hen he made his State of
the Union address in January, George W. Bush knew he would soon
be announcing sizable cuts in Medicare and Medicaid two weeks later.
He chose to say nothing about that. Apparently he understood that
a $101.5 billion cut over 5 years in Medicare and Medicaid is not
the sort of thing that provokes standing ovations from members of
Congress on prime-time television.
What Bush did mention was “two new initiatives” that would
shift federal subsidies from some Americans to other Americans.
His first “initiative” called for raising taxes on Americans
who have employer-sponsored health insurance in order to lower taxes
on Americans who buy health insurance on their own. His second proposal
called for shifting federal tax subsidies from hospitals that serve
disproportionate numbers of uninsured patients to insurance companies
(which are not in the business of serving uninsured patients). The
White House estimated the first proposal would lower the nation’s
number of uninsured, now at 47 million, by 3 to 5 million in 2009
when these proposals would take effect. The White House offered
no estimate of what the second proposal would do.
Bush’s proposal to raise taxes on people with employer-sponsored
health insurance rests on the assumption that health care inflation
in the U.S. is driven by “overuse” of medical services
and that overuse is in turn driven by health insurance with “low”
deductibles and copayments. According to the right wing in this
country, medical care is no different from any other commodity—if
insurance pays for most of your medical costs, then you’ll
consume far more medical services than you need.
To make this point, advocates of high-deductible policies like to
ask audiences to imagine what would happen to food prices if all
Americans had grocery insurance that paid for 95 percent of their
grocery bills. The problem with the grocery/insurance analogy is
that medical services, unlike food, are rarely pleasurable and are
often painful and even life-threatening. Would you rush off to have
your uterus or prostate removed if it was not cancerous just because
you are insured and would pay only a minor portion of the bill?
Would you endure radiation and chemotherapy if you did not have
cancer? Or, to take a service that is not painful, but just plain
boring, Would you take time off work to have blood drawn for a cholesterol
test you didn’t need just because you didn’t have to pay
Research demonstrates that Americans, including insured Americans,
vastly underuse medical services. To take just two examples: (1)
half of all insured Americans with high blood pressure are not being
treated for it; and (2) one-fourth of insured Americans who have
had an angiogram that demonstrates they need either bypass surgery
or angioplasty have neither done.
A large study conducted by the Rand Corporation that was published
New England Journal of Medicine
late in 2003 demonstrated
that underuse of medical care occurs four times as often as overuse.
The high-deductible policies advocated by Bush and the Republican
Party ($5,000 to $10,000 per year for families) might or might not
reduce overuse (patients are not doctors, after all), but they will
definitely aggravate the underuse problem. Of course, highdeductible
policies will not address the enormous waste generated by the health
care industry in the form of excessive administrative costs, excessive
prices for specialist services and drugs, and fraud.
Bush nevertheless invoked the myth of the “overinsured”
America, arguing that some unspecified portion of the populace had
“gold-plated” health insurance. He implied that overuse
by these people was a primary cause of health care inflation. To
discourage the purchase of “gold-plated” health insurance,
whatever that is, Bush proposed to raise taxes on those who purchase
Under Bush’s proposal, employer contributions toward employee
health insurance would, for the first time, be treated as income,
just like wages and salaries are now. Employer contributions would
show up on W-2 forms, just like other forms of income. However,
Bush would offset this new liability with a deduction worth $15,000
for families and $7,500 for individuals. Thus, as long as you keep
your insurance premium below the deduction, you would not have to
report your employer’s payments for your health insurance and,
therefore, you would not owe more taxes. One way to do that, of
course, is to buy health insurance with a very high deductible.
According to White House estimates, the average cost of family insurance
in 2009 will be $13,500, which is just below the $15,000 deduction
Bush is proposing. Bush announced during his State of the Union
address that 80 percent of Americans with employer-sponsored insurance
will pay no new taxes. What Bush did not mention was that this 80
percent figure, while accurate for 2009, will fall as time goes
by because the $7,500 to $15,000 deduction is pegged to the general
inflation rate, while health insurance inflation zooms along at
3 to 4 times the general inflation rate in most years. By 2011 or
so the average price of health insurance will surpass the deduction.
According to the Tax Policy Center, the percent of Americans with
employer-sponsored coverage who will pay more taxes will rise to
40 percent within a decade.
is not proposing that the new tax revenues go to the government. He
would use the revenue raised from Americans with “goldplated”
employer-sponsored insurance to create a new tax break for Americans
who currently buy health insurance on their own. (There are about
18 million of these people as compared with about 160 million who
get insurance from an employer.) Under current law, people who buy
health insurance for themselves (for example, a farm family or a musician)
cannot deduct their premium payments from the income they report to
the IRS; but people who get insurance from an employer can. There
is no question that this disparity in tax treatment is unfair and
that Bush’s proposal would end that disparity by giving individual
(nonemployer) purchasers the same deductions he proposes to give people
with employer-sponsored insurance—$7,500 for individuals and
$15,000 for families.
But the justice done for individual buyers will be offset by new
injustices done to the sick and the lower-income. Bush’s crude
definition of “gold-plated” makes no allowance for the
fact that the health insurance industry charges higher premiums
for sicker groups and individuals. The sick are far more likely
to wind up paying a disproportionate share of the new taxes. Also,
as is the case with all tax deductions, the deductions Bush is proposing
will mean a lot more to the rich than they will to the middle and
lower income classes.
The White House estimates that making the new deduction available
to individual buyers will cause 3 to 5 million of the 47 million
Americans who currently don’t have health insurance to buy
it on their own. Whether the proposal will have even this much effect
is debatable. The reason is obvious. Many of the uninsured pay so
little in income and payroll taxes (payroll taxes are also reduced
under Bush’s proposal) that the Bush deductions are meaningless.
Even among those households that will enjoy a substantial reduction
in their taxes, say $5,000, many will still be unable to hand over
$13,000 or more to the insurance industry.
Comedian Steven Colbert articulated this defect in Bush’s proposal
quite succinctly: “It’s so simple. Most people who can’t
afford health insurance are also too poor to owe taxes. But if you
give them a deduction from the taxes they don’t owe, they can
use the money they’re not getting back from what they haven’t
given to buy the health care they can’t afford.”
Whereas Bush’s deduction proposal at least has the redeeming
value of eliminating the disparate tax treatment of employerversus
individually-sponsored insurance, Bush’s second “initiative”
has no redeeming value at all. Under this proposal, federal dollars
that currently go to public and teaching hospitals that treat an
above-average portion of the uninsured would be funneled to insurance
companies via the states. The money, which the White House calls
“affordable choices grants,” would go only to states that
promise to use the money to subsidize the purchase of high-deductible
policies from insurance companies. High-deductible policies are
“affordable,” get it?
Bush’s rationale for shifting money from hospitals to insurance
companies is that if people have insurance, they won’t be showing
up at hospitals seeking free care. But by shifting money from hospitals
to insurance companies, the actual dollars available for patients
shrinks. That’s because hospitals use nearly all of the money
for patient care, whereas insurance companies will waste 20 percent
of the money on non-medical expenses such as advertising, underwriting,
“managing” care, profit, lobbying, and rich perks for
executives. Hospitals can ill afford to see 20 percent of their
revenues siphoned off to pay for insurance industry overhead.
minor effect of the two money-shifting “initiatives” Bush
announced during his State of the Union address will be swamped
by his proposed cuts in Medicare and Medicaid. Granted, these cuts
are not reductions in total dollars for Medicare and Medicaid, but
are, rather, cuts in the projected rates of growth in expenditures
if current law governing coverage and eligibility is not altered.
Nevertheless, we may call them cuts because enrollment in both programs
is growing and inflation in health care costs these programs have
to pay for is high and unrelenting.
Rising expenditures on Medicare and Medicaid are essential to our
increasingly sick health care system for the same reason an ever-expanding
tourniquet is essential to someone with an ever-expanding wound.
The unrelenting increase in health care costs, a problem Bush has
done nothing to address in his six years in office, is driving employers
and individuals from the health insurance market. If it were not
for government-financed health insurance programs, of which Medicare
and Medicaid are by far the largest, the percentage of the U.S.
population without health insurance would be much higher.
To give you some idea of the protective role Medicare and Medicaid
play, consider the results of a study that examined how insurance
status changed in this country between 2000 and 2004. Over that
period, the percent of nonelderly Americans without health insurance
rose from 16.1 to 17.8. The 2004 figure would have been 20.4 percent,
not 17.8 percent, if Medicare, Medicaid, the State Children’s
Health Insurance Program, and smaller public health insurance programs
run by the states had not acted as the safety net for some of the
four million Americans jettisoned by the private health insurance
industry during the 2000-2004 period. At a time when our safety
net is not big enough to catch all the people being tossed from
the ranks of the insured, it is irrational to propose cutting the
Judging from the contemptuous reactions of the Democrats who chair
the health committees in Congress, Bush’s little money-shifting
“initiatives” are going nowhere. Pete Stark (D-CA), who
chairs the health subcommittee of the House Ways and Means Committee,
dismissed Bush’s plan to tax “goldplated” insurance
as a “new tax proposal [that] would shift health care costs
to working families.” Even some Republicans agreed.
But Democrats will find it more difficult to ward off all of Bush’s
proposed cuts in Medicare and Medicaid. They would find it slightly
easier to do if they were to stop the overpayments to HMOs that
participate in Medicare and Medicaid and much easier to do if they
brought the Iraq war to a quick end and let a substantial portion
of Bush’s 2001 tax cuts expire in 2010 as scheduled. Americans
would be well advised, however, not to hold their breath for these
events to come to pass.
With polls indicating threefourths of Americans support universal
health insurance and twothirds support achieving universal coverage
with a single-payer (or Medicare-for-all) system, it is difficult
to endure the sight of Democrats dickering with Republicans over
whether to cut Medicare and Medicaid. In a democracy less influenced
by money, we would be watching Congress debate HR 676, the single-payer
bill sponsored by Rep. John Conyers (D-MI). Hopefully, that day
Sullivan is a health systems analyst with the Minnesota Universal
Health Care Coalition. He is the author of
The Health Care