This pisses me off. For 16 years, I have worked for local government, mainly because of the benefits(Health, retirement). I could make more in the private sector, but the benefits aren't as good. Now Bush wants to screw this up.
SAN FRANCISCO (MarketWatch) -- Linked since World War II, health insurance and the workplace may be heading for a separation.
The tax-free status of health insurance for workers who receive coverage through their jobs will disappear for many if President Bush's health-care tax reform proposal gains support. It may fail to do that in a Democrat-controlled Congress, but here's a look at what's on the table.
During his State of the Union address Tuesday night, Bush proposed implementing a standard deduction for health insurance in an effort to "level the playing field" between Americans who get coverage through their jobs and those who buy individual private plans -- mostly self-employed people and those who work for small businesses. Under the proposal, starting in 2009 workers would have to pay taxes on family health plans valued over $15,000 or individual plans worth more than $7,500. The government would consider insurance beyond those thresholds taxable income.
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"Changing the tax code is a vital and necessary step to making health care affordable for more Americans," Bush told the nation.
The administration estimates the change would result in lower taxes for 80% of employer-sponsored policies. The other 20% of people with higher-value policies would have the choice of trading down to a less comprehensive, less expensive plan or paying the excess tax bill to keep the plan they have. Job-based insurance is currently tax-exempt for workers and tax-deductible for employers, who are allowed to claim it as a business expense.
Some economists have been urging such a change for years, arguing that the system unfairly penalizes people who are between jobs or otherwise can't get group coverage. Others maintain health care's tax treatment has led people to buy broader coverage than they need, inflating costs and distorting the marketplace.
Regardless of the outcome of Bush's plan, the return of health care to the national agenda is a welcome sign. Spiraling costs have tethered the budgets of employers, governments and individuals alike, restricting U.S. enterprise in a global economy.
But several aspects of the Bush proposal could bring dire unintended consequences if left untreated, critics and analysts warn.
First, the exclusion caps would rise in tandem with the consumer price index, meaning general inflation, instead of being calibrated to health-care inflation, which rose last year at 7.7% and has gone up a cumulative 87% since 2000, according to the Kaiser Family Foundation. Health costs on average have been far outpacing general inflation and wage gains for the last six years. Such a scenario could lead to a tax situation that functions like the alternative minimum tax by ensnaring more and more middle-income people who have insurance that exceeds the cap.
Second, the proposal may create an incentive for employers to get out of the business of offering health care to workers, further eroding employment-based coverage. The percentage of employers offering coverage fell to 61% last year from 69% in 2000, according to the Kaiser Family Foundation. Less than half of the smallest companies (those with three to nine employees) offer coverage.
Savvy employees also may get restless. By setting up a calculation between tax liability and out of pocket costs, workers -- especially the young and healthy -- may ask their employers to cut them a check for the cost of their health benefits so they can go out and buy their own policy at a lower price, leaving older, sicker workers to populate a reduced workplace pool and potentially higher costs.
A market in need of a revamp
One big criticism is that the individual insurance market needs an overhaul if it's expected to work for people who need coverage the most -- the uninsured, low-income families and those who are older and sicker. People buying insurance on their own hardly receive a fair deal compared with their employment-sponsored counterparts. Individuals have to pay the full cost of premiums, which tend to be much higher, with their own after-tax money while employers typically pay about 75% of the premium for workers receiving job-based coverage.
Even if individuals can afford it they may not be able to get insurance in the first place or hold on to it if they need it. In many states, companies may choose not to offer coverage to older, sicker people or those with pre-existing conditions. They also may rescind it or escalate the price if a person makes too many claims.
Neither large employers, which provide the bulk of the nation's private insurance, nor Democrats expressed much enthusiasm about Bush's tax-deduction proposal. Rep. Pete Stark (D-Calif.), chairman of a powerful health subcommittee, said he wouldn't consider it.
"The President's so-called health-care proposal won't help the uninsured, most of whom have limited incomes and are already in low tax brackets," Stark said in a prepared statement. "But it will hurt middle-income Americans, whose employers will shift even more cost and risk to their employees."
Paul Fronstin, director of the health research and education program at the Employee Benefit Research Institute, said the impact of the caps wouldn't be felt for a few years. But when it does kick in, big changes could come rapidly. By 2012, assuming an 8% medical inflation rate, the average family policy could exceed $18,200, making for a $3,000 bill on which taxes would be due, he said.
"This is the beginning of the end of employment-based coverage as we know it," Fronstin said. "For every year those two rates of inflation have a gap between them, more and more people will become subject to the cap."
A combination of employers that are tired of the costs and headaches of offering insurance and workers who want cash to take their chances on the open market may lead to a shrinking and then disappearing group market, he said. "All it takes is one employer to make that move and you've got a big herd right behind it."
Making consumers take on more responsibility
The tax proposal is part of a continuing movement toward making consumers more sensitive to costs, said Steve Wojcik, vice president of public policy for the National Business Group on Health, a coalition of 260 large employers. Bush's big victory in this area was the 2003 creation of health savings accounts, which are portable accounts attached to high-deductible health plans that consumers can use to pay for qualified health-care expenses.
Of the proposed tax caps, Wojcik said, "I think the political reality is it's going to be a nonstarter."
"We would be very cautious about this approach, but we still want to see more details," he said. "Outside of the Medicare program, this is the second most popular way people have coverage, and we don't want to do anything that would damage that. That's not to say it's a great system, but we don't want to do harm to people's coverage as we're seeking solutions to the cost of care, affordability crisis and rising number of uninsured."
Wojcik said he's waiting to see if the market responds with improved individual plans in Massachusetts, which is beginning a universal health-care law that makes buying insurance coverage mandatory. "If we don't get rid of some of the dysfunctions in the marketplace for health coverage, it may not be so meaningful to have the tax deduction."
Tom Billet, senior consultant with Watson Wyatt in Stamford, Conn., agreed. "The major drawback here is that the individual insurance market is badly broken and this proposal doesn't deal with it at all. Does it put more money into the system? Yes. But it doesn't address the problem."
Getting access to individual policies is more of an issue for many people than the cost, and many large companies wouldn't count on that market to maintain a healthy, productive work force, Billet said. He called the idea that employers would stop offering insurance a "fantasy."
"I don't think they're looking to throw their people to the wolves and say 'Here's a check. Good luck. See what you can do.' I think they're interested in giving their people quality, affordable health-care coverage."
"What this shows is it's very, very hard to reform health insurance in a piecemeal fashion," Billet said.
Uwe Reinhardt, professor of economics at Princeton University in New Jersey, said changing the tax code would be "somewhat more equitable" but wouldn't solve health care's overarching problems. Still, it's a starting point around which Democrats could negotiate, he said.
Kristen Gerencher is a reporter for MarketWatch in San Francisco.
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