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President Bush’s Health Care Proposal will be “Dead in the Water” by Rob J Thurston, President, HRCG, www.hrconsultinggroup.com, (888) 438 9445, hrcg@relia.net We feel that that the Proposal by President Bush to provide a tax credit of $15,000 for family medical coverage and $7,500 for single is not feasible. “There are four main reasons this will not work: 1- The House and Senate will not pass legislation to allow this. The House of Representatives leadership like Pete Stark has said that “it’s dead on arrival.” Harry Reid of the Senate has stated:” Punish people because they have good insurance? I don’t think they would agree with that. Taxing people who have health insurance doesn’t make sense to me.” Charlie Rangel of the Ways and Means Committee says the President’s idea is “a dangerous policy that ultimately shifts cost and risk from employers to employees.” 2- 60,000,000+ Americans will be worse off. Estimates show that there are between 150,000,000-168,000,000 covered under employer health plans. President Bush claims that 100,000,000 currently covered in employer health insurance will be the same or better off with his Proposal. What he fails to mention is the approximately 60,000,000+ covered who will be worse off. The Wall Street Journal 1/24/2007 stated: “The 17 million Americans who buy their own coverage would be big winners…. The Treasury estimates the new deduction would add at least 5 million Americans to the ranks of the insured….” That is a grand total of 22,000,000 individuals, of which 5+ million are currently uninsured. The American Hospital Association has stated that this Proposal could “undermine the employer-based system that already provides insurance to the vast majority of Americans and on which we need to build to extend coverage to the 47 million uninsured.” So is this new Proposal worth it if it penalizes employers and 60,000,000+ workers? Yet it only helps 17 million get a tax credit and 5+ million who were uninsured? Does it even make economic sense to take away dollars and benefits from 60,000,000+ covered individuals to provide a tax deduction for approximately 22 million? Even the most liberal Senator Edward Kennedy (D-Mass.), has stated that the Proposal "will do little to improve the quality of health care. This policy would immediately impose a new tax on nearly 7.5 million Americans who now have good employer-sponsored coverage. It penalizes workers with good health care, many of whom are middle- or lower-income, and creates a disincentive for employers to provide comprehensive coverage." Kennedy feels that only 7.5 million employees and their dependents will be subject to more taxes. We are estimating more like 60,000,000+ will be affected.
Paul Fronstin,
senior research associate with the Employee Benefit Research Institute,
says the proposal "raises questions of equity" because unhealthy
workforces pay higher premiums than healthier workforces. That means
some individuals might face a new tax simply because their co-workers
are unhealthy. Scott Idelson, president of Regence BCBS of UT, has clarified what many of us have been saying for years:”Low income wage earners often do not earn enough to itemize deductions or use a tax credit.” Rich Umbenstock, president of the American Hospital Association, agrees:”For many people, even with a tax break, coverage remains unaffordable and out of reach.” Right now under current Federal tax law there is an existing Health Care Tax Credit for low income individuals who have health insurance. Even with this current Tax Credit; there was still 47 million uninsured. Why isn’t the Bush Administration promoting first the existing Health Care Tax Credit? 3- This could be an alarming trend to cap and tax employer provided benefits which in turn will affect not just employers but also all 160,000,000 covered individuals who generate most of the income and pay most of the taxes in our economy. It is also unclear if the cap proposed by Bush would limit just medical insurance only but also the total of HSA, FSA, Premium Only Plans, and other health related contributions. Now let’s explore the “Hidden Tax” that the Bush Proposal does not address: Not disclosed is the fact that employers and many employees will now be paying an additional 7.65% on the value of their medical insurance premiums if this Proposal is passed. Currently, almost all employers use a Section 125 Premium Only Plan to allow employees to pay their share of medical insurance premiums before FICA (6.25%) and Medicare (1.4%) are calculated. If the employee can now only use a Federal Tax Credit on their 1040 form; they will be paying those medical premiums with money that FICA and Medicare have already been deducted from. The employee could also lose the local State taxes he had been saving as well which could range from 0-11+%. It might take years for each State to pass legislation to allow a similar tax credit for these medical premiums. The employer will also lose the matching 7.65% (FICA/Medicare) that he also had been saving. The employer could also lose the savings on Federal Unemployment tax (FUTA), State Unemployment tax (SUTA) and in some cases Workers Compensation rates. That could add up to more than 10% that the employer will lose on the value of the medical insurance premiums. Even the least paid employee would lose these tax savings: Suppose an employee who is single with one tax exemption earns $15,000 a year (which is about $7.28/hour). He would pay no Federal Income tax and thus not be eligible for any Tax Credits. He receives and has single medical premiums of only $1,000/yr. Under his Section 125 Premium Only Plan he saves immediately $76.50 in reduced FICA/Medicare. He gets that tax savings spread out equally in each paycheck. In addition, the employer will on average save $100 on the $1000 contributed and will save as a result 10% in taxes (Social Security, Medicare, SUTA, FUTA, Workers Compensation). With the Bush Proposal the employer and the employee will both lose money. Not counting the amount of local State tax savings the employee will lose, the Bush Proposal will collect a new Hidden Tax of $176.50 on the value of every $1000 in medical premiums. This is a combined effective tax rate of 17.65% If you counted the loss of local State tax savings, the combined effective tax rate could range From 17.65% to 28.65%+. 4- Individual medical insurance has too many State Mandated limits and will be too expensive for many individuals; even with a tax credit... For many years each State has required and mandated to varying degrees that medical insurance provide coverage for things like maternity, psychiatric, certain drugs, experimental or exploratory surgeries, etc. That was why Congress passed the ERISA law in 1974 to allow federal law to supersede state law if you have an employer sponsored voluntary medical plan. ERISA permits multi-state employers to maintain nationwide health insurance, providing uniform benefits nationwide. But if you buy individual insurance, you must buy it in the State where you live and be subject to these more expensive State mandates. There is no mechanism for an individual to select medical insurance nationally over the internet free of the worst State mandates. After 33 years of ERISA, most States have not moved to offer medical insurance that does not contain numerous, expensive mandates. A notable exception is CT. Even Mike Leavitt, Health and Human Services Secretary for President Bush, admits that some states have mandates in place requiring certain things to be in a medical insurance policy that could drive up the price, making it out of reach for some people. In an article in the Deseret News, 1/25/07:”He (Leavitt) likened it to telephone service. Some people just want a plain dial tone but end up having to pay for call-waiting, caller-ID, the Internet, voice mail and other options. He said if states can come up with a simplified plan that is affordable for lower income people, the federal government will come up with grants to help fill in any gaps to allow people to buy the coverage. Details on this will be laid out in the president’s budget, according to the White House.” States are just as slow as the Federal Government in making these needed changes. And many States are moving in the opposite direction by seeking to impose more mandates and penalties on employers who do not offer medical insurance. The State of New York's "Fair Share for Healthcare Act" attempts to increase individual healthcare coverage through costly mandates on businesses. This proposal would ultimately cost up to 100,000 jobs and impose as high as a $9.2 billion hit to business. This still leaves 83% of the uninsured without coverage. The devastating impacts of this bill are illustrated by an EPI-sponsored study conducted by University of Kentucky and the Economist Dr. Aaron Yelowitz. The study found that while only 17% (466,000) of New Yorkers in need of healthcare coverage would be affected by the bill, businesses will be forced to pay for what is essentially redundant coverage for over 586,000 currently insured New Yorkers. Furthermore, since it would mandate redundant coverage for many already insured employees, so the cost per newly insured employee could be as high as $19,617 a year. "It's obvious that trying to remedy the healthcare crisis through employer mandates does little to address the problem of the uninsured," said John Doyle, of the Employment Policies Institute (EPI). The New York’s mandate is ineffective, not to mention costly. ERISA has protected Walmart from such State mandates in MD. The Fourth District Court of Appeals rejects the State penalties and mandates for such employers like Wal-Mart. The same logic applies to the recent CA and MA plans being promoted. We predict that both the CA and MA plans will not comply with ERISA. When a state mandates that certain coverages like maternity, unproven surgical procedures, designer drugs and mental health coverages must be included- then the ability to control health care costs is minimized. The proposal from Massachusetts requires that individuals buy certain health insurance and they claim it is much the way they would buy car insurance, giving the responsibility to the employee. The problem is car insurance does not require that you insure it for collision and repair- only for catastrophic incidents. So you can see the difference. In fact, according to the Wall Street Journal, 1/23/2007, the soon-to-be compulsory medical insurance policies in MA will start at a whopping $380 per month ($4560/yr) for single coverage! And we predict you will see even more escalating costs in Massachusetts’ health care after 3+ years. So what will work for Health Care? We do not believe that the federal or State governments can “fix” health care. And everyone agrees that one company alone cannot “fix” health care. We believe that it must be a combined effort by a lot of companies on a national level who get the federal and state governments to quit “legislating” health care as an entitlement. One good example is Wal-Mart- who happens to be one of the largest employers with the greatest number of employees in North America. As far as Wal-Mart is concerned, health care is a national problem. In order to fix it, Wal-Mart feels that the government, corporations, and workers are supposed to join their efforts to find ways to make the system more efficient. The key step would be to find out what is driving up health care costs and then weed out the inefficiencies in the system. Another important component would be to develop or acquire information technology expertise to help develop a system for keeping electronic medical records as another way of reducing costs. One result is that Wal-Mart has offered HSAs and HRAs to its employees. Another leading edge effort by Wal-Mart is to open medical treatment facilities within Wal-Mart stores. The bottom-line result for Wal-Mart will be lower costs and better utilization of health care services by its employees. We see another three trends in health care. Now ask yourself who would be better qualified and able to address these trends: 1- The rate of change in information is increasing exponentially and there is information overload. So historically, have corporations been able to better access and adapt to change and process information better than the Federal and State governments? 2 - As a percentage of GNP- health care costs and its infrastructure are growing faster than any other sector. So do you agree that Management at corporations has listed Health Care Costs as a critical issue and the Federal Government cannot get State Governments or Congress to make it the top priority? 3 – Employee/Consumers want to make their own decisions about health care. Is that more the thinking of Management at Corporations or does the Congress and Federal and State Governments really agree with that philosophy? Honestly- you already know the answers to these questions above. Predictions- We feel that the following will occur: a- This is the first proposal from President Bush that will have many large employers, unions, and most of the Democrats all against it. We would not be surprised if many Republicans will also not endorse it. b- This will become a campaign issue in 2008. c- If this Proposal eventually removes any of the tax deductibility of premiums for health care from employers- what incentive does the employer have to continue to pay even a small portion of the premiums? d- Putting a cap of the amount of benefits offered is a first step in taxing all employer provided benefits. e- We predict that many employers will eventually drop health care if Bush’s proposal is passed. Thus resulting in many more people not having health care coverage. What Needs to Change- My suggestions to help control health care costs are not the entire answer. But it is a good starting point and can give incentives for long term change. In the long run we will also need to change individual behavior, lifestyle/wellness and encourage prevention. But here are five things can be done right now to help change Health Care: 1- Provide the same tax deductions on both the Federal and State levels for health insurance. Individuals and Employers should get the same tax deduction. Don’t remove or reduce the current employer provided tax deductions. But would any employer honestly consider providing housing, clothing, and food on a pre tax basis for their employees? So why is health care allowed to be on a pre tax basis just for employers? 2- Fix Social Security and Medicare so they are more efficient. The answer is to offer part of these payroll taxes into individual Health Savings Accounts (HSAs) and into Retirement Savings Account (RSAs) like a Roth IRA. In 2005 over 8% of GDP was for Social Security, Medicare and Medicaid. Just taking 50% of those funds and investing them would cause tremendous growth to the economy. Why? Because these accounts could be invested in stocks, bonds, mutual funds, real estate, etc.. These accounts could be even better than a Roth IRA if the contributions could made pre-tax, the investments would grow pre-tax, and the withdrawals would be pre-tax. 3- Remove State mandated limits and coverage only available by each State for those who live there. If we allowed freedom of choice of healthcare across state lines- competition would increase. If we removed the many State limits and mandates; then the cost of such plans would be dramatically less. If we allowed association type plans that could be offered across State lines; people could “pick and choose” which plans they wanted to belong to. 4- Streamline the Food & Drug Administration (FDA) drug approval process. We need to get drugs approved and in the marketplace faster. Have the FDA focus soley on the approval of new drugs based on Safety. Let the testing of efficiency and efficacy of drugs be provided on a voluntary basis by the Drug Companies and outside monitoring groups. Let the marketplace determine if a drug will be successful or not. If a drug is not effective or causes problems; then the marketplace will determine the value of the drug and the value of the damages due to the drug. 5- Price Transparency on all medical procedures and quality ratings on care. If you give people information and rank the quality of care; then you will have increased competition and eventually lower costs. Just like shopping for cars, car insurance, homeowners insurance, life insurance, etc-- price transparency only leads to better decisions about health care. Summary- If you are interested in expressing your opinion and reading the opinion of Benefits Professionals- please add your comments at the following website provided by Employee Benefit News: http://www.benefitnews.com/health/detail.cfm?id=10025 If you want to contact your Congressmen to express your opinion- Here is an online link for the US Senate and the House of Representatives to the most updated contact information for your representatives. About HRCG- HRCG is providing help to employers, administrators, and insurance professionals On HR and Benefits issues. Their partners have been in business over 25 years And deliver cost effective solutions for plan design, documents, and software. Contact: Rob J Thurston, President HRCG (888) 438 9445
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