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Bush health plan faces uphill battle

Posted On: Jan. 28, 2007 12:00 AM CST

WASHINGTON—The Bush administration's proposal to tax employees on the cost of group health insurance premiums could impose challenging administrative burdens on employers and would result in geographical inequalities in workers' health care-related taxes.

At the same time, employees would have a new financial incentive--a reduction in their federal tax liability--to enroll in health care plans that cost less--but also expose employees to more costs--such as high-deductible plans linked to health savings accounts (see story, page 25).

That, along with other provisions in the proposal outlined by President Bush last week in his State of the Union address, could reduce the number of uninsured Americans--now about 47 million--by several million, the administration says.

Although the full details of the proposal are not yet out, the administration's plan broadly calls for allowing employees to take a $7,500 tax deduction if they have single coverage and $15,000 for family coverage. Those amounts, though, would be offset by the cost of the plan in which employees were enrolled. If the cost exceeded the deduction, employees would be taxed on the difference.

The proposal already has drawn a frosty reception from several top Democratic legislators on Capitol Hill, raising doubts about the chances of enactment.

"This faces a stiff, uphill challenge," said Amy Bergner, a principal with Mercer Human Resource Consulting in Washington.

But others, while not endorsing the proposal, welcome it as a catalyst for the administration and Congress to begin serious discussions about comprehensive ways to reduce the number of uninsured. In the absence of action from Washington, individual states have tackled the problem, which could produce a hodgepodge of laws and requirements for employers.

"This is the starting point for discussions...to get the dialogue going" in Washington, said Paul Dennett, vp-health policy at the American Benefits Council in Washington.

Administrative burdens

For employers, the most significant impact of the proposal would be administrative. They would have to calculate the cost of each health care plan offered, for both family and individual coverage.

For each employee, the employer would have to come up with a figure--presumably to be put on the employee's W-2 wage statement--on the cost of coverage for health care plans the employee was enrolled.

"Many administrative changes would be required," Ms. Bergner said.

The proposal offers no details on how "health care" would be defined, such as whether the cost of health care-related programs, such as wellness and disease management, also would be included in valuing coverage for tax purposes.

"There could be some significant reporting issues for employers. It would not be a pretty picture," said Tom Billet, a senior consultant in the Stamford, Conn., office of Watson Wyatt Worldwide.

The administration says when the proposal would take effect in 2009, about 80% of those in group health care plans would see their taxes decrease. The tax bill for those who purchase coverage on their own on an aftertax basis would decline by an average of $3,650.

Over time, though, many employees' tax decreases would gradually fall, unless current health care cost trends radically reverse course. That is because the standard deduction amounts would rise in tandem with increases in the Consumer Price Index, while health care inflation historically has increased significantly faster than CPI, said Michael Langan, a principal with Towers Perrin in Valhalla, N.Y.

Fairness concerns

The proposal likely would result in significant inequities. For example, employees working in areas of the country with high health care costs would be more likely to be taxed on their health care benefits because the cost of coverage would exceed the permitted deduction, while employees in lower-cost areas would not.

"There would be some real equity and fairness issues," Mr. Billet said.

Even employees in low-cost areas could be affected. That could occur if the overwhelming majority of employees in a health care plan live in areas with high health care costs, which would increase the plan's per capita cost.

Similarly, all employees would be impacted if a company employed a disproportionate number of older employees, whose health care costs tend to be above average.

Experts note that the proposal neatly fits with the administration's belief that high health care costs are the result, at least in part, of overly generous corporate health care plans that give employees little incentive to use health care services carefully. That drives up costs and ultimately premiums, making coverage less affordable for all, the administration says.

While experts don't entirely disagree with that assessment, they also say the level of health care coverage is only one factor in the high cost of health care.

Other factors--not addressed in the administration's proposal--include the ability of hospitals, in areas where there isn't competition, to charge high rates and the lack of information to enable consumers to compare the price and quality of providers.

"There still isn't enough price comparison and quality information," said J.D. Piro, an attorney in the Norwalk, Conn., office of Hewitt Associates Inc.

Some observers say that the proposal simply doesn't have enough support to go forward.

"Basic political science says you need to reach out with proposals that have a chance of passage. I don't see the political climate where this proposal will be taken seriously," said Andrew Webber, president of the National Business Coalition on Health in Washington.

"Based on what Democrats and even some Republicans are saying, this whole thing seems dead on arrival," said Barry Barnett, a principal with the human resources unit of PricewaterhouseCoopers L.L.P. in New York.