White House Proposes Health Reforms

February 2007

President’s health insurance reforms draw spectrum of supporters, but face marketplace and political opposition

In his State of the Union address, President Bush proposed reforms in the tax code that would create a standard deduction for heath insurance and in effect turn health insurance into taxable income. Under the proposal, families with health insurance of their own or supplied by an employer would not pay income or payroll taxes on the first $15,000 in health insurance premiums. For singles the cap would be $7,500.

If enacted, the proposal would be a boon to the self-employed, who must purchase any health insurance with after-tax income. Supporters say it would also add an incentive to employers to offer reasonable but not excessive health coverage.

The White House estimated the proposal would result in lower taxes for about 80 percent of employer-provided policies or more than 100 million Americans. The remaining 20 percent would pay more or employees could adjust their compensation to have lower premiums and higher wages.

The proposal quickly came under fire from Democrats and industry opponents who say it will raise taxes for millions of Americans. Other critics such as Paul Fronstin, director of health research at the Employee Benefit Research Institute (EBRI), said the president’s proposal would mean an end to employer-based benefits because employees could get the same tax break on their own.

But the proposal received support across a broad political spectrum of the media, with the Washington Post editorializing that the proposal “has flaws, but those can be addressed—if Democrats are will to do more than hurl criticism.” The Wall Street Journal’s editorial said, “Most Americans can see that the current employer-based system is breaking down…The Bush plan ought to jump start that debate.”

Were the proposal to be enacted, however, it could be years before it had an impact on the workforce. Frank B. McArdle, a health policy expert at Hewitt Associates, said large corporate employers, the segment for which the law would bring the most changes, would be reluctant to terminate health benefits because there are few reliable sources of affordable insurance coverage for employees

It could also do little to hold down health care costs or to cover more workers because most states allow insurers to deny coverage or charge higher premiums for less healthy individuals.