New Tax Breaks for Medical Expenses
Wednesday, January 25, 2006
President Bush will propose that Americans be allowed to take tax deductions on more of their out-of pocket medical expenses, as part of an initiative the White House believes will rein in soaring health costs by shifting responsibility toward individuals, according to congressional and other sources familiar with the administration's thinking.
The new tax breaks for personal health spending, to be included in the 2007 budget Bush will release in less than two weeks, are designed to help the uninsured and to allow people with insurance to write off a greater portion of the money they spend on co-payments, deductibles and care that is not covered. Under current tax rules, people can deduct medical expenses only if they exceed 7.5 percent of their adjusted gross income.
The president also plans to call for an expansion of health savings accounts, an idea long favored by conservatives and approved by Congress slightly more than two years ago, in which people who buy bare-bones insurance policies are allowed to put money into tax-free accounts for their medical expenses.
In addition, Bush intends to propose changes to allow people to keep their insurance, without extra cost, if they change jobs or decide to start a business, building on a decade-old law that was designed to make health coverage more "portable."
The three proposals -- and possibly others -- are part of a renewed effort by the White House to tackle medical costs, a theme that administration officials said yesterday Bush intends to emphasize in his State of the Union address next week. The health initiative also represents one of the few areas in which the president will try to create new domestic policies through what he and aides have said will be an austere budget.
Part of the initiative recycles proposals that the White House could not push through Congress, including tighter limits on medical malpractice lawsuits and changes that would allow small businesses to band together to buy insurance in ways that bypass state insurance rules.
But the new components would propel the nation's health care system in a direction that many Republicans and business groups embrace: lightening the burden of insurance cost on employers to some degree, while creating financial incentives for individual patients to restrict how much care and medicine they use.
Even before most people on Capitol Hill learn of the proposals, several senior congressional aides and health policy experts predicted yesterday that Bush may have a difficult time winning support. They said that fiscal conservatives may balk at the expense, and that many Democrats will argue the changes are inadequate for poor people, who are most likely to be uninsured.
White House officials would not confirm the decision to allow tax breaks on consumer health spending, and it remains unclear how large a deduction the president envisions.
In an interview yesterday, however, Allan B. Hubbard, director of the White House's National Economic Council, said the current system is flawed because it gives employers tax deductions for the health insurance they buy for workers, but no similar tax preferences for people who buy coverage because their company does not provide it.
"That's not fair. It's really almost backwards," Hubbard said. He said that inconsistency concerns Bush, adding: "Normally, when he's got concerns, he tries to find solutions."
Hubbard said Americans are not as careful consumers of health care as they are in shopping for other services, because insurance masks from them much of the cost. He said the price and quality of health care would improve if consumers were given greater financial incentives and had to decide for themselves how much care they really need.
The idea of tax breaks for out-of-pocket medical expenses is borrowed from a recent book by three academics, including two with whom Hubbard has close ties: R. Glenn Hubbard, a former chairman under Bush of the White House Council of Economic Advisers, and John F. Cogan, a White House economic adviser when Ronald Reagan was president. Their book, "Healthy, Wealthy & Wise," calls for all such spending to become tax-deductible. The authors estimate that the revision in tax law would cost $28 billion a year when phased in completely, although they predict much of that lost revenue would be regained through ripple effects the change would create in the health care system.
Several outside health policy experts, both Democrat and Republican, speculated yesterday that the president is unlikely to make such a large financial commitment at a time when the administration has pledged to halve a $400 billion budget deficit during the next several years. Joseph R. Antos, a scholar at the conservative American Enterprise Institute, predicted that Bush will "open this particular door. But how far does it open? We'll see."
An administration official, speaking anonymously because he was not authorized to discuss the budget in advance, said Bush is focused on both the deficit and medical costs. "He feels . . . there may need to be some additional investment to deal with the cost" of health care, the official said. "The overall gain, not only to the federal budget but the family budget, is worth that."
Allan Hubbard said Bush also thinks the government has not done enough to help people keep insurance when they change jobs. Under a law passed in 1996, an insurer may not penalize people who change jobs -- by charging them more because of preexisting medical problems -- as long as they began a new job within about two months. Hubbard said the protection should be extended to include people who take longer before they begin a new job or who go to work for themselves.
Hubbard also said "it would not surprise me" if Bush proposes to expand health savings accounts, although Hubbard would not describe the changes the White House would like.