Bad Plan, Necessary Step

It's dead on arrival in Congress. It penalizes workers and families with good health benefits. It won't significantly reduce the number of uninsured. And it will do little, if anything, to slow down rising health care costs.

So should we just bury Bush's proposal, unveiled in last night's State of the Union address, to convert the tax exclusion of employer payments for health insurance into a flat, $15,000 deduction? No. Anyone with a long view of the struggle for universal health insurance ought to be in favor of it.

Before I bring down a chorus of disapproval, let me explain.

Ever since the 1940s, when employment-based insurance took off, proposals for universal coverage have faced a huge barrier in public opinion. The millions of people receiving employer-provided coverage have had no idea how much it costs.

Many employees believe they are getting coverage essentially for free. Or else they see their own share of the premium -- say, 20 percent -- and mistake it for the whole cost. New taxes inevitably seem to them an extra burden, and they are easily recruited into the opposition.

To get a clear and fair debate over progressive proposals -- whether those are for single-payer or other alternatives -- requires that Americans understand how much health insurance already costs. The Bush proposal is a step in that direction. It would eliminate the tax-free status of employer payments for health insurance, which means everyone would see on their W-2 how much they were paying for coverage. Then there would be a $15,000 deduction for a couple ($7,500 for a single person) regardless of whether they bought health insurance directly or received it via their job.

Is this more equitable than the current system? Yes, actually it is. It spreads the tax expenditure for health insurance more evenly. (A more progressive option would be to turn the deduction into a flat tax credit.)

But what would be the effects? Here is where we need a long- rather than short-term perspective.

The short-term effect would be to encourage employers to disengage themselves from the purchase of health coverage. Some firms already want to ditch their health plans. This measure would help them rationalize that decision. Under the Bush plan, employees could now get the same tax benefit in the individual insurance market, though they probably couldn't get as good a price for the same coverage.

Long term, however, that would establish a new set of alternatives. The individual-insurance market is staggeringly inefficient; administrative overhead is far greater than in the group market. Liberals can win the debate over health insurance if the cost of the alternative is fully visible -- and if, for many people, the alternative to a public plan is an expensive and inadequate individual insurance policy.

Moreover, bringing the current tax expenditure for private health insurance into full view would also help politically in other ways. Many people believe the government spends lots of money on health care for poor people but nothing on the middle class. Increasing the visibility of the tax expenditure for private coverage would help clarify that the government is already subsidizing middle-class health care, and it would make it easier to transition to a universal, tax-supported system.

Conservatives support a limit on the tax exclusion of health benefits because they believe that it would lead Americans to accept lower insurance coverage and higher out-of-pocket costs and, therefore, would slow overall cost increases. I think they have misjudged the public reaction. Clarifying the full cost of private health insurance is going to make Americans much more likely to support a public alternative.

In a world where health costs have been submerged, liberals have been at a huge political disadvantage. In the world conservatives want to create, liberals would have a much better shot. It's too bad Bush's proposal won't go through.

Editor's note: See Robert Kuttner's 1/29 response to this piece.

Paul Starr is co-founder and co-editor of the Prospect. His new book, Freedom's Power: The True Force of Liberalism, will be published in April by Perseus Books Group; see more about the book, as well as Starr's blog, here.

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