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The health-care coverage problem has gone beyond incremental solutions and partial answers. Employers' health-care costs are increasing at almost 10 percent per year, forcing employers to cut back on benefits, raise employees' contributions or drop coverage altogether.

More than 46 million Americans lack health insurance coverage, yet they require, and receive, health care. The result? Their care is paid for by cost-shifting to those of us with insurance--employers, tax payers and providers.

This is a crisis, one that demands comprehensive reform. Promoted as a major new plan and a bold initiative, the two-part reform that President George W. Bush outlined in his State of the Union address fails to confront the main issue: providing health coverage to everyone who needs it, at a price that's affordable.

Instead of a comprehensive solution, the president's plan will likely modestly increase demand for health insurance, while doing nothing to increase either its availability or affordability, while completely ignoring the central problem--cost.

THE BUSH PROPOSALS

The president's proposal has two components. One is a fixed tax deduction for people who buy health-care insurance: $7,500 for individuals and $15,000 for families. The other piece, dubbed "Affordable Choices," frees the states from many of the restrictions that control their use of federal funds allocated for Medicaid and other programs. Essentially, states would have more flexibility in how they spend the dollars, but the amount of dollars they get to spend would not increase.

The part of the plan that has generated the most press is the as-yet-unnamed "tax deduction plan." In the State of the Union, President Bush stated, "For the millions of other Americans who have no health insurance at all, this deduction would help put a basic private health insurance plan within their reach."

The president believes that giving a tax deduction to people who buy health insurance will encourage them to seek coverage, thereby expanding the market for health insurance writers. The reality is the incentive provided by the deduction is tiny compared to the actual cost of insurance coverage. Folks covered by their employers' plans already enjoy a tax benefit, as employer-paid premiums and, in most cases, employee-paid premiums are paid for with pretax dollars.

Thus, the deduction would only provide a financial incentive for people seeking coverage through the individual market, a relatively small population.

No matter how you slice it, the Bush tax deduction proposal would do little to reverse the growth in the number of uninsured. That's too bad, because the more people who have health insurance, the less cost-shifting will occur.

Cost-shifting happens when providers increase the price per service and/or the number of services delivered to their insured patients to cover the income they lose when they deliver care to those without insurance. And as the number of uninsureds grows, providers' behavior will quickly adapt as they increase the volume and cost of services delivered to those with private insurance.

COSTS: A CRUSHING BURDEN

But the much larger problem, and the one not addressed by either of President Bush's proposals, is the underlying cause of the nation's health-care crisis--cost. The United States spends 16 percent of its gross domestic product on health care, 50 percent more than any other industrialized country, and 140 percent more than the average industrialized nation.

And contrary to conventional wisdom, the cost differential is not due to fear of malpractice or the rationing of care. A study published in 2005 in Health Affairs, a peer-reviewed journal that explores health policy issues, indicated that only 3 percent of U.S. health-care costs are for services that involve waiting lists in other countries; whereas, additional costs attributed to malpractice, including defensive medicine, account for about 5 percent of total health-care costs in the United States.

For American employers, these "excess health-care costs" are dollars that can't be used to pay for training, infrastructure, research and development, and product development; to reduce prices; or to pay out higher profits. Swiss, Japanese, British, Australian and Dutch companies have a built-in cost advantage when competing with American firms, a cost advantage that makes it harder for American firms to succeed in the global economy.

We're not talking peanuts here. U.S. health-care costs are five times higher per capita than costs in the Czech Republic and Korea, three times costs in Spain, and two times costs in Germany, Denmark, France, Austria and Sweden. Considering that these countries are home to multinationals--Nokia (Finland), Volvo (Sweden), Hyundai and Samsung (Korea), VW/Audi and BMW (Germany), and Airbus (the United Kingdom, France and Germany)--the competitive impact is obvious.

Take the auto industry. In 2002, Americans bought 1.7 million cars that were made in Japan, where health-care costs are 50 percent less than the United States. The trade deficit attributable to the auto industry alone amounted to $44 billion that year; it has grown substantially since then.

In 2004, General Motor's health-care costs amounted to $1,538 per car. GM is not the only U.S. company hamstrung by health-care costs. Ford spends $1,400 per car, and Chrysler (the U.S. version) spends $1,100.

Toyota, which is about to overtake GM as the world's largest car company, spent just $201 per car on health care according to the Washington Post. The more than $1,300 cost differential would be enough for GM to slash car prices; invest billions in research, development and worker retraining; build a cash hoard; and pay out a higher dividend to stockholders.

Instead, it provides Toyota with a competitive advantage, one also enjoyed by Nokia over Motorola's U.S.-manufactured phones, Airbus over Boeing, MAN over Caterpillar and Detroit Diesel, and KLM over US Airways.

The impact of health-care cost inflation is broad and deep. In my town of Madison, Conn., health-care benefits for teachers and town employees are helping drive up the property tax rate significantly faster than inflation, increasing the cost of doing business.

Medicaid, Medicare and other government programs to fund health care are consuming an increasing part of the federal and state budgets, again leading to tax increases that consume dollars that could be invested elsewhere.

The final legislative product often bears little resemblance to the original presidential proposal. Perhaps the final version will take on the cost problem. But that still doesn't address a fundamental flaw in President Bush's thinking--the demand problem.

SUPPLY AND DEMAND

Financially, the numbers don't support the president's optimistic outlook. In 2004, there were 88 million people in families earning between one and three times the federal poverty level, now set at $19,307 for a family of four.

Of those 88 million folks, 20.2 million were uninsured, or almost half of all individuals were without health insurance. When one considers that the best off among these families would have to allocate fully 20 percent of their gross income to health insurance, the error in the president's calculus becomes apparent. Their wealthier brethren, those earning up to four times the poverty level, or $57,000, would still have to pay one-seventh of their gross income to their insurance company.

Karen Davis of the Commonwealth Fund, a private nonpartisan foundation that supports independent research on health and social issues, has emphatically made this point in recent published reports, stating, "Ninety-five percent of the uninsured wouldn't get a significant amount of money from this deduction because they earn so little."

And without a financial boost, demand for health insurance just won't increase.

The failure to reduce the number of uninsured citizens is not only a big problem from a societal perspective, it also drives up insurance premiums for individuals and employers. This hidden tax, which amounts to more than $1,000 per insured family, is required because the relevant federal law--the Emergency Medical Treatment and Active Labor Act, known as EMTALA--requires providers to render treatment to all regardless of ability to pay.

The payment for that treatment has to come from somewhere. Overwhelmingly, that "somewhere" is employers' health plans.

Not only does the president's plan provide little incentive or financial assistance for the vast majority of the uninsured, it also depends on a broken market to supply the solution.

The individual health insurance market has three major problems that must be addressed before it can be part of the solution.

First, individual insurance plans cost more than employer sponsored plans.

Second, insurance is expensive. A typical family policy premium is about $11,500, while the typical family median income is just under $45,000. Health insurance alone would eat up more than a quarter of the average family's gross income. And that's before adding in the $788 spent on deductibles and copayments.

Third, there is the issue of underinsurance. Individual health insurance almost always requires medical underwriting, so for those insureds who do need treatment for excluded conditions, they will find they are still "uninsured."

And therein lies the problem with Bush health care. His plan seeks to use the insurance markets and tax policy to reduce the number of uninsureds, who would use tax credits to fund their new insurance plans--except few would find a plan at a price they can afford, especially if they have a pre-existing condition.

SOLUTIONS WITH PROMISE

Fortunately, there are several other reform proposals on the table. California, Massachusetts, Illinois and other states have all pushed innovative health-care reform measures to the top of the agenda.

My personal favorite is Oregon Democrat Sen. Ron Wyden's Health America Act, which is currently before the Senate, as well as presidential candidate John Edwards' innovative plan. Major health insurers have proposed their own initiative, as has the American Hospital Association and various physician groups.

And, perhaps most tellingly, two arch-enemies, Wal-Mart Stores Inc. and the Service Employees International Union, have jointly proposed that any health-care reform package include universal coverage and involve all stakeholders in its design and funding.

Perhaps the best blueprint for reform is that put forth by the Coalition for Health Care Reform, a nonpartisan entity that includes providers, large and small employers, labor groups, insurers and health plans among its members. It addresses universal coverage, cost control and financing, and is attracting growing support.

The Bush tax deduction plan might be nice, but it applies to a relatively small number of people and will defray a relatively small portion of the premium expense.

It relies on a very small market, but might as well be for those individuals and families at or even significantly above the median income levels.

And it completely ignores the fundamental problem--cost.

JOSEPH PADUDA is principal of Health Strategy Associates, a health-care consulting firm.

April 15, 2007

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