Bush FY2008 Budget Proposal:
Provisions Affecting the Private Insurance Market
The President’s budget includes several provisions that, taken together, encourage people to buy minimal health insurance coverage as individuals rather than obtaining more comprehensive health insurance coverage through their jobs. These provisions push people towards the individual market and towards opening “Health Savings Accounts” to pay for uncovered health expenses—not realistic options for many people with low or modest incomes.
Under the President’s proposal, the amount employers contribute to health insurance premiums will be added to workers’ taxable income: The President’s proposal eliminates tax exclusions that assist people who get health insurance through their jobs. Under the proposal, any amount that employers pay for their employees’ health insurance would be added to the employees’ gross taxable income.
The President’s proposal eliminates most existing medical deductions, including the deductions for excess medical expenses and for health insurance premiums paid by the self-employed: Self-employed people would include in their incomes any amount they paid for health insurance premiums. If people have out-of-pocket medical expenses, they will no longer be able to claim an itemized deduction for them (unless they are enrolled in Medicare). People will not be able to use Flexible Spending Accounts to pay for medical expenses with tax-free dollars, nor will they be able to use tax-free dollars to pay their for health insurance premiums through cafeteria plans. They will only get a tax benefit if they set aside money in a Health Saving Account or use a Health Savings Account to pay for medical expenses.
The President's proposal gives a new tax deduction (not a tax credit) to everyone who purchases health insurance: The President proposes a tax deduction of $7,500 for individuals who purchase health insurance coverage ($15,000 for families). The amount of the tax deduction will be the same for everyone who purchases coverage, no matter how much they actually spend for their health insurance policies: If someone buys an inexpensive health insurance policy that provides minimal coverage, they will have more tax savings than a person who buys a more comprehensive health insurance policy. Similarly, if a person is offered a low premium for health insurance because the person is young and healthy, that person will realize more tax savings than an older, sicker person who is charged high premiums for the same health insurance plan.
The value of a tax deduction varies with income. People in higher tax brackets save more money from a $7,500 tax deduction than people in lower tax brackets. People with income so low that they do not owe any taxes do not get any benefit from a tax deduction.
The dollar amount of this new deduction will be adjusted annually according to the consumer price index. Because medical inflation rises more quickly than the consumer price index, the tax deduction will erode over time, covering a smaller and smaller portion of peoples’ health care costs.
Budget Impact: Taken together, the above proposals will cost $135.5 billion over five years and $32.7 billion over 10 years. Starting in 2014, the President estimates that the proposal will begin to raise revenue, because health care costs grow faster than the value of the deduction.
Expands the use of Health Savings Accounts: Under current law, Health Savings Accounts can only be used in conjunction with High Deductible Health Plans. The President proposes to also allow the use of Health Savings Accounts with plans that do not have high deductibles, but instead require people to pay for half of the cost of their health services (50 percent coinsurance), leaving them exposed to out-of-pocket medical costs that are as great as those in high-deductible health plans. The budget also makes some smaller, technical changes in HSAs.
Budget Impact: The HSA proposals will cost $3.7 billion over five years and $10.4 billion over 10 years.
In addition, the President proposes to weaken the authority of state government to regulate insurance companies.
Association Health Plans: The budget proposal reiterates the President's support for bills pending in Congress that would allow small employers, civic groups, and community organizations to band together to form Association Health Plans (AHPs) to purchase health insurance. These bills would exempt AHPs from most state insurance laws and regulatory protections.
Budget Impact: No cost reported.
"National Marketplace for Health Insurance": The budget proposal reiterates the President's support for the creation of a "national marketplace for health insurance" so that individuals can purchase health insurance in the individual market across states lines.
Budget Impact: No cost reported.
Families USA’s Commentary on Private Market Proposals
The President’s proposal provides disproportionate tax breaks for people in the highest tax brackets and will not help uninsured, moderate-income working families. Tax deductions are regressive. Since the amount of tax relief offered by a deduction depends on the individual’s tax bracket, the higher the income, the greater the tax relief. A study by Lewin, Inc. estimates that, under the President’s health care tax proposals, families with income of over $150,000 will save $1,493 per year while families with income less than $10,000 will save just $34. 1/
Approximately two-thirds of the uninsured have incomes below 200 percent of the federal poverty level ($33,200 in annual income for a family of three, $40,000 for a family of four). Individuals with less than $31,850 in adjusted gross income are in a 15 percent tax bracket, and therefore the new tax deduction will only provide them with a tax break to offset health costs of $1,125 at most (the $15,000 deduction x tax rate of 0.15). This means that moderate-income people will be left with a price tag of thousands of dollars simply for premiums, with additional significant costs for deductibles and copayments. Clearly, this leaves health coverage unaffordable.
People with low and modest incomes will not save enough to be able to purchase health coverage. The changes in the tax code do too little to enable most uninsured people to obtain coverage. Many of the uninsured have such low incomes that they have little or no tax liability, so they will not be helped by the proposed tax deductions. For those who do get a deduction, the value of the deduction—$1,125 annually for someone in the 15 percent tax bracket—does not come close to the annual cost of comprehensive health insurance.
The proposals encourage people to buy minimal health insurance plans that will not meet the needs of people who are sick. The proposals encourage people to buy high-deductible policies and policies that only pay half of their health care costs, leaving them with even greater exposure to medical costs. But already, one in six privately insured adults have substantial problems paying their medical bills. 2/ The proposal eliminates tax exclusions for Cafeteria Plans and Flexible Spending Accounts, which now allow people to use tax-free dollars to pay for any out-of-pocket medical expenses regardless of their type of health coverage. Under the President’s plan, people must be in high-deductible plans or plans that pay only half of their medical expenses to get a tax exclusion or deduction for their out-of-pocket costs. Underinsured people will face mounting medical debt or will forgo needed care.
Many employers will likely drop coverage for their employees. People will be left to buy coverage on their own, where older people and people in poor health have very few protections. One study estimates that 12 million workers will lose employer-sponsored coverage under the President’s proposals. 3/ Many of these people will find that they cannot obtain individual health insurance policies. In most states, insurance companies are free to deny coverage to individuals based on their health status. Further, they can charge people higher, unaffordable premiums if they are older, sicker, or otherwise appear to be higher risks to the insurer.
Two initiatives touted by the President—Association Health Plans and the so-called "National Marketplace for Health Insurance"—would eliminate state regulation of insurance products. This deregulation would leave many consumers with higher premiums. What's more, it would put consumers at risk of paying premiums for what they could later discover to be substandard polices where basic health care services are not covered—or where an insurer cannot pay claims for health care services.
The AHP proposal, in particular, is unnecessary: No state or federal laws prevent small businesses from forming groups now to leverage their buying power. Moreover, the current AHP proposal would find cost savings not through building group buying power but by overriding state laws and providing less generous benefits. The resulting skimpy packages, by attracting and skimming off firms with healthy employees, would directly harm those businesses with employees who need the excluded health benefits provided by more comprehensive packages. In fact, the Congressional Budget Office (CBO) has estimated that 80 percent of workers would be worse off under AHPs: 20 million employees of small employers and their dependents would experience a rate increase.
The "National Marketplace" proposal would encourage a race to the bottom, removing critical state consumer protections, allowing cherry picking, creating the potential for more insolvent plans, and jeopardizing states' ability to effectively regulate insurance. This proposal would hurt millions of Americans who are not offered health coverage through their employer or who are self-employed and purchase insurance in the individual market.
1/ John Sheils and Randy Haught, President Bush’s Health Care Tax Deduction Proposal: Coverage, Cost and Distributional Impacts (Falls Church, Virginia: The Lewin Group, January 2007): Figure 8, page 9.
2/ Hoffman, et al., Medical Debt and Access to Health Care (Washington: Kaiser Family Foundation, 2005).
3/ John Sheils and Randy Haught, op. cit.
