That old adage, Where you stand depends on where you sit, takes on a particularly poignant ring when it is applied to the health care proposals President George W. Bush outlined in his State of the Union address earlier this month.

While many stakeholders are withholding final judgment on the presidents plan until more information is made available, the varying degrees to which they lean in favor or against are, of course, closely tied to whom they represent.

In his 2007 State of the Union address, Bush outlined changes to the nations current health care policies, which he said both penalize individuals who obtain coverage without using their employers as conduits and encourage people to overspend on their health insurance plans.

While stakeholders within and beyond the health care industry applaud the president for helping to elevate the debate about health care affordability to the fore of public debate, support for the tax cuts is a far cry from universal. Democrats, hospitals, and groups that represent workers oppose the measure for fear, they said, that proposed funding reallocations would leave medical facilities unprepared for community demands, and that changes to the tax code would force people into the individual and small group insurance markets and increase their taxes. But insurance carrier groups favor the proposal because they said it would create more options for Americans and would lower the tax burden for most people.

Tax Cuts for Most

The first half of the proposal calls for changes in the tax code that would reclassify employer contributions to health insurance as taxable income. The changes also call for income and payroll tax breaks to offset this reclassification. These tax breaks, $15,000 for families and $7,500 for singles, would be offered to anyone who has health insurance, regardless of whether they use their employers to obtain coverage and regardless of the actual value of their plans. According to the White House, these standard tax deductions would result in 80 percent of insured people paying less in taxes.

According to the Treasury Department, a family with a total compensation of $60,000, including $46,000 in wages and $14,000 in an employer-based insurance policy, would save an average of $303 in taxes. Under the current system, the family would pay income and payroll taxes on $46,000 in income. Under the presidents proposed policy, the family would have $60,000 in taxable income before the standard deduction and $45,000 after the family standard deduction is applied, resulting in a $1,000 decrease in total taxable income and a tax savings of $303 (see attached chart).

But tax bills would increase for those families or individuals who have policies worth more than the value of the standard deductions, including 20 percent of the insured according to estimations by the administration. That is because each dollar that the total health care plan is worth over the value of the standard deduction would be taxed as any other income.

One of the biggest criticisms of the tax break proposal is that it would not do enough for the uninsured, who tend to pay very little in taxes anyway. White House officials said that the changes would lead to three to five million of the nations 46.6 million uninsured obtaining coverage. Since Bush took office, the number of people without health insurance has climbed by about five million according to the Census Bureau.

But the one component of the tax change that has drawn much support is the extension of health insurance tax breaks to the individual and small group markets. Currently, people who do not have employer-provide insurance must pay taxes on the income they use to buy health insurance, up to 7.5 percent of their income. Proponents of the plan say that it is high time that the government gave these people equal tax treatment for their insurance policies, which can be significant financial burdens.

The average health insurance cost for a family of four today is about $11,500 according to the Kaiser Family Foundation. That price tag is expected to rise to about $13,600 by 2009 when the proposals would be implemented, said Katherine Baicker, a spokesperson for President Bushs Council of Economic Advisers, but critics and supporters of the presidents plan alike said that the tax break figures might lead to more people paying increasing amounts of taxes in the future as premiums rise. Although the tax break levels would be pegged to the Consumer Price Index, currently health care premiums are rising at much faster rates, two to four times as fast, according to the Employee Benefit Research Institute (EBRI).

Shopping Around

Merrill Matthews, executive director of the Council for Affordable Health Insurance (CAHI) and an adamant supporter of the presidents proposal, acknowledged that if the measure were to pass, Congress might have to raise the levels of the tax deductions in the future above the CPI increases to account for this difference. However, Matthews also said he anticipates the rate of premium increases to slow, somewhat offsetting the difference. He said bringing tax breaks to the individual and small group markets would free people to seek out more individually tailored plans than their employers are providing, allowing them to only pay for coverage that makes sense for them and therefore lowering their premiums.

The twofold danger of this freedom to shop around, according to the proposals detractors, is that employers might refuse to offer health insurance plans in the future, or would face risk segmentation. Paul Fronstin, director of health research and education for EBRI, and a vocal critic of the proposal, worried that employers might drop their coverage completely. He also expressed concerned that employers who do continue to offer benefits packages would do so by increasing employee contributions, or by offering plans with higher deductibles and other out of pocket expenses or more limited coverage.

Neil Trautwein, a vice president of the National Retail Federation, said, The danger is that you could encourage younger, healthier workers out of employer plans and into other markets and increase the costs of remaining plans. In other words, it would leave employers holding the bag for their older and less healthy workers. The result would be increases in costs of insuring workers to levels that might exceed the tax breaks, leading to higher taxes for those workers.

Employer-Provided HC In Danger?

Between the potential for more workers entering the individual market and the possibility that employers would face higher costs, some worry that the employer-based system that insures 100 million Americans is in peril. We are not convinced of the need to disrupt employer-based healthcare by removing the tax exclusivity for employer provided coverage, Trautwein said.

But this concern is not universal. Matthews said that employers have a vested interest in having a healthy workforce and so are unlikely to start dropping their coverage in droves because individuals can also get tax breaks.

And for the 17 million Americans who currently obtain coverage without their employers, the tax break would be welcomed assistance, said Mohit Ghose, spokesperson for Americas Health Insurance Plans. There are pieces of [Bushs proposal] that afford a high degree of promise, he said.

Reality of Budget-Neutral Tax Cuts Debated

One promising part of the proposal is the White Houses assertion that the tax cuts would be budget-neutral over the next 10 years. No details are yet available as to how this would be accomplished, and even Matthews wonders if it is a realistic goal. It is unclear where funding would come from if the tax code changes do not pay for themselves.

Beyond saving tax money for people who obtain coverage in the individual and small group markets, the tax cut is also intended to encourage people to obtain less expensive insurance plans. Under current tax policies, when workers choose more expensive health care plans, they receive more total compensation from their employers tax-free than they do if they choose cheaper plans. This is because employer contributions are not subject to income and payroll taxes. Under the proposed tax changes, workers would be able to choose less expensive plans but still claim the entire tax break. This is supposed to eliminate the current tax incentive to spend more on insurance. But it remains to be seen whether employers would increase salaries to offset the cheaper health care plans.

Coverage for the Hard-to-Insure

The second part of the presidents proposal, the Affordable Choice Initiative, calls for reallocating existing federal funding to states to establish programs to insure their poor and their hard-to-insure. States that decide to participate would have several possible ways to use the money. They could choose to offer direct private insurance premium assistance to qualifying residents, they could opt to establish high-risk pools for residents deemed too sick to be insured by the non-group market, or they could facilitate the pooling of small businesses and individuals to increase access to private health plans.

Although details regarding precisely where the funding for the initiative would be drawn are not yet clear, the president has said that the money would come from existing federal health care funding, namely Medicare and Medicaid, and not from new taxes or entitlements.

Hospital Officials Object

At this point, it is impossible to tell how individual states might react to the proposed initiative, but hospital officials have already starting wringing their hands over entitlement program cuts. Children, seniors, and the disabled who depend on the Medicare and Medicaid programs are being unfairly singled out to carry the burden of achieving a balanced budget, said David L. Allen, spokesperson for the American Hospital Association in a statement. The proposed budget includes a tidal wave of cuts that will inflict real damage on hospitals ability to care for these patients.

One of the biggest concerns among opponents of the initiative is that cuts to hospitals would leave them ill-prepared to handle the demands placed on them by the surrounding communities.

If youre going to provide coverage to somebody in [the small group insurance market] and remove funding from the hospital they might have gone to when they were without insurance, and then if they lose their insurance in that market, where will that person go? said Bill Van Slyke, vice president of communications for the Healthy Care Association of New York State (HANYS).

Administration officials said that providing more coverage for the poor and chronically ill would decrease the demand on so-called safety net hospitals that have a disproportionately high number of uninsured patients, making the funding reallocation realistic.

Susan Feeney, vice president of public affairs for the American Health Care Association, which represents assisted living and nursing facilities, offered some tentative support, but not without reservations concerning the funding. While we support the expansion of access to health insurance for more Americans, we have concerns that funds might come out of very limited Medicaid funds on which our patients " the frail, elderly, and poor " rely, she said.

Its too soon to tell what kind of support this part of the proposal could ultimately garner. It is likely that, if the proposal is enacted, roiling debates would ensue within states that choose to participate in the initiative.

And with Democrats such as California Representative Pete Stark, Chairman of the Ways and Means Health Subcommittee, vowing to not even consider the presidents proposals, its likely the entire discussion about the potential impact of the presidents proposals might be moot.

But Matthews insisted that Bush has raised some interesting possibilities that might prove to be more necessary than they are popular. [Bushs plan] is a very good approach, he said. Health policy economists know it needs to happen. Most of the public wont get it, but its an important proposal.