For all the griping about our system, Americans have the most advanced health care in the world in part because we still have something resembling a private market for insurance. But it is not a truly efficient market because current tax policy lets businesses--but not individuals--deduct the cost of health expenditures. Thus most Americans with private insurance get it from their employers, which leads to inequities and insulates individuals from the real cost of their treatment decisions.
Mr. Bush's "standard deduction" for health care would move in the direction of solving both problems. Instead of giving employers an unlimited deduction and individuals none, Mr. Bush would give every family a $15,000 deduction ($7,500 for individuals) regardless of their insurance source.
That might mean a slight tax increase for those who currently have the most expensive insurance plans. But the average employer-sponsored family plan runs about $11,500 annually, and about 80% of the 160 million employer-insured Americans would benefit. All Americans with employer-sponsored insurance would have to report the value of their health benefit as income, but they could deduct the full $15,000 no matter how much their insurance cost.
The 17 million Americans who buy their own coverage would be big winners. And because the tax deduction would apply to payroll as well as income taxes, the benefits would be large even for low-income earners. So a family making $60,000 would wind up with a tax savings of $4,500, which would offset the cost of acquiring coverage in many states. Meanwhile, a young person making $40,000 could buy a high-deductible plan for, say, $1,000 and actually get a tax break of $2,250 for doing so. The Treasury estimates the new deduction would add at least five million Americans to the ranks of the insured, but our guess is that would be higher given the incentives all of this would provide for new private insurance products.
Individuals who buy their own health insurance now struggle because there are so few of them and they can buy only in a single state market. That means insurers have little incentive to develop and market innovative products. But this will change if the equalized tax treatment convinces enough people that it makes more sense to have their own, portable policies than take whatever their boss offers. Imagine the same kind of capitalist energy devoted to selling health insurance as you now see selling where to roll over your 401(k).
These new products are also likely to be policies that put individuals directly in charge of more routine spending. That's because removing the tax advantage would mean it will make less financial sense to "insure" for predictable expenses like several annual office visits. That in turn could put pressure on health care providers to post--and actually compete on--prices. Such new price awareness might even generate pressure for states that overregulate their insurance markets (New York, Massachusetts) to ease their costly mandates.
It's true that additional subsidies might be needed for some people with chronic illnesses who might have a harder time finding private insurance in this kind of world. And we'd also like to see a more national insurance market, with companies able to sell policies over the Internet free of the worst state mandates.
But the biggest problem with Mr. Bush's plan is that it wasn't offered two years ago, when it had a better chance to pass. The White House wasted its first term health energies on a failed attempt to buy votes with the Medicare drug benefit. Now the GOP is a minority in Congress, and Democrats aren't likely to favor Mr. Bush's ideas because they think health care is a winner for them in 2008.
Ways and Means Chairman Charlie Rangel was quick out of the box to call the President's idea "a dangerous policy that ultimately shifts cost and risk from employers to employees." But the numbers show that most Americans would have lower costs, and in any case the current tax treatment of health care benefits tends to benefit the well-to-do over the poor. Figures from the Lewin Group show that the average tax subsidy under the current system was $2,780 for families earning over $100,000 in 2004, while those with incomes below $30,000 got less than $725 in aid. Democrats ought to favor this idea on equity grounds alone.
But no matter if they don't. We're fated to debate health care in 2008 anyway, and Mr. Bush is finally offering a GOP reform based on market principles that the editorial page of The Wall Street Journal has encouraged for years. Most Americans can see for themselves that the current employer-based system is breaking down, as more companies pass along the rising cost of their insurance to employees (in higher co-pays and deductibles). Yet the system remains opaque and frustrating because of the underlying tax bias for businesses instead of individuals.
This status quo won't hold, and the political race is going to be between those who want to move to a more genuine market and consumer-based health care, and those who want to move toward Canada, Europe and more government control. The Bush plan ought to jump start that debate.
Copyright © 2007 Dow Jones & Company, Inc. All Rights Reserved.
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