Health Reform Can Pay for Itself

The task isn’t as difficult as you may have heard.

Click here for a guide to following the health care reform story online.

Barack Obama

Alarmism is setting in about the health reform bill. “Alliances In Health Debate Splinter,” says the Washington Post. “House healthcare plan to add to deficit: analysts,” says Reuters, echoing earlier stories about Congressional Budget Office Director Douglas Elmendorf’s congressional testimony last week that health reform would be a budget-buster. President Obama’s approval ratings are slipping, and public approval of his handling of the health care issue has for the first time dropped below 50 percent. Slate warns readers on its home page, “We’re About To Make a Huge Mistake on Health Care.” Or maybe health reform is already dead because the Senate finance committee is dithering and six moderate senators are urging the Democratic leadership to slow things down further. Bill Kristol, who helped strangle Hillarycare in its crib, smells blood.

Never mind that the health reform bill last week cleared three congressional committees (two more to go!) and that the House bill, which is more liberal than the bill approved by Sen. Ted Kennedy’s health, education, labor and pensions committee, was endorsed unexpectedly last week by the American Medical Association. While it would certainly be more convenient for health reform to clear Congress before the August recess, a failure to do so, which is looking increasingly likely, will hardly be the devastating setback that’s widely supposed. The New Republic’s Jonathan Cohn worries that the recess will provide “four long weeks in which special interests can bang away at legislation, running ads and ginning up grassroots opposition.” But it will also provide four long weeks in which supporters of health care reform, whose numbers and union backing are not inconsiderable, can bang away at legislators who aren’t supporting health reform.

It would also provide four long weeks for Congress to figure out how to pay for the bill. The high cost of health care reform has emerged as the principal political argument against it. But this is an eminently solvable problem—and one that Congress has already solved to a much greater extent than many realize.

The Senate bill, as passed last week by the health committee, would cost about $600 billion over 10 years, according to the Congressional Budget Office’s most recent calculation. The health committee proposed no offsetting taxes. But that’s because the health committee can’t propose any taxes: Taxation lies outside its jurisdiction. The Senate finance committee is giving serious consideration to offsetting health reform’s cost by taxing employer-provided health benefits, which currently are not taxed. The exclusion costs the Treasury $250 billion per year. Unions hate the idea of limiting the exclusion, and during the 2008 campaign Obama attacked Sen. John McCain’s proposal to eliminate it. But more recently, Obama has signaled that he might support scaling it back.

The health insurance exclusion is regressive, since people making more money tend to receive the most generous health benefits. On the other hand, eliminating the exclusion entirely would increase the tax liability of people earning less than $50,000, as a percentage of income, much more than it would people earning more than $200,000, assuming both groups received health insurance through their employers. A reasonable compromise, therefore, would be to maintain the exclusion for people earning below a certain amount (say, $50,000) and reduce it for people earning more. In the March 17 New Republic (“Tax My Health Benefits, Please“), Cohn noted that a tax scheme along these lines, proposed by Jonathan Gruber of the Massachusetts Institute of Technology, would raise “more than $700 billion over ten years.” If included in health reform, such a plan would net the feds a $100 billion surplus during the next decade. As a side benefit, it would exert some pressure on health insurers to lower premiums.

The House bill, as passed last week by the ways and means and education and labor committees, would cost about $1 trillion, according to the Congressional Budget Office’s most recent calculation. But this doesn’t take into account the bill’s sliding surtax on incomes above $350,000, which (according to the joint committee on taxation) would raise an offsetting $544 billion during the same period. (As liberal think tank Citizens for Tax Justice points out, $544 billion is a lot less than what this crowd got during the last 10 years from George W. Bush’s tax cuts.) Other taxes in the bill and projected savings in Medicare and Medicaid further reduce the House bill’s cost to $239 billion over 10 years. Congressional Quarterly gasps that this is “larger than the [deficit] run by the government for all of fiscal 2007.”

But it comes to about $24 billion annually, a manageable amount that could be eliminated by adding in a much more modest scale-back of the health insurance exclusion than the one envisioned by Gruber. Further savings could be achieved if Congress were to adopt the Obama administration’s proposal to create a Fed-like Medicare Advisory Council that could set rates for Medicare providers while being somewhat shielded from congressional meddling.

I won’t even bother to suggest paying for health reform with a progressive Medicare payroll tax rather than the flat 1.45 percent tax on individuals that we have now. This would be the most sensible way to pay for health reform. Citizens for Tax Justice has a very modest proposal here; note that the top rate would be all of 2.5 percent. But Congress would never approve it. That’s a shame, because it would raise $500 billion over 10 years.

“Let’s pass [health care] reform by the end of this year,” President Obama said today. His language would seem to signal that he’s reconciled to waiting for a decent, fiscally responsible bill. It’s possible he won’t get it. But achieving it isn’t all that hard, and it just may be that Congress gives him one.