In last week’s State of the Union address, President
George Bush unveiled his plans for health care reform with
a new proposal aimed at reducing the number of people without
coverage as well as addressing tax code disparities within
the current American health care system.
Currently, 46 million people in the US are uninsured, costing
the government billions of dollars in annual coverage for hospital
and emergency room treatments. As a recent poll conducted in
October of last year by the Kaiser Family Foundation showed,
46 percent of Americans are “very worried” about
paying for health care, an issue coming in second only to the
war in Iraq.
With health care being such a top concern for US residents,
this issue is a hot topic of debate in the senate, and both
critics and proponents of Bush’s health care reform plan
are currently battling out the merits and the drawbacks of
the new proposal.
"
This plan helps people be able to afford private health insurance,
and that is really the crux of good health care,” Bush
stated in his State of the Union address. He also noted that
this is a revenue neutral plan within 10 years, meaning that
it will shift tax revenue around but not actually bring in
more taxes or save them.
Since the creation of the current health care system, which
began in World War II when employers began to offer health
care coverage to their employees in compensation of a national
wage freeze policy, 59 percent of Americans now obtain their
health care coverage through their jobs.
Since its very creation, the framework of the current employer-based
health care coverage system has become quite complicated.
Yet the basic point – and perhaps the simplest point
- of Bush’s proposal is that the government aims to
provide a standard health care coverage deduction to everyone.
As Karen Ignagni, Chief Executive Officer of Trade Association
America's Health Insurance Plans, points out, "The tax
code fails to assist individuals unless they spend in excess
of 7.5 percent of their adjusted gross income on health care.
Enacting common sense tax incentives for individuals will
go a long way toward helping millions secure and maintain
the
coverage they need."
Under the proposed new system, families would receive a
$15,000 tax deduction and singles would receive a $7,500
tax deduction.
This would cause the current system of employer-based health
care coverage to change substantially. Currently, employers
pay directly for the coverage and the actual cost is not
reflected as income to the employee; it is simply a benefit
for the employee
who in most cases does not even know the actual cost of coverage.
In the new system, employers would still pay directly for
the coverage, but the amount they pay would be added as taxable
income to the employee when they file their taxes, and employees
would apply the deduction on their personal taxes. The employer
would still be able to write off the money spent as a business
expense on their end as well. Most plans have mandatory enrollment,
therefore businesses would not likely allow employees to
opt
out or exchange coverage for income. It would not be advantageous
to an employee to drop employer coverage and purchase coverage
on their own. Employer-based plans would still remain the
best value as they create balanced risk-pools to insurers,
enabling
the premiums to remain lower for everyone by having both
high risk and healthy people in the same group. Individual
coverage
has higher premiums because of increased risk to the insurers.
In his plan, Bush has suggested that states work out deals
with insurers to create a “balanced risk-pool” outside
of the employer-based health plans to reduce premiums for
everyone.
If the employee’s plan costs less than the full allowable
deduction of $15,000, they will still be able to deduct the
full amount when filing taxes. One example of this is a family
whose coverage costs $12,000. Under the health care reform
changes, this family would still be able to deduct the remaining
$3000 difference for a total of $15,000, resulting in a tax
savings of approximately $980. If the plan costs more than
$15,000, the remaining amount would be taxed as regular income
if the employee wished to retain the same level of coverage.
The new rules would reduce the tax bills of approximately
80% of the currently insured. For the 20% whose plans cost
more
than $15,000, the extra cost would become directly taxable,
meaning that these health care users would have to either
downgrade their coverage to remain within the price range
of the deductions,
or pay the extra amount to keep their current coverage.
Who benefits most from Bush’s new plan? If implemented,
the health care reform plan will best benefit the 18 million
people who currently purchase their health care coverage
on their own. For, under the current system, there is no
tax break
for this segment of the population. The new plan would give
these citizens the same tax-free health care deduction enjoyed
by those who are on a plan with their employer. A family
buying their coverage on their own, for example, could see
up to a
$4,500 tax savings under the new system.
Under the new rules, Bush estimates that 3 to 5 million
more uninsured people would be likely to purchase coverage
because
of the offered deductions, although for the half of the uninsured
population who do not contribute to federal taxes, the deduction
will not make a difference since there is no taxable income
to deduct from.
In addition to this main change, Bush also proposed a number
of other changes, such as increased protection against frivolous
medical lawsuits, promoting the use of tax–free health
savings accounts (which were introduced in 2003), using information
technology to update the medical records system, and fighting
fraud and abuse of the system.
All these proposals have their upsides & downsides,
of course. Next week, we’ll look at both sides of the
issue and see what critics and proponents are saying about
this current
topic up for debate.
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