance will pay no income or payroll taxes on $15,000 of their income. Single Americans with health insurance will pay no income or payroll taxes on $7,500 of their income.” The proposal would supposedly make private health insurance plan for millions of Americans who do not have workplace health coverage.

President Bush refrained from mentioning in the State of the Union that the administration proposes other changes in the tax code to pay for the health insurance deduction. Specifically, the White House has proposed to treat employer expenditures on employee healthcare as taxable income. For example, when a skilled nursing facility (SNF) spends $35,000 on a single employee's wages and $4,000 on that employee's health insurance, the employee today is assessed income tax only on the $35,000 in direct wages; under the President's proposal, the employee's taxable income would increase to $39,000 by incorporating the SNF's expenditures on health insurance—and then drop to $31,500 as a result of the new $7,500 deduction.

The catch for many employers is this: Because the proposed deduction has a fixed value, employees would effectively be penalized if their employers provided generous health coverage. As a result, the proposal rewards the employees of businesses who spend relatively little on insurance, and would therefore encourage those businesses to do just that.

The proposal could be especially nightmarish for Americans whose employers self-insure: A middle-aged employee who experiences a minor heart attack might find his/her taxable income rising by $30,000 or more if he/she works for a self-insuring employer who paid out that expenditure for treatment of the condition. In addition, for employers contributing to long-term care insurance for their employees, the President's proposal might treat those expenditures as taxable income for the employees and therefore make the practice less desirable for everyone.

This is why, when interviewed in the Washington Post on January 25, Karen Davis of the nonprofit Commonwealth Fund stated that the President's proposal effectively attacks the 70-year tradition of making employers responsible for healthcare coverage. “The question is,” said Davis, “should you try to undermine employer coverage?” Many members of the Democratic majority on Capitol Hill agree and have declared the President's tax deduction proposal to be “dead on arrival.”

The proposal could be especially nightmarish for Americans whose employers self-insure.

President Bush's other proposed healthcare financing initiative would encourage state governments to make basic private health insurance available to their poorest adult citizens. In the State of the Union address, he asked Congress “to take existing federal funds and use them to create ‘Affordable Choices’ grants. These grants would give our nation's governors more money and more flexibility to get private health insurance to those most in need.”

The “Affordable Choices” grants are seen as a more palatable healthcare financing policy among the Bush offerings. One possible drawback, however, is that they would substitute for existing specialty healthcare grants, such as the federal funds used to operate Maternal and Child Health Centers or to support new facility construction. Another concern is that they will be offered in an atmosphere of continued budget cutting. President Bush began his discussion of domestic priorities in the State of the Union address with a discussion of the need for spending discipline. He told Congress that “In the coming weeks, I will submit a budget that eliminates the federal deficit within the next five years. I ask you to make the same commitment. Together, we can restrain the spending appetite of the federal government….”