Bush “Health Plan” Is Really a Reallocation of Taxes

January 24, 2007

A preliminary review of the Bush “health plan” suggests that it’s not a plan in any real sense, nor is it a “tax break.” (Journalists are mischaracterizing it when they call it a “break”- they should study the details more carefully.)

Although not all the details have been released, the plan looks it simply shifts existing tax revenues and expenditures in order to meet some policy goals without reducing tax income for the Federal government. It may wind up leaving both liberals and conservatives unexcited.

While some of its goals appear to be market-based, fiscal conservatives may eventually be turned off by the fact that its unlikely to reduce the overall tax burden. And liberals will be unhappy with the way the financial burden is allocated.

The plan creates a tax break only on $15,000 in payroll and income tax for workers who buy family coverage, and $7,500 for those who buy individual coverage, regardless of the actual cost of that coverage. That feature’s designed to encourage people to pay less for their insurance.

I call it a re-allocation, rather than a tax break, because it’s actually taking away some tax benefits while offering others. Specifically, worker contributions to plans that are above the limit will now be taxed where they weren’t before. While it’s not a tax increase, as some opponents have suggested, that could be the net result in the long run.

The plan also reallocates some funding away from hospitals. The net result of that could well be more increases in the fees hospitals charge to insurance carriers. That will result in increased premium fees back to consumers, thereby passing the financial burden directly back to the taxpayers this initiative was intended to help.

Workers who pay less than the break point for coverage (roughly $12,000) will initially come out ahead, but that will change over the next few years. The net result is that workers in higher-cost states will soon lose financially under the plan. Workers with pre-existing conditions will also suffer under the plan, if they’re paying a premium surcharge. This effect could be so pronounced that one consumer advocate scathingly called the plan a “cancer tax.”

In a little-noted provision, the plan also caps payroll taxes at the $15,000 level. This will discourage employers from offering health insurance as premiums continue to rise.

The plan’s flat $15,000 provision is designed to encourage consumer shopping based on price, and to drive price competition among insurers. It remains to be seen whether insurers will compete on price. What’s more likely is that some financially-strapped consumers will elect to pay less in premiums by enrolling in high-deductible catastrophic plans. They’ll be betting they can avoid serious illness or injury. If they bet wrong, this plan could cost them plenty.

The plan is part of the Administration’s overall initiative of shifting the burden of purchasing health insurance away from employers and back to individuals. There are many problems with our current employer-based system, but shifting the risk burden back to individuals without a coordinated plan to protect their interests could result in a great many unintended consequences.

It’s unlikely that this plan will receive support from liberals, and even conservatives are at best lukewarm about it – as this listless National Review “endorsement” suggests.

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