The War Over Healthcare Begins

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Last night, President Bush proposed to start taxing healthcare benefits but also to create a new $15,000 standard deduction, $7,500 for single people, for all taxpayers who obtain qualifying health insurance. If turned into law, the plan could accomplish a number of things.

An analysis from the nonpartisan Urban Institute says it's "a major step toward improving the efficiency of the market for health insurance. By severing the link between work and insurance, it would offer everyone the same tax incentives to obtain insurance coverage and limit spending on healthcare."

More people buying their own insurance would very likely lead to more numerous, inexpensive, and innovative products from insurance companies. And because healthcare would no longer be a tax-free fringe benefit, employees would also have a greater incentive to closely examine their insurance plans and question medical costs and hospital bills as lower healthcare costs translate into higher real wages and greater after-tax income. One reason healthcare costs are rising so fast is that consumers don't directly pay for their services and are thus insulated from the true cost of healthcare. As economist Arnold Kling, author of the healthcare policy book Crisis of Abundancehas explained:

Because consumers are not spending their own money, they accept doctors' recommendations for services without questioning them and without concern for cost. Faced with an insured patient, a healthcare provider is like a restaurant catering to convention-goers with unlimited expense accounts. The customer will gladly take the most high-end recommendation and not worry about the price. Consumers are happy as well. Insulation relieves the patient of the stress of making decisions about treatment. The patient also does not have to worry about shopping around for the best price."

Bottom line: The hope is that taxing generous plans will drive down costs over time, though its effect on the pool of the uninsured is more limited. (The addition of a healthcare tax credit would be a big boost to uninsured low-income families.) But will this proposal make it into law?

Kim Wallace, a political analyst at Lehman Brothers, notes that Bush's proposal comes out of his 2005 tax reform panel. "The proposal was not well received in 2005, and we do not expect it to be received very well this year, " Wallace writes in a note to clients. "The probability for enactment is very low in our view. The plan has sparked public opposition from labor unions, ... some employer groups, as well as leading House and Senate Democrats. Both House and Senate healthcare aides we have spoken with confirm that the probability for passage starts at 20 percent at this stage."

Yet the Bush proposal may form the core of the GOP's free-market response to Democratic calls for universal healthcare with greater government involvement–an almost sure topic of debate in the 2008 presidential race.