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REFORM: 5 Steps To Improve The President’s Plan

February 23rd, 2007

Len Burman, Jason Furman, Greg Leiserson, and Bob Williams of the Urban-Brookings Tax Policy Center contribute the following post to the Health Affairs Blog.

In his State of the Union Address, President Bush proposed a radical restructuring of tax incentives for health insurance. Instead of the current unlimited tax exclusion for employer contributions to workers’ health insurance, there would be a new standard deduction for health insurance (SDHI)–a flat exemption from income and payroll taxes for anyone who has qualifying health insurance. The SDHI would apply to both employer-sponsored insurance (ESI) and individual nongroup insurance. The exemption amounts–set at $7,500 for single coverage and $15,000 for family coverage in 2009–would be indexed to the CPI, which grows much more slowly than health care costs and premiums. As a result, even though the deduction will start off bigger than premiums for most people, it won’t be by the end of the budget period in 2017.

The Urban-Brookings Tax Policy Center has analyzed the pros and cons of this proposal in a new report, “The President’s Proposed Standard Deduction for Health Insurance: An Evaluation.” Like many health analysts, we worry that the proposal would undermine our current employment-based system that covers 60 percent of Americans without solving the problems in the nongroup market that can leave millions of sick and/or low-income people uninsured. But we think the proposal could be improved to ensure increased coverage and provide real help for many vulnerable families who lack insurance today or are at risk of losing insurance under the current system.

In a nutshell, here are our recommendations (see the full report for detailed discussion):

1. Replace the deduction with a refundable tax credit or a voucher. Either would give low-income families the same assistance as richer families would get and make it more likely that they would obtain coverage. And there would be less threat to current employment-based coverage.

2. Make eligibility for the credit or voucher contingent on states’ setting up effective mechanisms to guarantee availability of affordable health insurance in the nongroup market. That would reduce the uncertainty of coverage if traditional sources of health insurance weaken.

3. Dedicate additional funds to expand public programs like Medicaid and SCHIP, increase subsidies for small business ESI, and support pooling arrangements for nongroup coverage. Those steps would help those most vulnerable to losing insurance.

4. Eliminate tax subsidies for health savings accounts to equalize the treatment of different forms of health insurance. Without this change, high-deductible health insurance plans would have a huge tax advantage over other health insurance options, including aggressively managed care, even if the other options were more efficient and attractive to consumers.

5. Index the credit or voucher to the health CPI or even the rate of growth of all health spending rather than the slower-growing overall CPI. That change would protect against the erosion over time of incentives to obtain coverage.

The basic thrust of the President’s proposal–leveling the playing field for health insurance–is laudable. But the plan fails to address some of the most significant problems in today’s market for health insurance and actually threatens many of the most vulnerable families. Specific changes would make the proposal fairer and improve its chances of meeting its goals. Without those changes, it could worsen an already precarious situation.

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1 Trackback for “REFORM: 5 Steps To Improve The President’s Plan”

  1. Tax Form » REFORM: 5 Steps To Improve The President’s Plan
    February 23rd, 2007 at 3:17 pm

5 Responses to “REFORM: 5 Steps To Improve The President’s Plan”


    Neil Gardner asks who created the website “Responsible and Fair Healthcare For All”? It was put together by Donald Strombeck. Much of the American public would accept the changes outlined in this website. Who would be shocked by such changes? Mostly, the health insurance industry, corporations making billions on drugs and all kinds of medical technology, the medical profession-especially medical specialists, and individuals who choose to live a healthy lifestyle and do not believe they need the right to insist on receiving every available option for diagnosis and treatment of any medical problem. It may take an economic crisis for these groups to be shocked.

  2. Neil Gardner Says:


    .More on this can be found at
    Very interesting website. Who put this together??

    I have been arguing for a similar social and centrally controlled system with a group of conservative market enthusiast for 10 years or more on an old listserv website. I have recently given up because the site only now contains such libertarian-market types, AND THEY WILL NEVER NEVER AGREE ON THIS TYPE OF CENTRAL CONTROL OF HEALTHCARE! It is against their religion, I guess, but meanwhile anything market oriented fails to satisfy anything, or so it would appear.

    Most of the trickling changes or incremental changes that have managed to come about over the last 15 years instead of a major system overhaul as suggested at the above web address has happened because this market oriented, libertarian oriented group is sizable and has been gaining power in government until the last 2006 election. Still, gettting the kind of centralized changes recommended AT THIS WEBSITE WILL TAKE SOME SERIOUS SHOCK THERAPY given to many, many conservative Americans before they will acquiesce to such a change.

    Any suggestions on how to get them shcoked??


    The healthcare crisis will not change until people have an incentive to change their behaviors that are responsible for 8 of 9 leading causes of death. Spending more money will not be effective. Changes in the lack of healthcare standards and their costs are needed. All this can be done with the additional accomplishment of providing responsible and fair healthcare for everyone. More on this can be found at

  4. Maynard Clark Says:

    I’m still waiting for Republican proposals for integrating cost-saving wellness into any healthcare proposal, whereas Democrats Villsack, Clinton, Edwards, Biden, et al (but not Obama) already had done so publicly.

  5. Johnathon Ross Says:

    I am shocked, shocked, that this President might recommend a policy that would be bad for the most vulnerable and better for the healthy and wealthy and the insurance industry. Who would have imagined it?

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