Health proposal gives and takes

Wrapped in the promise of big new tax deductions, President Bush’s plan for encouraging more people to get health insurance is one of the most sweeping changes yet proposed for financing medical care -- bringing potential benefits for some, new taxes and new uncertainties for others.

And healthcare experts said that although Bush’s immediate proposal faced almost certain rejection by the Democratic Congress, the basic ideas underlying it would probably play a part in the coming debate over a healthcare overhaul.

Today, the premiums that pay for job-based medical insurance -- by far the most common source of healthcare coverage -- are not treated as taxable income. Employer-sponsored health insurance has been a tax-free benefit for most of the last half-century.

Under Bush’s plan, that tax exemption would be eliminated. Premiums for workers’ health insurance -- the amount paid by the employer plus any share paid by the worker -- would be added to their taxable income. Then, tax deductions -- up to $15,000 a year for families, $7,500 for single workers -- would be provided to cover the premiums for workers with typical plans.

“With this proposal, more than 100 million men, women and children who are now covered by employer-provided health insurance will benefit from lower tax bills,” Bush said in his State of the Union address Tuesday.

But the plan would also raise taxes for 30 million people. And, with health insurance premiums steadily rising, the initial tax savings could disappear for many middle-class workers as the cost of their coverage rose above the caps.

The proposal’s complexity and uncertainty about its possible effects appeared to stir anxiety even among potential beneficiaries.

Twenty-nine-year-old Nathan Hardwick of Hesperia, for example, is the father of four and has worked for seven years on the maintenance staff at TXI Oro Grande Cement. He earns $55,000 a year and has employer-sponsored health insurance worth about $8,400 a year for which he pays $57 a month. Projections show he would save about $1,500 in annual taxes under the new plan.

But Hardwick, who voted for Bush in the past, worries that his tax savings will evaporate as healthcare costs rise. “I’d much rather be on my plan now and pay my $57 a month and not get the tax break,” he said.

Some experts said Hardwick’s fears were not groundless. Though Bush proposed indexing the deductions to inflation, healthcare costs have grown faster than the overall inflation rate of 2.5%. Health insurance costs grew by 6% last year, according to Mercer Human Resource Consulting, a leading advisor to employers.

At the outset, only about 20% to 25% of insurance plans would be above the deduction threshold. But in the following 10 years, as premium costs increased, 40% of plans would face additional taxes, according to an estimate by the nonpartisan Tax Policy Center in Washington.

The Bush proposal appears to have two goals: to encourage the uninsured to get coverage by reducing their out-of-pocket costs; and to encourage workers with insurance to switch from high-premium coverage to bare-bones plans and rely on personal savings to cover more of their healthcare costs.

“This supports the president’s idea that people should at least have the option to go into less-expensive, high-deductible plans, and to take more responsibility for their health insurance costs,” said Amy Bergner, a Mercer tax policy specialist.

To encourage savings, Bush again pitched an expansion of government-subsidized health savings accounts, which he has long favored.

An estimated 47 million people in the U.S. have no health insurance. Some experts said Bush’s incentives may be too weak and complicated to produce a significant reduction in the ranks of the uninsured.

Many of the uninsured are low-income or unemployed people who don’t file income taxes, and it’s unclear whether the promise of tax deductions would move them to buy insurance.

Bush’s proposal could make coverage more affordable for those who don’t get health insurance through an employer and pay for it with after-tax dollars. If they bought moderately comprehensive health insurance, they could offset much of the cost by claiming the deduction.

Workers with employer plans that cost more than the caps would pay taxes on the difference. That would increase taxes for employees who have better-than-average benefits, but also for some older and sicker workers who must pay more for even moderate coverage, experts say.

“Health status will determine whether or not you are above or below the cap, not whether you have Cadillac benefits or not,” said health economist Paul Fronstin of the Employee Benefit Research Institute. “Healthy people will be able to buy below the cap, whereas less-healthy people will get stuck buying plans above the cap.”

“The younger people are going to benefit, and the older people are going to have a problem,” said Scott Hague, a San Francisco insurance broker and small-business advocate. “It really doesn’t seem fair to have one-size-fits-all.”

Under Bush’s proposal, as of Jan. 1, 2009, the total premium for a worker’s health insurance would be added to income line on the W-2 form, subject to payroll and income taxes.

Then workers could take the new deductions.

For instance, a worker earning $90,000 with what Bush considers a “gold-plated” $20,000 employer-sponsored family health insurance policy would pay $1,250 more in income taxes until switching to a less-costly plan.

A worker earning $60,000 who now picks an employer-provided HMO plan for $11,300 -- close to the average price, according to industry surveys -- would save about $800 using the tax deduction.

A worker with a similar income buying a high-deductible plan on the open market would see about $4,500 in tax savings. But experts say insurance costs on the open market vary widely and increase exponentially for the elderly and for those with preexisting conditions or chronic illnesses.

The plan would eliminate flexible spending accounts, which allow workers to sock away before-tax money for medical expenses. Critics say it could also erode workers’ Social Security payments because it would reduce the taxable income on which payments are calculated.

Some experts said the plan would be uneven in its impact, helping some and hurting others.

“I’m not sure the government should be steering people in the direction of a particular type or types of coverage, that your coverage is too generous and yours is too little,” said Neil Trautwein, a lobbyist for the National Retail Federation. “That should be left to the marketplace.”

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molly.hennessy-fiske@latimes.com

ricardo.alonso-zaldivar@latimes.com

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The president’s plan

President Bush’s healthcare proposal would mean the biggest changes in more than 50 years in how the tax system treats health insurance. A look at the plan’s pros and cons, and examples of how it would work.

Current law

* Employer-provided health insurance is tax-free for workers.

* People who buy coverage on their own don’t get the same generous tax break.

* Companies can deduct the cost of healthcare for their workers as a business expense.

Bush’s proposal

* The deduction would be $7,500 for an individual plan, and $15,000 for a family plan.

* Employers would report health insurance premiums as income on workers’ W-2 forms.

* Workers with employer plans worth more than the $7,500/$15,000 limits would pay taxes on the difference.

* Companies could still deduct the cost of healthcare.

Pros

* Everybody who buys health insurance would get the same tax break.

* Employees would learn the true costs of their insurance.

* Employees could reduce their taxes by switching to a lower-cost health plan.

* Cost-conscious decisions by employees could curb health expenses over time.

Cons

* The new deduction would be indexed to general inflation, but healthcare costs are growing much faster.

* Premiums could be higher for older workers and those in poor health, exposing them to taxes.

* The new deduction would not go as far in parts of the country where premiums are higher.

* Low-income workers get less benefit from a deduction.

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Sources: Los Angeles Times research, White House