The Health Care Bills, the Fine Print, and a Troubling List of Budget Gimmicks

Julie Appleby has an important article today at Kaiser Health News.

She has identified an important and before unreported issue in the Senate Finance health care bill.

In order to keep the cost of the plan down, the Senate Finance bill literally locks in the erosion of insurance subsidies for middle class families.

From her report:

"The first year the legislation would take effect, people getting subsidized coverage would be required to pay from 2 to 12 percent of their incomes for insurance. The government would pick up the rest of the tab. People with lower incomes would pay less and those with higher incomes more.

"But in the second year, it changes. From then on, it is based on a percentage of the premium that was paid the first year, no matter how far premiums rise.

"For years, health insurance premiums have risen faster than wages, and the trend is expected to continue."

"Let's assume in subsequent years that the family’s income kept pace with inflation and they remained at 220 percent of the federal poverty level. They would continue to pay 29 percent of the cost of the premium. But because premiums are likely to rise faster than inflation, Solomon’s analysis found, the family’s cost would soon rise above 8 percent of their income.

"Since 1999, insurance premiums have jumped 131 percent, while wages increased 38 percent, according to the Kaiser Family Foundation. (KHN is a program of the Foundation.) This year, the average premium for all family policies rose about 5 percent, to $13,375 annually, the foundation reported, while workers’ wages rose 3.1 percent."

“They did this to make subsidies a little cheaper,' says Karen Pollitz, director of the Health Policy Institute at Georgetown University. 'But it means that if you’re [a low-income policyholder] struggling in the first year, it will get harder and harder … unless we have some massive breakthrough in cost containment' and the growth of premiums slows."

This isn't the only example of the Senate Finance authors using the same gimmick to lower costs. The 40% "Cadillac" benefits tax has the baseline for calculating the tax tied to the CPI plus 1% while the cost of health insurance has historically risen three to four times inflation. The result will be that more and more people will get caught in this AMT-like tax trap as the years go on.

This from an op-ed in yesterday's Washington Post by Harold Meyerson regarding this gimmick in the "Cadillac" benefits tax:

"The Senate's tax would initially apply to all individual policies costing more than $8,000 a year, or $21,000 for a family. Those thresholds are to be indexed to the overall consumer price index (CPI) plus 1 percent. Problem is, medical costs and health insurance premiums increase a good deal more than the overall CPI. Since 2000, they have risen three to four times faster -- which means, more policies will be subject to the tax with each passing year. The congressional Joint Committee on Taxation has calculated that in 2013, when the reforms kick in, the tax will apply to 19 percent of individual plans and 14 percent of family plans, but that by 2019 it will sock 34 percent of individual plans and 31 percent of family plans."

While the word is that Senate Majority Leader Harry Reid is going to increase the baseline--to $23,000 for a family for example, the same principle would apply--the baseline for calculating the tax will almost certainly rise much slower than the cost of the insurance trapping more people into the tax every year.

These gimmicks that would take advantage of higher health insurance cost inflation when compared to general inflation or similar wage rates have the effect of making the health care bills cheaper by tens of billions of dollars keeping the cost under the $900 billion objective the President has set.

This gimmicky approach to health care reform isn't terribly different from failed Democratic attempts to peel out the $250 billion Medicare physician fee fix last week, arguing the Medicare physician fee problem is not really part of what comes under health care reform.

By trying to add that $250 billion to the deficit last week and their apparent ongoing attempts to keep this physician fee issue out of the health care bills, setting an AMT-like tax trap in the "Cadillac" benefits tax scheme, and now setting up middle class families for significant erosion in their subsidies as another budget gimmick, all to keep the ten-year price of the bill under $900 billion, Democrats are making a mockery of the President's claim when he said "we can't just keep kicking this [health care fiscal] can down the road."

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.

Anybody Know Where We Can Find a Quick Trillion Dollars?

"Irrational exuberance" over the chances for health care reform meet the budget realities.

The House and Senate Budget committees have begun work on the federal budget.

Last week’s CBO report estimated the Obama budget would:

• Produce a nearly $9.3 trillion deficit over the next decade.
• Generate annual budget deficits of nearly $1 trillion in each year from fiscal year 2010 to 2019.
• Increase budget deficits to more than 4% of GDP each year over the next decade.
• Double the national debt to 82% of GDP by 2018 (it was 8% of GDP in 2001).

Still stunned from that report, and under immense pressure from moderates in the Democratic party to cut spending, both the House and Senate Budget chairs have made it clear they intend to reduce the Obama budget and see the Congress proceed with health care reform following the pay-go rules.

That would mean any new health care reform spending over the next ten years needs to be offset with either cuts to existing spending or with new revenue.

President Obama outlined a $634 billion “down payment” on health care reform in his budget.

Half of that, $318 billion, came from raising taxes by reducing the charitable and mortgage deductions high-income folks pay. That proposal is deader than a doornail up on the Hill.

Another $175 billion comes from payments private Medicare plans get. That proposal will likely survive the budget process--although it may well just get swallowed up fixing the upcoming 21% Medicare physician fee cut. Another $141 billion over ten years comes from minor cuts to health care providers and has a chance of surviving the legislative sausage factory.

So, assuming the HMO cuts and provider cuts survive in the form they were proposed in the Obama budget, we would begin the health care reform process with about $318 billion toward the ten-year cost of the effort.

The consensus of opinion is that an Obama campaign-like comprehensive health care plan will cost at least $1.5 trillion over ten years.

That means for the Congress and the President to achieve comprehensive health care reform they will have to come up with at least $1.2 trillion from a combination of revenue sources and cuts.

Since there aren’t any extra dollars elsewhere in the budget, it’s a good assumption any cuts to pay for health care reform are going to have to come from the health care budget itself.

Comprehensive health care reform of the kind Democrats talked about during the campaign literally comes down to finding another $1.2 trillion to pay for it.

I will remind you of the CBO’s December report on health care budget choices that provides a list of 115 options. It literally provides us with an a la carte menu of options to choose from. It also makes it clear that the cost containment “lite” proposals like wellness, prevention, pay-for-performance, and health information technology hardly make a dent. The big money is in the politically problematic areas of cutting providers and beneficiaries in very tangible ways.

Even if a politically acceptable tax increase can be found to replace the first one the President proposed, that still leaves us about a trillion short.

Any volunteers?