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GOP Health Care Reforms Rely on Tax Credits

September 8, 2008
Related Topics: Medical Benefits Law, Future Workplace, Health and Wellness, Latest News
If Sen. John McCain, R-Arizona, wins the presidency, he likely will propose a radical change in the way health care coverage is taxed, but observers say health care reform proposals likely to pass Congress will be much more modest.

Under McCain’s health care plan, all taxpayers would be eligible to receive tax credits to offset the cost of health insurance premiums. For individual coverage, the annual tax credit would be $2,500, while the available credit for family coverage would be $5,000.

These credits would be available to those buying coverage on their own as well as employees covered under group plans.

However, employees who receive coverage from their employers would be taxed on employer-paid premiums.

McCain’s proposals would be a big change from current law, which he says is unfair to those who buy coverage on their own.

Under current law, individuals buying their own coverage pay premiums with after-tax dollars. By contrast, employees receiving group coverage are not taxed on premiums paid by their employers, a tax savings of potentially thousands of dollars a year, while employee-paid premiums almost always are made with pretax dollars.

In advocating health care tax equity, Sen. McCain, who accepted the Republican Party presidential nomination last week at the party’s national convention in St. Paul, Minnesota, said making health care tax breaks available to all taxpayers would make coverage more affordable.

“We want a system of health care in which everyone can afford and acquire the treatment and preventive care they need,” McCain said in an earlier position paper, Straight Talk on Health System Reform.

“Health care should be available to all and not limited by where you work or how much you make,” McCain said in the position paper.

Such a proposal, though, would face rough sledding in Congress, observers say. For employees with company-provided health insurance coverage, the kind of change McCain advocates would result in additional taxable income, in some cases amounting to a significant new tax bite.

Such a change “would come as a real surprise for employees that they would be taxed on benefits they now receive tax-free,” said Paul Dennett, senior vice president of health care reform for the American Benefits Council in Washington.

The fear of a political backlash that likely would erupt from the millions of employees who would be taxed on employer-paid health care benefits would make federal legislators reluctant to back such a plan, observers say.

“This would be a minefield. It is hard to see any circumstances for an agreement on this scale of change,” said Frank McArdle, a consultant with Hewitt Associates in Washington.

The tax-free status of employer-provided coverage has long been a “sacred cow,” said Steve Raetzman, a senior consultant with Watson Wyatt Worldwide in Arlington, Virginia.

“No one in Congress has seen fit to back a change. And that is not very likely to change,” Raetzman said.

While the health care tax plan may be a nonstarter in a McCain presidency, other reform ideas backed by the Arizona Republican might receive a more favorable reception.

For example, McCain favors improvements in the portability of health care plans so employees could change jobs without the risk of losing coverage.

In his nomination acceptance speech last week, McCain said his health care reform plan would “make it easier for Americans to find and keep good health insurance.”

While McCain has not detailed exactly what he has in mind, improvements in health care portability would build on a 1996 law that removed some roadblocks for employees looking to change jobs. Under the Health Insurance Portability and Accountability Act, employees who change jobs cannot be denied coverage for pre-existing conditions by their new employer.

That politically popular law, though, has a number of exceptions that McCain might try to loosen. For example, in order for the ban on pre-existing medical condition exclusions to apply, employees can’t let coverage lapse for more than two months.

“Improvements in portability is something Democrats and Republicans could agree on,” McArdle said.

“This is one of the more logical areas Congress could address,” Raetzman said.

Another area for which the odds are high for enactment in a McCain presidency is parity in mental health care benefits, assuming Congress doesn’t reach a final agreement on parity legislation in the remaining weeks of the current session. Such legislation would mandate that employers provide the same coverage for mental disorders as they offer for physical ailments.

“I would expect mental health care parity to be part of Sen. McCain’s health care agenda,” said James Gelfand, senior health policy manager at the U.S. Chamber of Commerce in Washington.

McCain endorses mental health care parity, as does the Republican Party platform.

Observers also expect McCain to push for legislation to increase the appeal of health savings accounts. In a position paper, he said that if elected he would expand HSAs, which he described as “an important step in the direction of putting families in charge of what they pay for.”

Congressional Democrats, especially those in the House, are likely to oppose HSA legislation, but observers say such proposals shouldn’t be counted out. While acknowledging enactment of HSA legislation would be difficult, observers say Democrats might back such an expansion in exchange for presidential support of measures they want.

Filed by Jerry Geisel of Business Insurance, a sister publication of Workforce Management. To comment, e-mail

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