COMMENTARY: How States View the President’s Opening Health-Care Bid

President Bush, in his State of the Union address, put forward two major health-care proposals. The first called for equalizing the tax treatment between families and individuals who receive employer-paid benefits and those who purchase health insurance directly; the second proposal relates to state-federal negotiations regarding Medicaid funding. Both proposals present an opportunity for states to influence the policy debate and improve the state of health care in America.

To equalize tax treatment, the President proposed capping the non-taxable employer-paid component at $7,500 for individuals and $15,000 for families. The implications of this provision would be minimal in the short run because the average premium for a family is $11,500. Over time, however, the cap would reduce some of the upward pressure on the rate of cost increases because under current law the entire employer-paid benefit is tax-exempt, meaning approximately one-third of any increase for high-income individuals and families is subsidized by the federal government. In addition, the tax proposal would provide a $7,500 and $15,000 deduction for individuals and families, respectively, if they purchase health care directly from the marketplace. This would provide a new small subsidy for individuals and families who currently do not have employer-paid insurance.

Tax equalization is a positive step in that it creates a fairer tax structure across income classes and is a step in the right direction for health policy as it will reduce the incentive to purchase very robust health-insurance packages.

In the second proposal, the Bush administration has shown a willingness to negotiate with states that want to redirect the Medicaid disproportionate-share funding from institutions to insurance for low-income individuals. States also may be granted flexibility for Medicare disproportionate-share funds. The secretary of Health and Human Services does have the authority to negotiate with governors for Medicaid disproportionate share but will need congressional action for Medicare.

At the state level, there has been a virtual explosion of new proposals for universal health care, involving as many as 25 states. The trend began when Maine, Vermont and Massachusetts passed legislation in recent years. Now, California, Pennsylvania, Minnesota and a host of other states are proposing legislative solutions-some focused on universal care for all citizens and others targeted toward children. While states may be encouraged by strong revenue growth and minimal Medicaid growth in recent years, all states will need substantial additional federal assistance to attain the goal of universal care.

The question, then, is how states should respond to the administration’s proposals. From a state perspective, the president’s proposal raises a number of concerns. First, because health-care costs differ dramatically by state, the $7,500 and $15,000 deduction needs to be adjusted. Second, the deduction provision provides little help for low-income individuals. In addition, those states with little Medicaid disproportionate-share funds would not benefit at all from the proposal. Finally, states will need to create new mechanisms to bring providers and purchasers together in an expanded individual health-care market.

A counter bid the states could put on the table follows.

Adjust tax deductions – While the ,500-per-individual and ,000-per-family cap is appropriate for a national average, the total should be adjusted to address the substantial disparity between states in the cost of health care. High-cost states such as New York, Connecticut and Massachusetts might see their deduction increase substantially, while low-cost states such as Alabama, Mississippi and Arkansas might see a decrease.

Include refundable tax credit – Last year the president’s budget included a refundable tax credit-available to all low-income individuals-valued at $3,000 for a family of four with income below $25,000, phased out at incomes levels of $60,000. This should be added to the proposal, and eligible individuals and families should have the choice of being in Medicaid or choosing the refundable tax credit or the deduction. The refundable tax credit would provide considerable additional subsidy to low-income individuals. It would not be sufficient but would provide a good base to which states could add.

Provide additional benefit funding for states – Given the substantial number of states with very low disproportionate-share funds, additional federal money should be provided to states to ensure there is some equality across states in terms of flexible funds. This could be done as a share of the Medicaid program or on a per-capita basis for the currently uninsured.

Provide funding for state alliances or connectors – The federal government also should provide additional funds to states to create public/private alliances to assist in enrolling families and individuals who will purchase health-care benefits directly in the marketplace. This also would entail bringing beneficiaries and providers together to enable individuals to choose among a number of competing providers to minimize the cost and maximize the quality of benefits. State insurance regulations also may need to change to stabilize the small group markets.

It is also true that the administration and the governors will need to work toward an agreement on funding for the State Children’s Health Insurance Program (SCHIP) and Medicaid in order to complete a health-care package.

This would be an approach to assist the 25 states that want to move forward by providing universal health care for their citizens. Experimentation by a significant number of states is the best path toward adoption of a federal program.

Raymond C. Scheppach, Ph.D., is the executive director of the National Governors Association. The views expressed here are those of the author and do not necessarily represent those of the National Governors Association.