More Health Costs Would Shift to Individuals

Times Staff Writers

WASHINGTON — President Bush, in his new budget, wants to pare back many of the government safety nets that cushion the effect of illness and old age for millions of Americans, replacing them with arrangements the White House says assure greater benefits but that also place greater burdens on individuals.

Running through the myriad healthcare and other domestic spending proposals in the budget plan released Monday is a common theme: that Washington's current crop of programs to pay healthcare costs, provide retirement benefits and protect pensions are too expensive and unsustainable.

The chief solution, according to the president, is to grant tax breaks to get people to tackle the problems substantially on their own.

Although earlier struggles over trimming benefits and shifting burdens centered primarily on Social Security, this year's political battle lines are forming around healthcare.

The new Bush budget proposes to cut Medicare, the government's giant health insurance program for the elderly, by almost $36 billion over five years. Simultaneously, it wants to grant almost $60 billion in new tax breaks for health savings accounts, or HSAs, from which individuals would pay for medical costs.

Administration officials say the Medicare cuts and boosts for health savings accounts, together with the elimination of more than 140 other programs from the federal budget, would provide Americans with lean but durable protection.

"The safety net is tight and strong," Bush domestic policy advisor Claude A. Allen said.

Critics acknowledge the problems the White House says it is addressing, but question the proposed solutions.

"We know … there are more retirees and, more importantly, costs are skyrocketing throughout the healthcare system," said David Certner of the AARP, the huge advocacy group for retirees.

But "it's not clear," Certner said, "that HSAs would address either of those problems. Instead, HSAs would end up putting more risks and costs on individuals."

For the immediate future, few of Bush's safety net proposals are likely to win congressional passage with midterm elections approaching in November.

"Congress just finished reducing the growth of Medicare and Medicaid $11.1 billion over five years, and it wasn't an easy legislative accomplishment," said Sen. Charles E. Grassley (R-Iowa). "Any more reductions of a significant scope could be difficult this year." Grassley chairs the Senate Finance Committee, which has jurisdiction over major health programs.

White House strategists understand election-year realities. The proposals were apparently designed to maintain the president's credibility as a leader who is ready to take on issues such as healthcare. They also are intended to show the administration's concern about federal deficits, though Bush has presided over substantial growth in federal spending.

Although many of the president's latest safety net proposals appeared in past administration budgets or represented twists on already approved legislation, their inclusion in the White House's new tax and spending plan came as a surprise.

That's because Bush's last attempt at a substantial change in Washington's protective programs — his call to permit younger workers to divert a portion of their Social Security taxes into personal investment accounts — went down in political flames. And what was supposed to have been one of his signature accomplishments as president, a new Medicare prescription drug benefit, got off to a rocky start.

The setbacks appear to have left Bush unfazed. In instance after instance, the president has offered one potentially controversial proposal atop another.

The nearly $36 billion in Medicare cuts would affect a broad range of politically vocal service providers, including hospitals, nursing homes, home health agencies and outpatient facilities. Total spending on the $389-billion program would continue to grow, administration officials said, but more slowly — by 7.7% over five years, instead of the projected 8.1%.

In addition, the White House wants to set up a system that would trigger automatic spending cuts if Medicare's costs rise above specified thresholds. If its plan for such automatic cuts were approved, it would mark the first time such cost constraints were applied to a major benefit program.

One critic said the administration was itself to blame for the increasingly large share of Medicare costs taken from the Treasury's general fund. That's because 75% of the cost of the new Medicare prescription drug benefit is supposed to be paid for with general fund dollars. The remaining 25% comes from premiums participants pay.

"They passed legislation in 2003 providing that most of the cost of the drug benefit would be borne by general revenue," said economist Marilyn Moon, director of health programs at the American Institutes for Research. "Then they turn around and say that if the general revenue share is too high, the program is out of control."

A similar pattern can be seen with health savings accounts. The president's latest plan goes well beyond previous proposals, and also beyond what a group of conservative policy analysts who informally advised the administration had sought.

Health savings accounts, which won congressional approval in 2003, are designed to get individuals to play a bigger role in shopping for their own healthcare in hopes they will make more cost-effective choices. They couple a bare-bones, high-deductible insurance policy with an account into which people can deposit money and from which they can withdraw it tax-free to pay for medical expenses.

Some experts believe giving substantial tax breaks to health savings accounts could undermine traditional employer-based health insurance programs by encouraging healthy, relatively well-paid workers to move out of the plans.

Former White House economic advisor R. Glenn Hubbard, Stanford economist John F. Cogan and Stanford law professor Daniel P. Kessler, who advised the administration on its latest proposal, suggested in a recent book that the government should preserve at least some of the tax advantages that traditional employer-based insurance plans now enjoy over health savings accounts to ensure that "any shift toward individual insurance [and away from employer-based coverage] … be limited and gradual."

But the new White House proposal would almost entirely erase those tax advantages.

In addition to his proposals for Medicare and health savings accounts, the president will seek another round of cuts in Medicaid, the state-federal health program for the poor. Included is a $12-billion, five-year cut in Medicaid payments to states that Congress rejected last year, but that the administration has served notice it will seek to push through as regulatory changes that do not require approval by lawmakers.

Times staff writer Peter Wallsten contributed to this report.

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