Halfway to Paying for Health Care Reform? A Growing Consensus for Taxing Health Insurance Benefits Produces Lots of Money

But do we want to pay for most of it with tax increases?

This is a reprint of an April 22nd post.

Yesterday in Senate Finance it was clear that changes to the tax treatment of employer-provided health insurance are on the table.

I thought it important to revisit my earlier summary of just what such a tax change does toward raising the needed money for reform. Since I posted this, the most commonly used estimate for the cost of a health care reform plan is at least $1.2 trillion with the range continuing to be as high as $1.7 trillion.

We have not seen a health care reform bill much less seen it “scored”—or its costs estimated. Until we do, the working assumption is that a major health bill of the type the President talked about during the campaign would cost about $1.5 trillion over ten years.

As I have said many times, show me where we get that money and I can be optimistic about health care reform happening this year.

It is clear to me that there is real movement in the Senate on the issue of taxation of health benefits. I can see key Senators on both sides of the aisle agreeing to it as a means to help pay for reform. Likely, it would take the form of taxing everyone’s benefits above a certain threshold or taxing all health benefits for higher income people.

The CBO recently priced a couple of potential tax changes similar to these ideas:

• Replace the Income Tax Exclusion for Employment-Based Health Insurance With a Deduction– And begin to phase it out for unmarried tax filers making more than $80,000 a year and $160,000 for married couples. The CBO estimated that this structure would raise $552 billion over ten years. This option has the advantage of applying only to “wealthy” taxpayers. It is likely a compromise would not end the employer exemption but would only use the deduction phase-out part of this idea—but would have about the same fiscal impact.
• Reduce the tax exclusion for Employment-Based Health Insurance and the Health Insurance Deduction for Self-Employed Individuals – Limiting how much health insurance that would continue to be exempt from personal income taxes to the 75th percentile of what employers pay ($565 for individuals and $1,440 for families in 2010) would save an estimated $452 billion over ten years. This option has the politically negative impact of taxing lower-income families who are fortunate to have very rich benefit plans—union members for example.

A Senate consensus is by no means assured here. Republicans could end up insisting on a structure that discouraged "excessive" benefit packages while Democrats focused on cutting the tax benefit for just the "wealthy."

While the options the CBO scored may be somewhat different than any final deal, the CBO's work does give us a sense for what these kinds of tax changes could produce—about $500 billion over ten years.

My sense is that there could be a consensus around finding the needed $1.5 trillion for health care reform from the following places:

• A change to the tax treatment of health benefits—likely phasing-out the exemption for high-income earners—worth about $500 billion over ten years.
• “Equalizing” payments to Medicare HMOs—worth $175 billion over ten years.
• The relatively minor provider cuts outlined in the Obama budget that focus on reductions to hospitals, home health care, and post-acute care—worth $141 billion over ten years.

This totals $815 billion over ten years or about half the amount that will be needed to fund an Obama campaign-like health plan.

Where will the rest come from?

First, about everyone in this debate has said that we have to begin to control our health care costs.

Of the $815 billion I have identified, more than 60% comes from a tax increase.

If we are going to raise taxes to pay for health care reform it is important to understand that we would be tying taxes to something—medical trend cost—that has been increasing at a rate two to three times the growth in the rest of the economy for decades now.

And tax increases do not qualify as “bringing our costs under control.”

Some tax increases to pay for health care reform are inevitable but most of the money will have to come from reductions in what we would have paid for health care if we have any chance at crafting a sustainable system—and that means either provider or beneficiary cuts.

That’s the really hard part.

Half found and half to go. But that last half will be a lot tougher!

Recent post: Progress on Key Health Care Reform Issues?