WASHINGTON, D.C.—The Bush administration spending plan for 2008 proposes major funding curbs for Medicare, Medicaid, children's health and other government health programs.

The proposal aims to counter the "unsustainable growth of federal entitlement programs" by seeking more than $100 billion in Medicare "savings" over five years, largely by freezing payments to hospitals, nursing homes and physicians.

Healthcare providers immediately set plans to kill the fee cuts, while Congressional Democrats fumed that the budget was dead-on-arrival. Administration supporters described the proposal as the "opening bid" in the battle to reduce the budget deficit, without cutting taxes and spending huge amounts for the war in Iraq.

An important change for insurers is the plan to eliminate the tax system's current bias in favor of health insurance provided through employers. The administration proposes to eliminate current tax exclusions and deductions for health insurance premiums and out-of-pocket costs incurred by employees. This would be replaced by a standard $15,000 deduction for families purchasing health insurance, including self-employed and unemployed individuals as well as those working for companies.

This move to level the playing field between employer-sponsored insurance and the individual market aims to encourage more people to purchase health insurance, while also reducing incentives for overconsumption of healthcare. However, many analysts are concerned the change would weaken existing pooling arrangements and prompt some employers to drop health coverage altogether. If many employees fail to purchase coverage on their own, the tax change could actually increase the number of uninsured.

ADJUSTING PREMIUMS

Another controversial proposal is to expand the number of high-income seniors required to pay higher premiums for Medicare benefits and for prescription drug coverage. Such "means testing" of Medicare fees is strongly opposed by patient advocates and could discourage wealthier beneficiaries from joining prescription drug plans.

The Bush budget also seeks to cut Medicaid and the State Children's Health Insurance Program (SCHIP), which has to be reauthorized by Congress this year. Medicaid funding would drop by $26 billion, largely by reducing reimbursement for prescription drugs, dropping some fees to hospitals and making it more difficult for higher-income people to qualify for benefits. SCHIP funding would increase, but much less than needed to expand coverage further.

Health plans come out relatively unscathed in the Bush budget, although they will face increased scrutiny by Congress (see Politics and Policy). The spending plan seeks to ensure the accuracy of payments to Medicare Advantage plans, while relying on market competition to yield savings for private plans providing healthcare and prescription drug services to seniors.