Who Should Get the Health-Care Bill?

Bush's tax-credit plan is fueling a big dispute in Washington

Thomas J. Donohue, the free-market president of the U.S. Chamber of Commerce, and John J. Sweeney, the veteran chief of the AFL-CIO, don't often agree on much. But on Feb. 12, they sat side-by-side with other representatives of business, labor, hospitals, and doctor groups and pledged to find a way to get health insurance for the 40 million Americans who have none.

But beyond the lofty sentiment, Donohue and Sweeney are miles apart on how to achieve the goal. And their disagreement mirrors a much broader dispute that has split the nation's capital. At the core of the fight: Should Americans continue to get health insurance from their employers and the government, as Democrats believe? Or should they be encouraged to purchase coverage individually, in the same way they buy auto insurance, as Republicans advocate?

The standoff was largely responsible for killing the economic stimulus plan last December and is likely to doom a similar package passed by the House on Feb. 14. It also has kicked off a huge battle over $90 billion in tax breaks that President Bush has proposed to help the uninsured buy coverage. "There is a major philosophical gap here, and it seems to have widened," says Representative Pete Stark (D-Calif.).

At first blush, the issue of tax credits seems far too narrow to trigger a debate over how to fundamentally overhaul America's approach to health insurance. Bush, for example, targets only those who don't have coverage, either because they're unemployed or because they don't have insurance at work. His idea is to use refundable tax credits--effectively voucher-like cash payments--to help low- and middle-income families buy insurance. The credits would cover 90% of the cost of a premium, up to $1,000 for singles and $3,000 for families.

Almost everyone agrees with Bush's overall goal. Of the 40 million uninsured, 80% have a job or a family member who works. But many are part-timers, freelancers, or work for small businesses that do not offer insurance. For them, the only option is individual coverage, which is simply too costly for most without government assistance.

The problem with the tax approach is that many Democrats are convinced Bush's plan is the first step toward dismantling employer-based insurance altogether. The Bush plan wouldn't require companies to change plans. But if workers get substantial tax credits for health care, Dems fear it would gradually wreck the employer system. Here's how: If individuals buy policies on their own, healthy people would quit employer plans that effectively force them to cross-subsidize those who need more medical care. Employers would get stuck with high-risk workers, driving up premiums and forcing yet more employees into individual markets. "It would be a death spiral," says Iris J. Lav, deputy director of the Center on Budget & Policy Priorities, a liberal Washington think tank.

Democrats fear this spiral eventually would force most people to be responsible for buying their own coverage, with disastrous consequences. They say companies, which now pick up about three-quarters of health premium costs for a typical employee, would stop subsidizing insurance. Future medical inflation would be borne by employees at a time when premiums are rising at double-digit rates. Some companies have already begun to give workers a set amount for health care, making them responsible for any added increases. What's more, many families, especially those older or sicker, would lose the lower group rates that employers provide. Individuals also would be responsible for the hassle involved in buying and maintaining health-care policies.

Some Republicans have fueled Democratic anxieties by saying outright that they want to scrap the current approach. Last December, for example, House Ways & Means Committee Chairman William M. Thomas (R-Calif.) called the employer-based health-care system "fatally flawed." The Democrats' solution? Give companies new tax breaks to offer better coverage, as well as new subsidies to help the unemployed hang on to the policy from their last employer. The Dems want to expand Medicaid as well, to cover more poor families.

By contrast, conservatives argue that today's system provides poor care at high cost. They say workers shouldn't be forced into managed care they don't want and insist that workers, retirees, and the poor should be able to choose coverage appropriate to their needs.

Tax credits would help to level the playing field between company and individual plans, insist GOP leaders. Right now, employees avoid almost $120 billion a year in taxes because they don't have to count their company's health-care benefits as income. Families that buy insurance on their own should get a tax break, too, they argue. Conservatives also believe that if more people buy health care directly, they would make smarter decisions about what kind of care they really need--helping to curb medical inflation. This would strengthen and improve the private insurance market. "The only way to have a truly empowered consumer is to have the consumer control the money," says Tom Miller, health policy director of the libertarian Cato Institute.

There is some common ground here. White House officials insist that Bush is not trying to kill the employer system. And some Democrats think a tax-credit plan can be designed to bolster employer-based coverage. "You can use credits to help people purchase coverage through an employer," says Jeff Lemieux, senior economist of the Progressive Policy Institute, a moderate Democratic think tank. "It doesn't have to mean reengineering the system." He may be right that some consensus could be found. But there's so much distrust in the capital that few on either side seem inclined to look for it.

By Howard Gleckman in Washington

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