January 23, 2007 1:40PM

Bush Health Care Proposal Mirrors Cato Scholars’ Proposal

I’ve returned from my first pre‐​State of the Union briefing of the day by the Bush administration. (I’ve got another at 4:30). What I heard about the president’s health care proposal has me even more heartened.

In part, that’s because the president’s proposal mirrors the proposal for “large HSAs” that I introduced here and here, and that Mike Tanner and I explain in Healthy Competition: What’s Holding Back Health Care and How to Free It.

Tonight, the president will propose setting a very high limit on existing distortionary tax breaks for health insurance. The Large HSAs proposal would do the same. He also will propose extending the revamped tax break to all individuals, ending the tax code’s discrimination against those who don’t have access to employer‐​sponsored insurance. Ditto Large HSAs.

However, the president’s proposal does not incorporate an important third element of the Large HSAs idea: giving workers ownership of the part of their compensation that purchases their health benefits. 

Here’s why that’s important. If your employer currently spends $10,000 on your health benefits, that part of your compensation is untaxed. The president’s proposal would let you keep that tax break if you choose to purchase coverage someplace else. But it does nothing to make sure that you get to keep the $10,000 that your employer spends on your health benefits. That money is not a gift — it is part of your compensation. But if you choose to leave your employer’s health plan, the employer is under no obligation to give you the money that he otherwise would spend on your health benefits. In fact, your employer would face strong incentives not to “cash you out.” Being free to choose where to purchase your health insurance means less if you have to take a pay cut to excerise that freedom.

Large HSAs would give workers ownership of that part of their compensation. The proposal would convert the current tax break for employer‐​sponsored coverage into a tax break only on HSA contributions. The contribution limits on HSAs would be raised, so that most workers could put all of their health benefits dollars into the account. They could then use those funds to purchase coverage tax free from their employer, or any other source. Importantly, with Large HSAs, the worker would control that $10,000 from day one.

Even though the president’s proposal doesn’t give workers ownership over that portion of their compensation, it is still a step in the right direction.