Health-Care Reform: It's Coming

Suddenly, proposals to reform the health-care system are everywhere. Several high-profile groups are finally offering a menu of solutions after years of complaining about the cost of health insurance (premiums for employer-provided coverage have jumped 87% since 2000, compared with a 20% rise in wages and an 18% increase in inflation). And a some of these proposals have a good chance of being adopted. That could make a difference in the cost and scope of your health-care coverage.

Health reform is such a hot topic that even groups that usually don't agree have reached a consensus. Last week, the Health Coverage Coalition for the Uninsured -- a diverse group that includes AARP, Families USA, the U.S. Chamber of Commerce, the trade associations for health insurance companies, physicians and hospitals, plus several pharmaceutical companies -- offered a plan, which the group crafted with the help of professional mediators.

Instead of focusing on sweeping changes that would be polarizing -- such as universal health care -- the coalition proposed smaller steps that are more likely to be approved: expanding the State Children's Health Insurance Program, giving states money to expand Medicaid to cover more low-income adults and offering an insurance tax credit for people earning 100% to 300% of the federal poverty level. The group also proposed a grant program to help states experiment with innovative ways to expand coverage -- the same proposal that a bipartisan group of senators and House members has introduced in Congress.

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Most of the action, though, will be in the states this year. California Gov. Arnold Schwarzenegger started the new year by introducing a plan that would require everyone in the state to buy health insurance, prohibit insurers from denying coverage to anyone for health reasons and help provide coverage to low-income people. But there could be a downside: Requiring insurers to accept everyone could drive up the price of coverage for healthy people, who now pay low rates in California, which has a competitive health-insurance market.

Massachusetts, which introduced a similar plan last year, so far has successfully shifted money from reimbursing hospitals for uninsured patients to helping provide coverage for low-income people. But those who don't qualify for the subsidies may suffer from sticker shock. Judging by the initial bids from insurers, coverage may cost individuals $380 per month, about $100 more than expected.

That's not surprising. Insurers in Massachusetts aren't permitted to reject people because of their health and must cover a long list of services, including expensive procedures such as in vitro fertilization. So Massachusetts has always been one of the most expensive states for health insurance. See A New Plan for Covering the Uninsured for more information about the Massachusetts plan and its drawbacks.

What is unlikely to pass, however, is the highest-profile plan. In his State of the Union address, President Bush proposed creating a tax deduction for health insurance. Bush's plan would treat employer-provided health insurance as taxable income but would allow you to deduct $15,000 if you purchased a family policy through an employer or on your own; individuals could deduct $7,500.

The President's proposal would benefit most people with employer-provided insurance, and it would also help people who buy health insurance on their own. But Democrats have already warned that it could lead to higher taxes for those with expensive employer-provided coverage, including many union members. And the plan doesn't directly address the problem of people with medical conditions who have a tough time finding any coverage, especially if they live in a state without a high-risk insurance pool. (Read more about the President's plan.)

What could work? Mark McClellan, former head of the Food and Drug Administration and the Centers for Medicare &Medicaid Services and a leading health-care expert, recently talked about the future of health care in an interview with Kiplinger's Personal Finance magazine. As a physician and economist, and now a fellow with two top think tanks representing both ends of the political spectrum, McClellan's job is to figure out how to solve the health-care problem -- and he's one person who could actually do it. He proposes a combination of federal and state initiatives that stand a good chance of being passed, and talks about the shortcomings of some of the current proposals. To learn more about his prescription for improving the health-care system, see The Future of Health Care.

All of the reform proposals will go through a lot of legislative wrangling before anything will be approved. But a new law that just went into effect can help many families save money on their health-care costs right now. See the New HSA Rules column about how you can make the most of new contribution limits for health savings accounts and build a tax-free cash stash for health-care costs.

And many people with medical problems can still find health insurance coverage, as long as they understand how the system works. See Health Coverage for All for practical advice and strategies.