Rx America: What's the prescription for U.S. health-care reform?

Big Idea No. 2: The road to reform runs through Form 1040

By Pat Regnier, Money Magazine senior editor

(Money Magazine) -- Even now we don't have a free-market health system. It's not just that we have Medicare for the old and Medicaid for the poor. If you have insurance through your employer, the government is subsidizing you.

Uncle Sam gives up about $200 billion a year in taxes by exempting the premiums employers pay, as well as some employee contributions. If you have to buy insurance on your own, you don't get that subsidy. President Bush wants to change that by replacing the current tax exemption with a standard deduction for anyone with a health plan: $7,500 for individuals, $15,000 for families. Some people with more expensive plans would pay higher taxes.

But at a stroke, this could make it easier for millions to buy insurance on their own. For example, a single person earning $50,000 would get a $3,000 tax break to help buy a policy, according to the Tax Foundation. This is one time when Bush has actually gotten liberals to perk up and listen.

After all, much of today's tax benefit for insurance goes to the affluent. And health policy wonks of all political stripes think this big preference for employer-based coverage is outdated. "The country sort of slid into it by accident," says Wyden, the Senate Democrat, who notes that companies turned to health benefits as a way around World War II-era wage controls.

Wyden's plan, like some other universal-care proposals, would be financed in part by redirecting the subsidy. Taxes are also an important part of the new Massachusetts system, because it allows more people to buy coverage with pretax dollars. This could mean the difference between a monthly premium of $175 and one of $109 for a single man.

But there's a lot more going on in Bush's proposal than tax fairness. Conservatives want to shift people out of employer plans and into policies they choose and pay for themselves. For one thing, such policies would be portable.

"What gives stability to a system is if people have a long-term relationship with an insurer, even if they change jobs," says John Goodman of the free-market National Center for Policy Analysis.

Bush is also trying to use market forces to tamp down costs. Since his deduction would be a fixed amount, you'd have no tax incentive to buy a policy that cost more, and if you bought one that charged less you'd still get the break. That's a natural complement to Bush's other big health-care tax initiative, the Health Savings Accounts that made their debut in 2003. These allow anyone in a high-deductible health plan to save tax-free for future medical expenses.

Put simply: Bush wants more people to buy plans with skimpier benefits. The hope is that if you paid for more of your care, you'd be tougher than any HMO about keeping expenses down.

The messy details

Problem is, if you merely pull the loose thread of the tax code, you just might unravel the whole employer-based system before a new one replaces it. That's because the deduction could encourage some employers to stop offering health insurance.

But individual plans can't offer the low premiums that risk pooling affords employee plans. People with chronic diseases are often shut out altogether. Sure, that might change as tax incentives spurred the individual market to grow, and Bush wants to use federal money to encourage states to help people get coverage.

But economist Jason Furman, a former adviser to Bill Clinton and John Kerry, says the President's plan is too sketchy. "It's taking too big a chance to just assume that this thing will somehow get fixed," he says.

Advocates of universal health care are even less enthusiastic about HSAs, which look to them like a tax shelter for the affluent. Those high-deductible plans, they say, may not do much to discourage excessive health spending for those who can easily pay, say, a $4,000 deductible. Yet the same deductible may keep others from buying the care they need.

"It forces poor people to take risks," says Arnold Relman, former editor of the New England Journal of Medicine.

Big idea No. 3: Create the not-exactly-national health plan  Top of page