Bush Gambles on Health Care Reform Plan

When he delivers the new federal budget later this month, President Bush will try to capture the high ground in the bitter battle over health care reform by forcing the affluent elderly to pay more for Medicare and by taxing some workers’ health benefits for the first time.

But the President will be making a high-stakes political wager. The Administration is gambling that it can win more support by giving tax credits for the uninsured to buy health coverage than it will lose by raising taxes on Americans who already enjoy generous health insurance protection.

The President and his supporters in Congress hope a combination of tax credits and insurance market reforms can generate enough enthusiasm to drown out the Democrats’ call for national health insurance and mandatory coverage provided by business.

The President intends to attack Democratic health care initiatives as the work of reckless big spenders who want to drive the country into bankruptcy with grandiose schemes. The White House, in contrast, will offer a plan that claims to offer compassion at a far more modest price, Administration officials said.

But neither the Democrats nor the Republicans can escape a disturbing financial reality--a nation already spending $700 billion a year for health care will have to spend even more to provide coverage for 35 million Americans who lack health insurance.

Leading congressional Democrats want to pay for that coverage by forcing all businesses to offer health insurance to their workers, or else pay into a big new public program for the uninsured. This “play-or-pay” idea is bitterly opposed by hundreds of thousands of small-business owners who feel they can’t afford any new taxes.

The Administration believes that it can do the job for less by taxing those elderly and some affluent working Americans who already enjoy good coverage.

For each family of four, corporations will spend an average of $3,200 this year on health insurance premiums. This money is a tax-free benefit for workers.

Administration officials are now making the final decision on how much of this benefit should become taxable income and which income groups will be taxed. One proposal calls for taxing the value of health insurance benefits above $2,000 for those with an annual income of $90,000 or more. This could cost a family with $100,000 in income another $600 a year or more in taxes, with the amount varying according to the value of their health insurance.

Among Americans over the age of 65, Medicare beneficiaries with incomes exceeding $100,000 may be asked to pay double or even triple the current monthly premium of $31.80 for Part B of Medicare, which is insurance for doctor bills.

The Administration will argue for these proposals as fairness issues: Is it fair that well-to-do Americans get a big subsidy from the tax code while others have no health insurance at all? And is it fair that the rich elderly pay the same as the poor for protection under Medicare?

But these are risky tactics. Opposition to taxing employer-provided benefits “would be tremendous,” warned Sharon Canner, a health care analyst with the National Assn. of Manufacturers.

“This has been traditionally opposed by labor, business, consumers and employers,” she said.

“I think business remains opposed to any kind of tax on benefits,” said Lisa Sprague, a health analyst with the U.S. Chamber of Commerce.

Labor also views the proposals as a dubious idea. “It’s inappropriate,” said Claudia Bradbury, a health-policy expert with the AFL-CIO. “Those who already have benefits would be getting taxed to provide for somebody else.”

This approach backfired during the Ronald Reagan Administration, when Congress approved by overwhelming majorities an expansion of Medicare called “catastrophic care.” It offered unlimited days of free hospital care, a cap on payments for doctor bills and partial payment of drug costs. The vast majority of Medicare recipients--about 60%--would have paid only $5 a month for the extra benefits.

But the other 40% of people with enough income to pay federal taxes would have been hit with new tax bills ranging as high as $800 a year. They screamed, and within a year Congress repealed catastrophic care by huge majorities.

Senior citizens--who vote in higher percentages than any other group in the population--won’t like any proposal to raise Medicare premiums. “I don’t see any reason why any older person would be interested in making this change,” said John Rother, director of the legislative policy for the American Assn. of Retired Persons.

Charging higher Medicare premiums for the affluent elderly “strikes at people who are bedrock supporters of the President,” said Carl Schramm, president of the Health Insurance Assn. of America. “I’m not sure if politically this is a self-starter.”

However, the Administration is firmly committed to getting the revenues from upper-income elderly and workers. For more than a year, Health and Human Services Secretary Louis W. Sullivan has been making speeches about the unfairness of a tax code that subsidizes health care for some people.

“We must focus on equity in the system,” he said recently.

Under a tax-credit approach, anyone who buys a health insurance policy could reduce his federal tax bill. The credit would be reduced as income rises.

“What they still have to resolve is what the level of a good insurance policy should be, whether it would cover basic benefits, or a Cadillac plan (with extensive benefits) or something in-between,” said Dr. James Todd, executive vice president of the American Medical Assn., who has discussed the issue with top White House officials.

The AMA agrees with Sullivan that the value of some current health benefits should be taxed. “If individuals want benefits above a certain level, a richer package, it’s their decision. If they want a rich package, they should pay the tax on it,” he said.

For small business, the President is likely to offer a series of insurance market reforms, says Rep. Nancy L. Johnson (R-Conn.), a member of the House Ways and Means health subcommittee who has been working closely with Administration officials.

The reforms are likely to require insurance companies to offer renewal of policies without exorbitant rate increases and to restrict the ability of insurers to reject individuals or groups from coverage.

Small businesses are in dire need of protection in their dealings with insurance companies, says Carolynn Kane, health analyst with the National Federation of Independent Business. When someone changes jobs, the insurance coverage at the new company often won’t provide immediate protection if the worker or a family member has a continuing health problem. “The insurance company says: ‘Your kid has diabetes, we can’t provide coverage for a year after you come to work,’ ” she said.

The Administration’s health care reform package probably will require insurance companies to provide coverage immediately for a new employee.

“By reforming the small group market, by reducing the cost of insurance to small business, we can probably reduce by half the premiums they pay and hence increase access by 10 million (people),” Johnson said.

The President’s package also aims to slow the growth in spending for Medicare, which covers 33 million people over 65 and the disabled of all ages, and Medicaid, which pays for health care for 24 million poor Americans.

The Administration wants to expand the use of prepaid programs, such as health maintenance organizations--networks of doctors that have agreed to provide service for a monthly fee fixed in advance. The government therefore has established an upper limit on what it will spend.

About 2 million of the 33 million Medicare recipients now belong to HMOs, but the Administration is anxious to increase this number. The attraction for enrollees is that the HMO may offer services, such as eye examinations and glasses, that are not covered by Medicare. And the enrollee may pay less than the 20% co-payment required under Medicare for doctor services. The disadvantage is that the individual is no longer free to select any doctor.