To expand health coverage, Bush pitches tax code change

President Bush on Saturday entered the growing debate about providing healthcare coverage for uninsured Americans, calling for a major change in the tax system to help those whose employers don’t offer a plan.

Bush’s proposal is a combination of carrots and sticks -- and, if enacted, would create new winners and losers in the health insurance arena. It is likely to run into opposition in the Democratic-led Congress but could serve as a key element of a broader package dealing with rising healthcare costs and shrinking coverage.

The carrot in Bush’s plan is the creation of a health insurance tax deduction that all taxpayers would receive -- $7,500 a year for individuals and $15,000 for families.

But the proposal also comes with a stick: Those with insurance plans with an annual premium more than the deduction would have to pay income taxes on the difference. That would be a big change from current law, under which all employerprovided health insurance is tax-free for workers.

Bush wants to use tax revenue from people with benefit-rich plans -- the healthcare haves -- to pay for the new health insurance deduction. That would enable many of the estimated 47 million uninsured Americans -- the healthcare have-nots -- to buy coverage.

“One of the most promising ways to make private health insurance more affordable is by reforming the federal tax code,” Bush said in his weekly radio address.

“Today, the tax code unfairly penalizes people who do not get health insurance through their job,” he said. “It unwisely encourages workers to choose overly expensive, gold-plated plans. The result is that insurance premiums rise, and many Americans cannot afford the coverage they need.”

Bush’s plan may seem like a startling move from a president who has repeatedly vowed not to raise taxes. People with generous healthcare coverage would face the higher taxes, although they could avoid the hit by switching to a standard policy. Family coverage costs an average of $11,500 to $13,000 a year, according to industry surveys.

Defending the plan, a White House official said it would be a wash for federal coffers. Over 10 years, all the additional revenue would go toward the tax deduction to help people buy coverage.

Saturday’s radio address signaled that healthcare will be a theme of the president’s State of the Union message on Tuesday, in which he will also propose an initiative to help governors expand coverage.

Consumer groups, medical organizations, insurers, employers and state leaders have recently reopened the long- dormant debate over healthcare. In California, Gov. Arnold Schwarzenegger is pursuing an ambitious plan to cover as many as 6 million uninsured residents.

Though Bush focused Saturday on a plan to expand coverage, he stopped short of committing to the goal of coverage for all.

Congressional aides have privately expressed concern that the president’s budget will call for tens of billions of dollars in cuts in healthcare programs such as Medicare and Medicaid as part of his pledge to balance the federal budget in five years.

On Capitol Hill, prominent Democrats issued statements saying they were glad Bush was talking about healthcare but were skeptical about his plan.

“To the extent that the president is now recognizing that all Americans need health coverage, that’s positive,” said Rep. Henry A. Waxman (D-Los Angeles). “But it clearly cannot come at the cost of undermining comprehensive health coverage for those who do have insurance.”

Sen. Edward M. Kennedy (D-Mass.) said he questioned “why the president thinks the way to solve this problem is through the tax code.”

Many economists, however, say that Bush’s plan deserves serious consideration.

“Given that we agree that we need some combination of individual and social responsibility, this is one key step in a total package that could bring coverage to all Americans,” said Len Nichols of the nonpartisan New America Foundation think tank.

But Nichols would use the additional revenue to expand group coverage instead of individually purchased policies.

The current tax breaks for health insurance are worth about $147 billion a year, surpassing the mortgage interest deduction. Not only is employerprovided health insurance tax-free for employees, but companies can also deduct the cost as a business expense.

There are two main reasons many economists and healthcare experts believe this system is flawed.

One is that it gives no help to people without employerprovided coverage. In effect, that makes health insurance coverage even more prohibitive for small employers and the selfemployed.

“It’s an unlevel playing field in terms of providing support,” said Mark McClellan, who formerly headed Medicare and Medicaid and is a health economist and physician. “In the 21st century, we have more people working in self-employment, so there are more and more people who don’t benefit from the tax exclusion.”

The other reason is that many economists believe an unlimited tax deduction for employer-provided coverage encourages wasteful healthcare spending.

Many of those who would have to pay more under Bush’s plan are union workers who have negotiated generous health insurance packages. The plan is likely to be opposed not only by organized labor, but also by big employers, which fear that unions would push for bigger wage hikes if health benefits were curtailed.

Some influential administration allies, such as the U.S. Chamber of Commerce, have already raised questions.

“Our concern ... is that it would undermine the current system and become a disincentive for employers providing good, rich benefits for their employees,” said Katie Mahoney, a healthcare policy expert for the business group.

ricardo.alonso-zaldivar@

latimes.com