Monday, March 14, 2011

Bipartisan Down Payment on Health Reform

The current budget debate is all heat and no light. If we extend the current tax code to 2020, then even if we eradicate (read put to 0) all the domestic discretionary spending in the federal budget, we will have a deficit in 2020 just paying for health care (Medicare, Medicaid, ACA subsidies), Social Security, Defense and Interest on the debt. All the words being spilled about NPR and agricultural subsidies are a sideshow at best. The essence of this paragraph will not change even if the ACA is repealed.

Progressives need a balanced budget more than Conservatives, and Conservatives have no hope of ever having a balanced budget without having a long term health care reform plan that comprehensively addresses costs. Being opposed to the Affordable Care Act (ACA) is not a plan.

I asked Michael Cannon of the CATO Institute for his plan via twitter and he sent me this link. His plan has four basic parts:
  • Voucher the Medicare program (age and risk adjusted) and allow beneficiaries to purchase private health insurance
  • End the tax preference provided to employer paid health insurance and use this tax expenditure to help expand catastrophic coverage
  • Change a variety of health insurance and provider laws to create more competition and reduce barriers to entry
  • Block grant the Medicaid program
Let me say up front that Cannon's is not my preferred solution. Let me also say that I would rather try his approach than repeal the Affordable Care Act and replace it with nothing. Because the default of the status quo is that health care will bankrupt our country while systematically accepting 15-18% of the population as uninsured.

If the country decided we were going to try the CATO plan, we could work hard and implement it. Of course there would be unintended consequences and mistakes, but we could have continuous tweaks and clean ups each Congress for the next 20 years. I have no doubt that we could muddle through reasonably well, so long as the country bought into it as a strategy. The hardest part of Cannon's plan would be getting straight how we would deal with the fact that a vouchered Medicare program would provide less insurance coverage than would the current, projected Medicare program. If it did not, then it wouldn't save the federal government any money! This is not a technical problem, but a cultural and political issue. Vouchering Medicare can be done in a way that reduces the deficit, no doubt about it in policy terms. The real question is would the country accept it? Keep in mind that this would be a far bigger change than many proposed in the ACA that critics of the law say will never happen because they are too hard.

This is one of the biggest blind spots of opponents of the ACA--saying that the hard parts won't be taken to address costs while proposing hard parts that represent far larger changes to the current system than does the ACA.

We desperately need to decide on a way forward for expanding (or not expanding) insurance coverage so that we can focus on addressing health care costs. The ACA remains politically toxic and the legal challenges to the constitutionality of the individual mandate will likely continue for another year. I have proposed a set of compromises that would render the legal challenges moot, but any movement to make the ACA the reform of both parties seems unlikely before the next election.

Is there any room for a compromise in this Congress that could be viewed as a 'bi partisan down payment' on health reform that addresses costs? While leaving open the overall approach of health reform that may not be decided until the next election? It is very important to try and find such a compromise, because addressing health care costs is a necessary, but not a sufficient condition to ever have a balanced budget.

The most consequential policy this Congress could enact that would be flexible (meaning work as intended regardless of the outcome of legal challenges to the ACA and the next election) would be to change the tax treatment of employer paid health insurance. Currently, Duke pays my health insurance premiums and this money paid on my behalf by my employer is not taxable as income. This has been the case since World War II and has lead to people having more insurance than they would have if they bought coverage with after-tax dollars. This is part of why we spend so much on health care because many users don't understand how much their insurance, and therefore their care, costs.

The ACA addresses health care costs in part by imposing a tax on high cost health insurance policies that will take effect in 2018. Steve Pizer has a nice post describing the long term effect of this, which will be to slow the rate of health care inflation as more and more policies are hit by this tax over time if health care costs continue to rise much faster than inflation.

I would prefer to have a more straightforward cap on the amount of premiums that are not subject to taxation, even though both policies can have the he same ultimate impact on costs since insurance companies will just pass along the tax to consumers. Culturally, the passage of the tax on high cost health insurance in the ACA represents the 'camel's nose under the tent' in terms of ending the unlimited subsidy that those with employer provided insurance now receive, and have received since World War II. This will be a big step, but one that has been delayed.

Altering the tax treatment of employer paid insurance premiums is a flexible policy that would provide downward pressure on health care costs regardless of the future direction of health reform. Democrats have already voted for this in the form of the tax on high cost policies, and most Republican plans include changing the tax treatment of employer paid insurance. This would improve the cost saving potential of the ACA, and would improve the cost saving potential of just about any imaginable health reform. Democrats and Republicans should work together in this Congress to change the tax treatment of employer paid insurance sooner rather than later, and in so doing, make a bi-partisan down payment on health reform. This would prove they were serious about deficit reduction.


  1. Has anyone priced out what private insurers would charge these elderly for insurance. I have asked my broker and they will not quote prices for Medicare aged buyers.


  2. Steve
    I pulled your comment into a new post.