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In January, the United Congress convened for the 110th time.

With a new Democratic majority, President George W. Bush faced his first State of the Union before a hostile audience. In this forum, he addressed a number of subjects of national interest, including the war in Iraq, but he also challenged the nation to consider changing its view of health coverage with provocative new suggestions.

Since World War II, a cornerstone of the healthcare system in this country is that many citizens receive their health insurance as a benefit of employment. Health employers pay for the coverage, and the benefit is deductible to the employer and not income to the employee. This is the construct that has existed for nearly 70 years, but at the same time is systemically different than how we purchase other insurance coverage. For example, two other insurance products that are customarily purchased by United States citizens are fire and casualty coverage for our homes and accident/liability coverage for our automobiles. In both cases, individuals purchase this insurance coverage with after-tax dollars. By challenging the basic construct of employer-sponsored health insurance, President Bush is probing the nation to discuss health insurance that is individual in nature, but affordable and accessible to all.

The core incentive of employer-sponsored healthcare is the deductibility by the employer and absence of income to the employee. Under the President's proposal, employers would essentially convert the health insurance benefit to additional compensation for employees. The employee would, in turn, utilize the funds to purchase health insurance. The first $15,000 in compensation to families ($7,500 to single individuals), would not be subject to income or payroll taxes. The effect of this proposal is to generally negate the tax advantages for employer-sponsored insurance and equalize the consequences for the employer or the employee purchasing the coverage. One of the current inequities is that the self-employed individuals have to purchase health insurance with after-tax versus pre-tax dollars. By shifting to this construct, self-employed individuals would now effectively receive the same tax treatment as individuals who receive their health insurance through employers. Since self-employment and small business are the fastest growing venues for employment, that is a positive aspect of this proposal.

The nation has a vested interest in assuring its general populace has access to affordable healthcare. A key to that ingredient is the third-party payment system of insurance. By moving the nation to a tax construct, which has individual purchasers rather than group purchasers, there will be significant and profound ramifications. The primary incentive to purchase health insurance will be the deduction. Unfortunately, over 80 percent of taxpayers do not itemize deductions. Likewise, this is the group of citizens for whom health insurance is most important because without it they most likely would not have the means to pay for health services.

Although the President's proposal is provocative, it will, if approved, significantly disrupt the status quo of health plans and health insurers. Expect an active debate at both the policy and institutional self interest level when this proposal is considered by Congress. This prognosticator would not give it a high probability of passage by a Democratic majority.


Richard G. Cowart is chairman of the health law/public policy department of Baker, Donelson, Bearman, Caldwell & Berkowitz. He can be reached via
dcowart@bakerdonelson.com.

March 2007

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