In his Jan. 23, 2007 State of the Union Address, President Bush proposed tax code reforms that would profoundly affect the health insurance market. Whether Bush's proposals hurt or help you as an agent in the short run depends on the kind of book of business you have.
If you have a large amount of "gold-plated" insurance plans on which you collect renewal fees, the Bush proposal would likely sting in the short term. But if you sell mostly to individuals and families and are seeking out new clients, you could love what Bush wants to do.
That's because Bush's tax plan generates incentives for companies to drop their high-end employee insurance plans and replace them with cheaper, high-deductible plans. On the flip side, it creates tax incentives for uninsured families to go out and buy coverage.
Bush's plan places additional tax burdens on employees, while creating a deduction to offset those burdens. Currently, money that an employer spends on health insurance for an employee is not taxed as income to the employee. If Bush's proposal becomes law, that money would be considered income. For example, an employee who makes $50,000 and receives a family insurance policy worth $10,000 would, under Bush's new tax plan, have a gross income of $60,000.
But Bush's plan would also add a $15,000 deduction for this employee insuring his family. This would effectively reduce his taxable income to $45,000.
This is the way it looks for a person making $50,000 who receives an additional $10,000 family insurance policy: Spending less on insurance doesn't increase or reduce the size of the deduction. So, if the head of household spent just $3,000 for family coverage through work, the Bush plan would still provide a deduction of $15,000.
Currently, most Americans who don't receive insurance through work aren't given any tax incentive to buy insurance on their own. Bush's new proposal would give them this incentive. They, too, would receive the standard $15,000 deduction for families (or $7,500 for individuals). The deduction would apply regardless of the size of their premiums.
This deduction would encourage Americans to do two things:
1. Buy insurance if they don't already have it, not only for their health but for their financial well being, as well. You don't get the deduction unless you have insurance.
2.Select policies with lower premiums, because the tax advantages aren't affected by the price of the policies. The more expensive plans won't buy them a higher deduction.
Bush's plan could lower premiums and reduce the number of the uninsured. Critics of the plan, however, have zeroed in on what it doesn't address: poor Americans who can't afford health insurance, regardless of any tax benefit. The simple fact is that if someone doesn't have any income, they won't benefit from a deduction.
If the plan passes, agents would likely see high-premium plans rapidly go out of fashion. Employees and employers may want to switch to the CDHC/HSA plans already gaining popularity thanks to the Medicare Modernization Act. But agents would also find themselves selling more plans to a new tax-advantaged market: the 40 million-plus people who don't receive insurance through work.
While Bush's plan doesn't solve all of America's health care problems, it does move the ball down the field. Given several political factors, this plan could be a hard sell. Bush's proposal, however, could lower premiums while growing the market by giving the uninsured a new reason to buy insurance.
If this plan becomes law, expect a whole new health market to emerge.
Erik Espe is senior analyst for Vimo Research Group. For more information, visit www.vimo.com.
