President takes aim at health care costs

Published: Sunday, January 29, 2006 at 6:01 a.m.
Last Modified: Sunday, January 29, 2006 at 12:00 a.m.
WASHINGTON - More than 12 years after President Bill Clinton unveiled his plan to remake the nation's health care system, President Bush is moving the issue once again to the top of the national agenda and is expected to push a series of health care proposals in his State of the Union address on Tuesday.
Where Clinton was driven by a desire to guarantee health insurance for every American, Bush is focusing primarily on health costs, which he says are swamping employers and threatening economic growth. Where Clinton favored a larger role for government, Bush has a fundamentally different philosophy, built on the idea that placing more responsibility in the hands of individuals will create market pressure to hold down costs.
The long-running debate has taken on new urgency as more and more companies find themselves struggling to pay for employee health benefits. Health care costs have been a big factor in the troubles of the domestic auto industry, among others.
But some policy experts, Republicans and Democrats alike, say the Bush proposals, which are built around tax breaks, may further drive up health spending and costs by fueling the demand for health care. Such unintended effects show how difficult it is to apply economic theory to the complexities of the current health care system.
The White House has indicated that Bush will propose tax deductions for out-of-pocket medical expenses, rules to encourage the use of health savings accounts, and incentives for small businesses across the country to band together and buy health insurance, exempt from state regulation.
Regina E. Herzlinger, a professor at Harvard Business School, said, "Insuring the uninsured is a fine objective, but how will this control the health costs that are hobbling our global competitiveness? Health savings accounts will increase coverage, and that's great. But they are being touted as a way to control costs, and I very much doubt that claim."
Democrats see the Bush proposals as a pastiche of old and new ideas that falls far short of what is required to tame the growth in health costs.
Many economists, especially those with a free-market bent, say that the tax code, by subsidizing the purchase of health insurance, has fostered excessive use of health care services, driving up costs. Rather than proposing any limit on this subsidy, Bush wants to make it more widely available, to people who buy health care and insurance on their own.
Under current law, employers who pay health insurance premiums for employees can deduct the payments as a business expense on their tax returns, and the payments are not counted as taxable income for the employees. But such subsidies are unavailable to people who buy insurance themselves. Bush sees that difference as unfair.
Allan B. Hubbard, assistant to the president for economic policy, said, "Health care purchased by an employer is done on a pretax basis, before your payroll taxes, before your income taxes. If you work for an employer who cannot afford to provide health insurance and so you go out and buy it, you have to use after-tax dollars."
In an interview, Hubbard continued, "Another unfairness is that if you buy health care with your insurance, you use pretax dollars. If you pay for it out of pocket, you have to use after-tax dollars. That encourages you to insure health care events that are routine. Insurance was never created to deal with the routine."
People use health savings accounts to pay routine medical expenses and buy high-deductible insurance policies to cover larger expenses. Bush says this arrangement encourages people to take more responsibility for all aspects of their care, including its cost.
"It's the opposite of federal control," Bush told a group of small-business owners this month, in a preview of his speech to Congress. "It is patient control."
The White House had been hoping to highlight the new Medicare drug benefit as a model, showing how private health plans could deliver better benefits at lower cost than the government. But if Bush mentions it in his State of the Union address, he will invite catcalls from Democrats.
Sen. Richard J. Durbin of Illinois, the assistant Democratic leader, said the drug benefit had become "a fiasco, a disaster," because it was written by Republicans who placed too much trust in private markets.
Rep. Nancy Pelosi of California, the House Democratic leader, said, "Health savings accounts are brought to you by the same people who brought you the confusing, special-interest-driven Medicare prescription drug bill."
Health policy experts raise many questions about Bush's proposals: Would the new tax breaks go to people who already had insurance or would buy it anyway? Would they undermine the system of employer-provided health insurance? Would healthy individuals be more likely to take the new options, leaving employers to pay for sick people with higher health costs?
Stuart M. Butler, a vice president of the conservative Heritage Foundation, said Bush was focusing more on costs than on coverage for the uninsured. The tax proposals, he said, are "a bit of a gamble," forced on the president by the bizarre politics of health care.
"Insulating people from health costs, through tax relief, could have the unintended effect of raising the cost of health care for everybody," Butler said. "If you subsidize something for people, they are insulated from the cost, and the costs tend to rise."
Jonathan Gruber, a professor of economics at the Massachusetts Institute of Technology who worked at the Treasury under Clinton, said, "The new tax breaks would be expensive and regressive, offering the largest benefits to the highest-income taxpayers."
In diagnosing flaws in the health care system, Bush could lift whole sentences from Clinton's address to a joint session of Congress on Sept. 22, 1993.
Opening his campaign for "health security," Clinton said, "Our medical bills are growing at over twice the rate of inflation." He warned that "rising costs are a special nightmare for our small businesses," and that "health care costs will devour more and more and more of our budget."
Since then, national health spending has doubled, to $1.9 trillion. Health care now accounts for one-sixth of the nation's economy. Medicare and Medicaid, which accounted for 15.5 percent of federal spending in 1993, now consume almost 21 percent.
In Bush's first term, the number of people without health insurance increased more than 1 million a year, to 45.8 million in 2004, the last year for which official figures were available. The cost of a health insurance plan for a family of four reached $10,880 last year, about 70 percent more than in 2000, according to the Kaiser Family Foundation.
Democrats and consumer groups led the campaign for health care legislation in 1993. Now, business executives and small-business owners express a similar sense of urgency.
In his recent meeting with small-business owners, Bush said, "Government policy has got to aim at the increasing cost of health care." The number of uninsured is rising because health costs are going up, he said, "so the government needs to address the cost."
While they are not required to provide health benefits, many large employers are committed to doing so, despite the rapidly rising costs. Employers see health benefits as a way to attract workers and to keep them productive, said E. Neil Trautwein, assistant vice president of the National Association of Manufacturers.
Over the years, many employers have become expert in buying health coverage for their employees, and they do not want to drop this responsibility or dismantle the current system of employer-sponsored insurance.
But employers have been clamoring for policymakers to address the needs of the uninsured. Employers say they indirectly pay for the uninsured, because the cost of their care is factored into the prices charged by hospitals and other health care providers.
"The health care cost crisis has a lot to do with the growing number of uninsured," said Katie W. Mahoney, manager of health policy at the U.S. Chamber of Commerce.

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