Two days ago, we said that legislators must get serious about reining in costs if they hope to pass health-care reform legislation this year.
The Congressional Budget Office (CBO) recently released a cost analysis of the reform initiatives that are on the table. The CBO estimates that the most popular packages could cost upwards of $1 trillion over the next decade.
Conservative Democrats and moderate Republicans are unwilling to pass a bill that is not paid for in advance. They argue that doing so would only add to our national debt over the long-term.
In response, lawmakers are looking at three possible solutions:
- Cutting proposed benefits from the reform plans,
- Eliminating the tax subsidy for employer-sponsored insurance, and
- Implementing a range of other new taxes.
They should also consider adopting the difficult, but necessary, cost-cutting measures that the CBO recommends.
CBO Director Douglas Elmendorf sent this letter to Senator Kent Conrad (D-ND) last week. Mr. Conrad is chairman of the Senate Budget Committee.
In the letter, Mr. Elmendorf states that many popular cost-cutting measures, such as using electronic medical records and increasing preventive care efforts, would not generate significant savings since “little reliable evidence exists about exactly how to implement those types of changes.”
The big savings, says the CBO, would really come from cutting payments to providers.
- Reducing payments to physicians for “productivity improvements” would save $16 billion per year, or $200 billion over the next decade.
- Another $7 billion per year, or $92 billion over a decade, could be trimmed by imposing a 1% cut in hospital payments.
- Building on these ideas, President Obama has outlined a plan to save $622 billion over a decade by reducing Medicare and Medicaid payments to hospitals, insurers, drug companies, and to home health agencies. He would also eliminate Medicare subsidies to private insurers that offer plans to the elderly.
Cutting payments to physicians and hospitals is a political hot potato!
Both groups, especially primary care physicians, claim that they simply could not remain operational under a lower reimbursement schedule.
- Last week the American Hospital Association voiced “deep disappointment” upon learning of Mr. Obama’s plan to cut payments to hospitals.
The other options for generating revenue aren’t likely to be any easier politically.
For instance, the CBO has raised eyebrows by suggesting that the tax exclusion for employer-sponsored benefits be eliminated, at least for folks making above a certain income-level.
Currently, the federal government does not tax employee compensation that is put aside by employers to pay for health benefits.
- This tax exclusion is one of the main reasons why our employer-sponsored benefit system remains in place today; and why roughly 60% of Americans still receive insurance through their jobs.
It’s estimated that a health benefits tax would bring in $39 billion per year, or $452 billion over the next decade, even if the tax were capped to exclude 75% of benefits.
This amount, almost half of the sum needed for health-care reform, is just too large to ignore.
Think tanks, advocacy groups and some legislators are lining up in support of removing the tax exclusion, and some are insisting that this is the only reasonable option on the table to pay for health-care reform.
For example, the Center on Budget and Policy Priorities, a historically liberal think tank, supports the move to tax some health benefits.
In its report on this topic, the group argues that the current tax exclusion is a regressive benefit because:
- Low and moderate-income folks are often unable to afford employer-sponsored benefits in the first place, so they don’t gain at all; and
- The tax unfairly advantages upper-income earners: The 24% of tax units with incomes over $75,000 in 2004 received almost half of the benefits of the exclusion.
The group proposes capping the tax exclusion at a certain level. Under such a plan, only the employer compensation used to buy more expensive health care plans for higher-income workers would be taxed.
The Center on Budget and Policy Priorities also claims that implementing this tax would not erode employer-sponsored coverage if other policy reforms are passed, including:
- A mandate that all individuals obtain coverage; and
- A requirement that all employers provide coverage options or pay into a government health-care trust fund.
Despite some institutional support for this policy recommendation, getting such an option through Congress promises to be a tough sell.
For one, President Obama actively campaigned against taxing health benefits in the fall. Although he is said to now be considering the possibility, he risks facing political backlash for doing so.
Update: David Axelrod said recently that President Obama would prefer to limit tax deductions for couples making over $250,000 rather than tax high-end health benefits as a way to pay for reform.
It also appears that there is a lack of public support for this tax.
According to this Diageo Hotline Poll:
- Only 26% of voters support taxing health benefits, while 68% are opposed and 51% are strongly opposed.
- Americans would have to be convinced that this tax option would not mean the end of their employer-sponsored coverage.
That said, we can’t imagine that this tax proposal will just go away.
There is too much potential revenue to be raised this way- and not enough viable options for congressional lawmakers.
Some of the other tax options on the table certainly have merit. But they would not bring in as much money- which means that significant cuts in proposed benefits would be needed to pass a reform plan.
For example, House Democrats have suggested a number of “sin” taxes, including a tax on soda and other sugary drinks, a dollar-a-pack tax on cigarettes, and new taxes on alcohol. Each of these would generate between $5 and $10 billion per year, or about $200 billion over ten years.
This is a significant amount of money- and some of these taxes might also help to encourage more healthful habits amongst Americans. They would not solve the funding problem alone, however.
We’d love to hear what you think about these tax options.