updated 1/20/2007 10:57:25 AM ET 2007-01-20T15:57:25

President Bush will propose in his State of the Union address a tax break for people who buy their own health insurance and a limit on how much coverage individuals can receive tax free at work.

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The proposal to be announced Tuesday offers a tax deduction to people who purchase coverage and urges those with generous plans to either embrace cheaper insurance or pay taxes on part of it, according to a Bush administration official familiar with the proposals.

If passed by Congress, the plan would be the first time that workers could get a tax break for buying their own insurance. At the same time, it would be the first time that some employer-provided health care benefits could be taxed.

Bush also will announce steps next week to take some federal money now going to hospitals and institutions and give it to states for programs to reduce the number of uninsured people.

The cost of health care is growing more than two times faster than wages, making it harder for families to buy insurance and for employers to sponsor a health benefit for workers, Bush said Saturday in his weekly radio address.

"Our challenge is clear: We must address these rising costs, so that more Americans can afford basic health insurance," Bush said. "And we need to do it without creating a new federal entitlement program or raising taxes."

Further details of the two proposals were to be announced in the State of the Union address.

The official, who spoke on condition of anonymity so as not to pre-empt the president's speech, would not disclose the amount of the proposed deduction or the top amount of coverage from employer-sponsored plans that would remain free of income and payroll taxes.

"The tax code unfairly penalizes people who do not get health insurance through their job," Bush said. "It unwisely encourages workers to choose overly expensive, gold-plated plans. The result is that insurance premiums rise, and many Americans cannot afford the coverage they need."

He said health insurance needs to be treated more like home ownership.

"The current tax code encourages home ownership by allowing you to deduct the interest on your mortgage from your taxes," Bush said. "We can reform the tax code, so that it provides a similar incentive for you to buy health insurance."

There are an estimated 46 million to 48 million people in the United States who are uninsured at some point during the year.

‘Significant amount of new help’
"Most of the uninsured are people who are working and they've got a little bit too high of income to qualify for Medicaid or other government programs. If they buy health insurance they have to pay for it entirely out of their own pocket," Dr. Mark McClellan, former administrator for the Centers for Medicare and Medicaid Services and former commissioner of the Food and Drug Administration, said in a telephone interview. "This would be a significant amount of new help for them."

William Galston, a domestic policy adviser to President Clinton and a fellow at the Brookings Institution, said making health insurance more affordable for people on the individual market is a good idea. But he said he is worried that the proposal, taken by itself, could make it harder to argue for a more comprehensive measure for widening health care insurance to cover many more people.

"If it goes through as is, it's going to make the task of bargaining for a broader bill more difficult," Galston said, although he said he had not yet seen details of the proposals.

Under a second proposal, the president is proposing to redirect federal dollars that hospitals and other institutions get to help cover costs for caring for the uninsured. With this money, states would set up programs to assist people in getting health coverage and help people with high-cost health conditions.

Several states are working to reduce the number of people living without health insurance.

California Gov. Arnold Schwarzenegger, for instance, has announced a plan that would cost $12 billion a year to extend health care coverage to most of the state's 6.5 million uninsured. That would make it the second state, after Massachusetts, to require everyone to carry insurance.

‘Redirect that money’
"When somebody is uninsured and they come into the emergency room there are federal programs that provide some help with covering those costs," McClellan said.

"The idea would be to redirect that money to provide better subsidies and assistance for people to get affordable health insurance. If you've got more people with insurance, you don't need to have as much in the way of payments to the institutions," he said.

Hospital administrators are worried about what the president's plan will mean for their facilities. They fear they will be getting less money when they treat Medicare patients. They say the federal reimbursements already do not cover costs and that the president's plan will remove tens of millions of dollars for them.

Copyright 2007 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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