Health insurers are applauding President Bush’s rejection of a proposal to cap the tax exemption for employer-sponsored health care benefits.

The proposal was made by the Advisory Panel on Federal Tax Reform, which the White House commissioned to suggest changes to the federal income tax system. The panel suggested a cap of $11,500 or more for a family, noting that the current system could encourage expensive so-called “Cadillac” health plans and discourage consumers from making economical health care decisions.

Karen Ignagni, president of America’s Health Plans, said the president’s decision was “good news,” adding “the agenda for 2006 should focus on expanding rather than contracting care.”

National Association of Health Underwriters CEO Janet Trautwein also praised the rejection of the cap. “It’s an idea that will have unintended consequences, and we’re very happy the president has decided not to move forward with this commission recommendation.”

The proposed cap, she noted, could have affected some consumers that do not carry “Cadillac” coverage because it only measured the price of coverage, rather than the factors contributing to that cost.

“Health insurance rates may be higher for certain employer groups for any number of reasons,” she said. “For example, in certain areas of the country the cost of insurance is higher than in other geographic areas, and a group who has a large number of older or sicker employees also may have higher health insurance rates. Removing or capping the tax exclusion for these groups would result in new taxes for all employees in the group, including those who are low income.”

In addition to its merits as a policy, Ignagni noted that the president’s decision to reject the proposed cap on the tax exemption makes sense politically. During the fall of 2005, AHIP had the firm of Ayres, McHenry and Associates conduct a poll of both Democrats and Republicans to gauge their opinions regarding the taxation of employer-provided health benefits. The survey was conducted in Iowa, New Hampshire and South Carolina, which Ignagni noted are the first three states to conduct primaries for presidential elections.

According to the poll, a strong majority of respondents from both parties said they were opposed to taxation of health care benefits, with most of them saying they “strongly oppose” the idea. In addition, a majority of voters in all three states said support for a tax reform plan that included taxation of health benefits would make them less likely to support a candidate in the 2008 presidential election.

“The results of the poll,” Ignagni said, “show that Democrats and Republicans equally agree that’s not the direction they want to go.”

Although the rejection means that the taxation of employer-provided health care benefits will not be in any tax reform proposals from the White House, Trautwein said the issue is not entirely dead and could be taken up by members of Congress. However, she added, it does mean the chances of such a proposal becoming law are fairly remote.

With President Bush’s rejection, she said, any efforts to move legislation taxing health care benefits is “unlikely to be successful during his presidency.”