To Pay for Health Care Reform, We Need a Cash Cow
June 15th, 2009 . by economistmomThe President gave a speech before the American Medical Association today. He reiterated his Administration’s insistence that health care reform be paid for, with a combination of revenue increases and spending cuts:
[W]e can’t just raise revenues. We’re also going to have to make spending cuts, in part by examining inefficiencies in our current Medicare program. There are going to be robust debates about where these cuts should be made, and I welcome that debate.
But as a Washington Post article emphasizes, the AMA being an organization of physicians, they’re likely to oppose any spending cuts that might adversely affect the incomes of their membership:
In the early 1990s, the organization helped defeat President Bill Clinton’s massive health-care overhaul.
This time around, AMA leaders say they are trying to shape the legislation more to their liking. The physicians are pushing for coverage-for-all and a permanent fix to a Medicare payment formula that would slash reimbursements in January.
The President seems newly determined that the revenue offset be his proposed limit on itemized deductions for higher-income households. He said today that:
as part of the budget that was passed a few months ago, we put aside $635 billion over 10 years in what we’re calling a Health Reserve Fund. Over half of that amount — more than $300 billion — will come from raising revenue by doing things like modestly limiting the tax deductions the wealthiest Americans can take to the same level that it was at the end of the Reagan years…
even though the Washington Post story makes it clear that the proposal is still not going over well with Congress:
In recent days, Obama has revived a tax plan he first offered in February: limiting itemized deductions for the nation’s 3 million highest earners. Polls show that the idea is popular — it was Obama’s biggest applause line last week at an event in Wisconsin — and it would enable him to abide by a campaign pledge to pay for coverage for the uninsured with new taxes on the rich.
“He believes this is the most equitable way to do this,” said senior White House strategist David Axelrod. “It places the burden on people who can most afford it.”
But many Democrats, particularly in the Senate, have balked at the idea, saying they prefer a tax that has some hope of winning Republican support.
That tax proposal that is more likely to get bipartisan support is the one that limits the exclusion from taxes of employer-provided health insurance. Such a tax increase makes good economic sense–both from a fiscal responsibility standpoint and from a health economics one. Again from the Post:
Politics aside, the tax dwarfs all other current proposals as a potential cash cow. The tax-free treatment of employer-provided health insurance is the biggest loophole in the tax code and the second-largest federal health-care cost, after Medicare. Taxing half of all employer-sponsored premiums would generate nearly $1.2 trillion over the next decade, according to the nonpartisan Joint Committee on Taxation, compared with about $270 billion for new limits on itemized deductions for the rich.
Advocates say taxing benefits also makes good economic sense. The rewards of the current tax break fall heavily to the wealthy, and there is no similar tax break for workers who must buy insurance on their own. Many economists also dislike it because it encourages workers to take compensation in the form of health care instead of higher wages, pushing resources into the health system and increasing costs.
“Even in the absence of wanting the money, you’d want to do it,” said MIT economist Jonathan Gruber.
Of course, the “cash cow” aspect of the proposal to limit the tax exclusion probably scares as many (or more?) policymakers as it excites–just like the idea of an add-on value added tax to fund health care. But given the technical difficulty in figuring out how we might reduce health care costs, and the even greater political challenge of following through with the tough policy choices that actually cut costs–and given the Congressional Budget Office’s just-released estimate that expanding health coverage as proposed under the President’s health reform plan (as currently being considered in the Senate) would cost around $1 trillion over 10 years–it seems we could really use a really big “cash cow” to pay for health reform.
it seems we could really use a really big “cash cow” to pay for health reform.
…and just as a reminder to all, expanding coverage, even if “paid for”, actually reduces our ability to solve our overall long-term fiscal imbalance, because there are only so many times we can go to the well, both due to politics and due to economics: there are diminishing returns to tax increases, (1) in terms of incremental revenue relative to what static scoring would calculate, and (2) due to adverse impact on GDP, which, combined, mean that as we seek to reduce our projected debt-to-GDP, each incremental tax increase will, ceteris paribus, produce diminishing positive impact on the numerator side of debt-to-GDP and increasing negative impact on the denominator.
Put differently, each incremental tax increase gets us closer to killing the goose that lays the golden eggs, or at least bites off part of the goose and leaves it less healthy and less able to produce eggs.
Yes, some contend that we cannot achieve substantial long-term cost-containment in healthcare — and in turn, in projected Medicare and Medicaid spending — without universal coverage, but (1) this assertion is debatable, (2) cost-containment over the long-term is only possible if cost-control mechanisms, thus far absent from healthcare “reform” proposals, are included (in particular, addressing incentives), (3) even if these cost-control mechanisms are put in place (which seems far from a certainty, given the current politics), the degree of cost-containment is a matter of great uncertainty, and (4) even if #2 occurs and this “reform” is long-term deficit-neutral, we are still left with the same unsustainable long-term fiscal imbalance, but with a higher level of taxation before starting to solve that imbalance, which brings us back to the point in my prior paragraph.
There is, of course, also a “rock soup” feel to much of the rhetorical packaging of healthcare “reform”, in that the supposed cost-control measures, such as medical IT and comparative effectiveness research and information-sharing, that will supposedly produce substantial net savings (despite the upfront investment) could be implemented without expansion of coverage, as could the offsets in the budget that the Obama Administration is proposing, without expansion of coverage.
What is the “rock soup” analogy? A story I was told a long time ago (and I’ll give an abbreviated version) of a traveler who arrives in a village with nothing but a pot. He sets himself down in the center of the village, gathers some rocks, fills his pot with water, and builds a small fire. As the water boils, villagers approach him and ask what he is cooking. He tells them “Rock soup, the most delicious soup in the world. I’ll be glad to share some with you. It’s made with these rocks I’ve gathered, although for it to be really good, I should add some high quality beef, fresh vegetables and the finest spices.” The villagers readily offer to provide these other ingredients, anticipating the delicious “rock soup”.
Again, some would retort that all the cost-control mechanisms could indeed be implemented without expansion of coverage, but that there would be an enormous difference in effectiveness (i.e., degree of cost reduction) without universal coverage. Again, that is quite debatable, even before we get to netting it out vs. the increased cost of the expanded coverage itself.
Bottom line is that the outlook for our fiscal and economic future would be best if we implemented cost-control mechanisms and held off on expansion of coverage unless and until we’ve addressed the existing, structural, unsustainable long-term fiscal imbalance (through some combination of tax increases and cuts in projected spending). But if healthcare “reform” is to occur, we need to (1) push at least for deficit-neutrality, (2) push for real cost-control mechanisms, and (3) realize that we need to do much more, because even “paying for” expansion of coverage does nothing to address the unsustainable long-term fiscal imbalance that we already face, and leaves us with this problem after having used up part of the resources for solving this problem (tax increases).
Our nation, from a fiscal standpoint, is like someone who is gaining weight at a dangerous pace, and whose ability to lose weight will decrease with age, with severe health consequences very predictable on the current course (he’ll start experiencing severe health problems and pain in 5 years, and he’ll die much sooner than otherwise). He is consuming more calories than he is burning and he obviously needs to consume fewer calories, burn more, or both. He decides that he’d like to add another meal to his daily diet, but thinks “ok, I’ll just add enough incremental exercise to offset those incremental calories”. Well, that just leaves him on his current course of weight-gain. He should be exercising more to change course and either lose weight or at least reduce the pace of weight-gain. And since adding exercise gets harder and harder with each incremental addition of more exercise, he has made it tougher now to add more exercise to address his already existing imbalance (current and projected). He has thus made it more likely that he will continue on his current, tragic course (or will to a much greater degree than he otherwise would).