News & Information

 

FEATURED PRODUCT

5500 Preparer's Manual for 2012 Plan Years
The premier resource in the field of Form 5500 preparation, 5500 Preparer's Manual will help you handle the required annual Form 5500 filings for both pension benefits and welfare benefit plans.

Learn More »

CCH® BENEFITS — 3/22/07

Study Recommends Revisions To Bush Health Reform Proposal

from Spencer’s Benefits Reports: A study from the Tax Policy Center, a joint project of the Urban Institute and the Brookings Institution, has found shortcomings in President George W. Bush’s proposal to provide a tax deduction for individuals to purchase their own health insurance and to set a limit on the amount of tax-free employer-provided health care benefits.

In The President’s Proposed Standard Deduction for Health Insurance: An Evaluation, the Tax Policy Center study states. “The tax proposal is innovative and a step in the right direction, but without substantial expansions and revisions the plan as a whole would weaken existing pooling arrangements and create substantial risks for the current system of health insurance coverage.” Even assuming that, as a result of a revised tax incentive, employers that dropped health insurance raised wages, healthy individuals will be able to get inexpensive individual health insurance; while individuals with health conditions, especially those with low incomes, will be unable to afford coverage, the study concludes. “Without successful efforts by both the federal and state governments to guarantee the availability of individual health insurance affordable to everyone, the tax proposal will fail to attain universal coverage.”

The individual mandate with a tax deduction, as set out in Mr. Bush’s proposal, is worth little to low-income individuals and offers them no real inducement to participate, the Tax Policy Center noted. More than one-third (35%) of households younger than age 65 owe no income taxes. Households that would lose health insurance (if, as suspected, small employers dropped health care benefits) under the President’s proposal tend to be sicker, older, or poorer and unable to obtain individual market insurance. Furthermore, a drop in individuals’ taxable income also would reduce those individuals’ Social Security benefits. In addition, the Administration’s estimate of 3 million to 5 million new insureds resulting from the President’s proposal is a relative “drop in the bucket” compared with the 47 million Americans currently uninsured; the proposal ultimately would expand the number of uninsured if, as suspected, small employers drop their health insurance benefits.

Among the Tax Policy Center’s recommendations to make the President’s health insurance reform proposal more helpful are the following:

1. Replace the deduction with a progressive refundable tax credit or a voucher that provides as much (or more) assistance to low-income families as it does to those with higher incomes. In addition, converting the proposal to an income tax credit would allow it to maintain a tax advantage for employer-sponsored insurance, in the form of a payroll tax exclusion for employer contributions to health insurance, that would help mitigate the unraveling of the employer-sponsored system.
2. Tie tax deductions (or credits) for individual health insurance to development of “effective” pooling arrangements or subsidies to guarantee affordable health insurance for low-income individuals and individuals with high health care costs. Insurers in those states that take this step would be allowed to sell health insurance qualified for tax deduction, but insurers in states without such a safety net would not be able to sell deduction-qualified coverage in those states.
3. To be able to sell insurance that qualifies for the federal tax deduction (or credit), insurers would have to offer insurance that is fully renewable and portable. Persons with continuous coverage (group or individual) would be guaranteed insurance at the lowest available rates, even if the insured’s health worsens. This would encourage healthy people to participate, thus keeping premiums relatively low.

In addition, the President’s proposal to retain and expand tax breaks for health savings accounts (HSAs) is biased toward high-deductible health plans for cost containment, when other cost-containment methods would be more effective. Instead, it would be better to repeal the tax benefits for HSAs, the Tax Policy Center asserts.

Under the President’s health care reform proposal, eventually more taxpayers will pay more taxes as the proposal’s amount of deductible increases fail to keep up with the cost of employer-provided health insurance, the study points out.

The study report is available at http://www.urban.org/UploadedPDF/411423_Presidents_Standard_Deduction.pdf.

For more information on this and related topics, consult the CCH Pension Plan Guide, CCH Employee Benefits Management, and Spencer's Benefits Reports.

Visit our News Library to read more news stories.