Would Bush Proposal End Employer-Based Health Insurance?

Would the president's proposal mean the end of employer-based health insurance? That's what some analysts fear.

By Martha Lynn Craver, Associate Editor, The Kiplinger Letter

January 25, 2007

President Bush's health care proposal doesn't stand much of a chance in Congress. Democratic leaders in both the House and the Senate say they're glad the president has offered a plan but doubt it would do enough to help the uninsured.

Still, the plan puts a previously sacrosanct issue on the table: the deductibility of employer-sponsored health insurance. That could affect the bottom line of every employer and every worker. "It's a dicey proposition at best," says J.D. Piro, a health care consultant with Hewitt Associates.

Under the proposal, employer-provided health benefits would be counted as part of income and be subject to taxation. At the same time, taxpayers who purchased insurance, either through their employers or privately, would get a deduction—$7500 for individuals and $15,000 for families, no matter how much the insurance cost. (The average annual cost of employer-provided family coverage is $11,500.)

The standard deduction would amount to a net tax cut for about 80% of those with insurance, analysts say, while the other 20% who receive gold-plated insurance coverage, mainly union members and top executives, would end up with a tax increase.

Some analysts warn that the plan could mean the end of employer-sponsored health insurance. Paul Fronstin of the Employee Benefit Research Institute says that employers looking for an excuse to no longer offer coverage would say, "Why offer it if employees can get the same tax break in the individual market?" Furthermore, it would encourage younger, healthier workers, who can buy cheap insurance privately, to drop out of employer plans, leaving a pool of older workers with health problems. That would prompt insurers to raise premiums, causing a "death spiral," says Fronstin.

Other analysts worry that coverage would suffer if more people bought insurance on the open market without the benefit of expert advice. Employer packages are likely to include valuable benefits that individual policies may not have, such as wellness and disease management programs, notes Paul Dennett of the American Benefits Council, which represents mostly large employers.

A thornier issue, says Dennett, has to do with capping the deductible at $15,000 for families, a measure aimed at encouraging people to purchase less-expensive policies. "But evidence suggests that people want more-comprehensive coverage and are willing to pay for it," says Dennett.

Another problem, says Dennett, is that the value above $15,000 would be considered wages for tax purposes and subject to payroll tax that both the employee and the employer would have to pay. That would discourage employers from offering more-expensive coverage.

Other specialists say that the standard deduction would be unfair because it doesn't take into account regional differences. The cost of providing care varies greatly, with people in the Northeast paying much more for coverage than those in the South, says Amy Bergner of Mercer Human Resource Consulting.

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