This is a partial transcript from "The Journal Editorial Report," January 21, 2006, that was edited for clarity.

PAUL GIGOT, HOST: When President Bush delivers his fifth State of the Union Address later this month the issue of healthcare reform promises to be a central theme.

As director of the White House National Economic Council, my first guest is one of the most influential members of the president's inner circle. And while he's kept a low profile since taking the job a year ago, his stamp on the Bush team's domestic agenda is unmistakable. Al Hubbard joins me now from Washington.

Welcome to the program.

AL HUBBARD, WHITE HOUSE NATIONAL ECONOMIC ADVISER: Glad to be with you, Paul. And congratulations on this new show.

GIGOT: Well, thanks. And thanks for joining us today to start it off.

A year ago at this time the president's agenda included Social Security reform and tax reform. Now there is a lot of talk about healthcare and other issues. Does this mean that Social Security and tax reform are off the agenda for this year?

HUBBARD: Well the president has made it very clear that Social Security will never be off his agenda as long as he's president of the United States. It is a huge problem facing this country. It is not going to go away.

Unfortunately, the Democrats last year refused to step up to the plate and deal with the problem. They decided it was a political issue that they could win and as opposed to addressing a big problem facing the country.

That was a very big disappointment to the president. It is a big disappointment to the American people. This problem grows by $600 billion every year. This president will never give up on it, but unfortunately the Democrats have refused to address the problem. But the president will keep talking about it.

By the way, he's going to talk about all entitlements, including Medicare and Medicaid. Because they are big problems facing the country; they're growing at unsustainable pace and we must address them.

GIGOT: All right. Let's talk about healthcare, because that's usually an issue that Democrats talk about not Republicans. What is it about the current healthcare system, what's wrong with the system that the president think he needs to address?

HUBBARD: Well, as you know, healthcare is a major, major issue in this country. It represents a sixth of the economy, close to $2 trillion a year, we spend on it. And there are a number of dimensions, including the 45 million uninsured, the fast growth of Medicare, the fast growth of Medicaid.

But in addition to that, to the people who have the traditional benefits from their employer, employer provided healthcare, they too are suffering, because the costs of healthcare are going through the roof. Every year people's premiums are going up, every year people's deductibles are going up, every year their co-pays are going up. And in addition, their employers are paying more for health insurance, which robs employees of their wage increases.

So it is a big, big problem facing this country, people are frustrated with it. The president wants to address it.

GIGOT: Well, it sounds like you're saying the employer-based healthcare system, and most Americans do get their health insurance from employers, is creaky, it is in trouble and it needs to fixed. How are you going to address that?

HUBBARD: Well there are a number of parts to the system that just don't work and the president wants to address those. There are parts of the system that are unfair and the president wants to address them.

First off, you know, this is one-sixth of the economy, and yet the consumers know nothing -- or know very little about the quality of the providers they're dealing with and they know virtually about the prices they're paying for the services. That is not the way we do things in America. That means the consumer is not well informed and we need to change that. We need to encourage providers, we need to encourage insurance companies to disclose quality information and prices so the consumer will be well-informed consumers.

GIGOT: One idea that I know you're familiar with, from your time in the private sector, is making health insurance tax deductible for individuals. Of course, the companies can do that now when they deduct what they pay for health insurance for employees, but individuals can't unless they spend an enormous amount of money, an enormous share of their income. Are you talking about making healthcare expenses for individuals tax deductible?

HUBBARD: Well, that's a very good point, Paul. It is truly a strange system we have whereby if you work for an employer that can afford to provide you with insurance, you use pre-tax dollars to pay for that. But if you work for an employer that can't afford to provide you with insurance and you buy it yourself, you have to use after-tax dollars, which means the average individual...

GIGOT: Is the president going talk about that in the State of the Union, make it tax deductible? Is he going to go with that proposal?

HUBBARD: Well, again, I'm not going to pre-empt what the president is going to say, but I can tell you that this is something that very much concerns the president, he thinks it needs to be addressed and I think you'll see him talking about how to address it.

You know, just excuse me for interrupting, but a similar problem is that we have a bias against paying for medical care services out of pocket. You know, again, if you get your medical care services from employer provided insurance, you are using pre-tax dollars.

But if you pay for those services out of pocket, or pay for a portion of those services out of pocket, it is after tax, which means you are paying 25 or 30 percent more than you would otherwise. And that's why people have insured for healthcare.

GIGOT: OK, Paul Hubbard, thanks for being with us.

HUBBARD: Thank you, Paul.

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