Congress Taking a Second Look At Changing the Way Health Benefits Are Taxed--Good--But We Can't Tax Our Way to Health Care Reform

As you have heard me say many times, paying for health care reform is the real challenge. An Obama campaign-style health plan will likely cost at least $1.5 trillion over the next ten years.

Until I see some constructive progress on how we pay for health care reform I cannot be optimistic the latest health care reform debate is going anywhere.

Where we stand today is that the Congress and the President have yet to come up with more than a small percentage of that $1.5 trillion. [See my recent post: Anybody Know Where We Can Find a Quick Trillion Dollars?]

However, my sense is that legislators are more open to changing the taxation of employee benefits than in the past—particularly in the Senate. That is not to say we are anywhere near the point where there is any kind of consensus on this idea—particularly among leading House Democrats. And, we can't forget that President Obama trashed the idea when Senator McCain proposed it in the campaign. But I do see some movement.

Changing the way we tax health care benefits would yield big money and, if tailored properly, it could encourage more efficient benefit plans. For example, in the CBO’s December report on health care reform options, they found that phasing out the deduction for employer provided health benefits for families with incomes greater than $160,000 a year [not a way that would generally encourage more efficient plans] raised $552 billion in new revenue over ten years—about a third of what would be needed for comprehensive health care reform.

The Wyden-Bennett “Healthy Americans Act” made the first constructive proposal to modernize our health benefits tax structure, which was created in the 1940s. You will recall that the CBO scored Wyden-Bennett as deficit neutral within two years of passage. That is primarily because the proposal exchanges the traditional tax exemption on employer-provided benefits for a fresh set of personal deductions on health benefits limited to a more efficient standard package. In addition, Wyden-Bennett replaces the traditional employer contribution with a new tax on all employers that ranges from 2% to 17% of payroll, based upon the size of the employer. In a recent change, Wyden-Bennett would also allow employers to continue their self-insured plans.

This combination of tax changes in Wyden-Bennett essentially reshuffles what employers pay for health benefits, as well as the tax benefits workers get for those benefits, to create the revenue needed to make this universal health care plan deficit neutral.

The realization that we are going to have to get creative in finding something like $1.5 trillion to achieve health care reform and universal coverage makes proposals like the Wyden-Bennett bill more relevant to the debate than ever.

But I want to be clear that we cannot only tax our way to health care reform.

CMS says that our current $2.5 trillion health care system will grow to $4.4 trillion in ten years. If we are going to tax our way to universal health care we are going to quickly run out of people to tax. In short, tying a tax system to health care costs that consistently inflate at unsustainable rates is a prescription for taxes tied to the fast lane.

Sustainable health care reform has to be built upon a system of health care costs we can afford. That means making some tough decisions about the level of payments to providers and beneficiaries as well as the incentives we build for more effective care. One health policy wonk's waste is a doctor's, or hospital's, or drug company's income. Take away excess costs and we take away at least a part of someone's livelihood.

Ideally, there is already enough money in the $2.5 trillion health care system to cover everyone without raising taxes. But, as a practical matter, I have to believe health care reform will almost certainly mean some new taxes. But if reform just means more taxes and doesn’t at the same time predominantly involve systemic reform to what we now pay, and how we pay, we will just be creating a tax-eating monster.