Cost and Coverage Impacts of the President’s Health Care Reform Proposal and a Congressional Tax Credit Proposal. The President’s Tax Deduction Proposal and State-Based Grant Funding Program


There are two major components to the President’s proposal: the tax deduction and a state-based grant funding program called Affordable Choices. 

Tax Deduction Proposal.  President Bush proposes to replace the existing tax exemption for employer-sponsored insurance (ESI) with a single tax deduction ($7,500 single; $15,000 family).  The tax deduction is available to people with private health insurance, regardless of whether it is ESI or non-group coverage. It is expected that allowing a deduction for non-group coverage will help people without ESI purchase insurance, thus reducing the number of uninsured.

Tax filers would count employer spending for ESI as taxable income for both income and payroll taxes, but would receive the full amount of the deduction as long as they have private health insurance.  Using a fixed deduction amount eliminates existing tax incentives that reward people for taking comprehensive coverage that encourages increased health spending. The current tax exclusion provides incentives for employees to purchase high cost plans with comprehensive benefits and low cost sharing so that most of their health care expenses are purchased with pre-tax dollars leaving only minimal copayments to be financed with after-tax dollars. The fixed deduction caps the amount of spending that can be financed with pre-tax dollars, which provides incentives for employees to purchase lower cost plans that do not exceed the amount of the deduction.  

Affordable Choices.  The President has proposed an Affordable Choices program.  Our report on this program is based on certain policy parameters and potential specifications provided to us by ASPE.  Under these draft specifications, the program would permit States to cover all people living below 150 percent of the federal poverty level (FPL).  States would be required to use private health insurance as the basis for health care coverage and delivery.  State residents must have access to at least one “basic” affordable private health plan that provides certain minimum required benefits.  The “basic” plan must also have a standard premium based on a certain percentage of the State median income that is expected to be accessible for its residents.  We were asked to assume that for a basic plan, a premium level at 6 percent of the median income in a State is required to make coverage affordable.  

Under Affordable Choices, states must also include provisions to increase access to basic private health insurance for high-risk individuals and provide a premium assistance program to subsidize coverage for specified low-income residents of the State.  The State must continue to provide the same level of funding that it currently provides for covering high-risk individuals in order to receive Federal grant money under the program. 

Also, some funding for Affordable Choices must be obtained through Medicaid Disproportionate Share Hospital (DSH) funds.  By the fifth year of the program, at least 50 percent of Medicaid DSH funds from the most recent fiscal year prior to implementation must be redirected into funding for Affordable Choices.    The State could also use other sources to offset the required DSH funding. 

Medicaid and State Children’s Health Insurance Program (SCHIP) eligible individuals are allowed to enroll in Affordable Choices to the extent that the State has submitted certain waivers for alternative coverage and that the State does not use Affordable Choices funds to supplant Title XIX (Medicaid) or XXI (SCHIP) funds to cover these populations. 

The grants to the States will be determined by a formula taking into account several factors such as the State’s number of uninsured and individuals under 150 percent of the FPL relative to the national totals, geographic differences in health care costs across States, and available DSH allotments.  Federal Affordable Choices funds cannot be used to reimburse care provided for Medicaid or SCHIP eligible individuals and a State must use no more than 10 percent of the grant money for administrative purposes. States are also required to adopt policies designed to prevent a shift of previously privately insured people to Affordable Choices.

Key findings on the impact of the President’s proposal include:

  • The proposal would reduce the number of uninsured – projected to be 48.8 million people in 2009 – by about 18.1 million people (37 percent);
  • Replacing the existing tax exclusion with the deduction would increase the federal deficit by approximately $73.8 billion in 2009 assuming the program was fully-phased in;
  • The initial increase in the deficit would decline to a net reduction in the deficit of $88 billion in 2018.  This is because the tax deduction is indexed with the Consumer Price Index (CPI), which grows at about 2.8 percent per year, while the tax exclusion that it replaces would be expected to grow with health care cost inflation at about 7.0 percent per year; and
  • The Federal impact of the program over the 2009 to 2018 period is estimated to be a net cost of $25.7 billion.

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