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Health Reform Can Pay for ItselfThe task isn't as difficult as you may have heard.

By Timothy NoahPosted Monday, July 20, 2009, at 5:43 PM ET

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Barack ObamaAlarmism 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.

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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.

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Timothy Noah is a senior writer at Slate.

Photograph of Barack Obama by Mark Wilson/Getty Images.

COMMENTS

It's true that health care reform can easily pay for itself. The key is to rearrange the perverse incentives in our current system to encourage prudent health care consumption. That could be done by having employees instead of employers take care of their own health care. One simple reform would go a long way towards achieving that goal. Instead of employers spending their resources on prepaid managed care plans for their employees, have them transfer that dough directly into employees' HSAs. Then the employees could choose their own plans from a multitude of choices ranging from high deductible catastrophic coverage with the savings remaining in the HSA to pay for routine care, to traditional prepaid health plans that many are accustomed to already. By having individuals make the choices about their own consumption and health care spending, prudence in consumption is incentivized. Instead of third party "benefit managers" working to reduce overconsumption, each of us would rationally choose, balancing the benefits and the cost of visiting the doc. At the same time, we'd have deep reserves of coverage in the event of a major catastrophic loss---cancer, serious accident, coronary, stroke, etc.

-- doodle6
(To reply, click here)

"Deficit-Neutral" and "Pay for itself" aren't good enough.

I am in favor of health reform - rising health care costs are the largest contributor to a future debt picture that is projected to become crippling within the next couple of decades. Reforming our health care system to reduce costs isn't even debatable - it's essential for our economic future.

I don't hear or read of any party or politician proposing the kind of fundamental changes that will really cut health care costs, though.

Obama talks of "deficit neutral." Noah's goal is that health reform "pay for itself."

These targets can be translated as "heading over a cliff at the same speed we're going now."

We need to slow down and reverse this headlong rush to debt-driven destruction, not just stay on the same course at the same speed.

Obama implicitly admits this when he talks of a health care system that's "breaking America's families, breaking America's businesses and breaking America's economy."

However, the plans he and others are proposing don't fix that problem.

-- alath
(To reply, click here)

There are those who are saying that adequately apportioned taxes will pay for healthcare, and that it's just a matter of charging the right people. Then there are people who seem to think that this is just expanding an "entitlement" (why don't these people ever get angry when funding is increased for water, electricity, police, firefighters, or roads?).

I have yet to see a single article comparing the total costs of healthcare today with the total costs of what the proposed legislation would render. Right now, $2.25 trillion of our dollars goes into healthcare each year.

The CBO recently said that the democrat's plan might cost $1 trillion at most.

So the question is, will at least $1 trillion worth of healthcare consumers use the public option, instead of the current system? People don't seem to factor in the fact that if you use the public option, you aren't still paying for your old private insurance. The price tag of health reform is NOT what it costs to pay for a government plan, it is the difference in costs between the new public option and the existing system. If the public plan had costs 1 trillion, and private/existing spending decreases by the same amount in response, then the cost of health reform is zero dollars.

What percentage of existing payments will be transferred to the public option in response to the plan? I can't really think of any other questions that people should be asking about healthcare reform.

-- jswschmidt
(To reply, click here)

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