Bush called for changes in the tax code that would make it easier for families and individuals to buy coverage on the individual market rather than receiving it through an employer.
He also said Congress should send grants to states that pass policies expanding insurance coverage, as Massachusetts and several others have done.
The speech, delivered to a Democrat-controlled Congress for the first time in Bush's presidency, was his broadest attempt yet to address rising health costs and the 47 million Americans who now lack health insurance.
But the plan quickly met strong opposition from key Democrats and unease from some Republicans, throwing into question whether Bush will be able to convince lawmakers to follow the proposal before he leaves office in early 2009.
Changing Taxes on Coverage
The first part of the proposal would, for the first time, tax health benefits received through an employer.
At the same time, it allows tax deductions for the first $7,500 in health coverage expenses for individuals and the first $15,000 for families, regardless of where they get their insurance.
The plan in effect would deliver a tax break to anyone who purchases coverage on the individual market, while for the first time raising taxes on others whose workplace health benefits exceed certain caps.
Health premiums now cost $11,500 per year for the average family of four and $5,200 for the average individual, according to federal figures.
In briefings earlier this week, administration officials estimated Bush's plan would result in a tax cut for roughly 80% of those with insurance and an increase for the other 20%.
Democrats attacked those figures as unrealistically optimistic.
But Bush said the plan would for the first time level the playing field for workers trying to buy their own coverage on the expensive individual insurance market.
"This deduction would help put a basic private health insurance plan within their reach. Changing the tax code is a vital and necessary step to making health care affordable for more Americans," Bush said.
The White House estimated the plan would expand coverage to 3 more million people.
Dems: Undermining Workplace Coverage
Most Democrats immediately attacked the plan, saying it would undermine employer-based health insurance.
Rep. Fortney "Pete" Stark (D-Calif.), who leads the House Ways and Means health subcommittee, said his panel would not even hold hearings on the plan.
"It would eliminate employer-provided coverage, through which 160 million Americans are covered today, and force people into an individual insurance market that regularly denies coverage because of family history, existing illnesses, or genetic makeup," Stark said.
"I am not going to tax Joe Six-Pack for health care," said Rep. David Wu (D-Ore.), a member of a subcommittee on employee benefits.
Republicans were less critical of the plan, though some expressed unease with encouraging workers to give up their employer-sponsored coverage.
Sen. Gordon Smith (R-Ore.) praised Bush for giving Congress "a green light" to engage in a broad health care debate. But Smith, a member of the Finance Committee, said he could not yet judge "what it means to cap one kind of insurance, and help the other, and who exactly is over-insuring themselves."
Experimenting in the States
The president also proposed sending federal money to states that form plans to provide lower-cost basic insurance plans to all citizens. States would be free to come up with their own plans --as Massachusetts, California, and others are doing -- as long as they met certain standards.
The grants would be designed "to help the states that are coming up with innovatie ways to cover the uninsured," Bush said.
A bipartisan group of lawmakers introduced legislation last week seeking to fund state insurance initiatives.
"I believe the momentum of this is only going to grow," Health and Human Services Secretary Michael O. Leavitt told reporters in a briefing Monday.
Instead of new spending, the White House plan would take federal money now used for charity care at hospitals and redirect it to the state initiatives. "There are many places in the federal budget where we support institutions and not individuals," Leavitt said.
That drew fire from groups representing hospitals that get billions each year to provide charity care.
"The president's proposal pulls the rug out from under safety net hospitals that care for some of our nation's most vulnerable people. We strongly oppose any plan to cut funding to safety net hospitals," said Rich Umbdenstock, president of the American Hospital Association.
In an interview this week, Tommy Thompson, who served as Health and Human Services Secretary during Bush's first term, endorsed using the states as "laboratories" for health reform, saying Congress has lacked the political courage to tackle the problem
Thompson, a former Wisconsin governor and possible 2008 presidential candidate, recalled that Congress failed to enact welfare reform in the 1990s until states did it first.
"The same exact thing is going to happen with the uninsured," he said.
SOURCES: President George W. Bush, State of the Union Address, Jan. 23, 2007. Rep. Fortney "Pete" Stark (D-Calif.). Rep. David Wu (D-Ore.). Sen. Gordon Smith (R-Ore.). Michael O. Leavitt, secretary, Health and Human Services. Rich Umbdenstock, president, American Hospital Association. Tommy Thompson, former secretary, Health and Human Services.
By Todd Zwillich
Reviewed by Louise Chang