Health care debate misses issue of costs
Sunday, August 23, 2009
Virtually the entire debate over President Obama's health care reform plan now has been reduced to whether there is a public option. Americans would be lucky if the public option were our toughest policy choice. It isn't. The issue - thus far largely ignored by the president and Congress, Sarah Palin and ultra-liberal Democrats who insist on a single-payer policy - is of health care costs.
With health care costs increasing at more than twice the general rate of inflation, any reform that does not adequately address costs will bankrupt both our economy and the U.S. Treasury, and thus ultimately will fail. Health care spending in 2009 will be 17 percent of our gross domestic product, nearly double its level in 1980. Projections suggest it will hit close to 20 percent in 2017.
The most significant and simplest policy to control costs - one that has thus far been rejected by President Obama and the Congress - is to tax employer-provided health care benefits
. It is not the only step, but it may be the most important one.
Those benefits disproportionately favor the wealthiest Americans with the most luxurious health plans and cost taxpayers $120 billion each year, according to the Joint Committee on Taxation. The cost to taxpayers increases each year as premiums grow.
Here's how the tax break works: Employee health care benefits are not taxed. Employers deduct these as a business cost, reducing their tax burden. The benefit is the greatest for high-income workers in high tax brackets with "Lexus" health care plans.
The low-income individual, who doesn't receive health coverage paid by his employer, buys a policy with limited benefits - a "Hyundai" plan - after paying taxes on his income. Thus, taxpayers subsidize those with the Lexus plans and the policy penalizes those with the Hyundai plans.
Why must we end this tax subsidy for the wealthiest?
It increases the national debt. The taxpayer-paid subsidy rises as insurance premiums rise (and at a rate well above inflation).
It raises health care costs. It encourages more Lexus health care plans with excessive benefits, and it discourages employees and their employers from holding down health care spending. An excessive plan is one with few or no co-payments, few or no deductibles and little or no consumer responsibility to keep health care costs contained
Why did the House and Obama cave so quickly on what might be the most important measure in controlling health care costs? Based on my experience in the California Assembly, organized labor probably moved quickly to protect the generous benefits its members receive. Like organized labor, the 85 percent of us with health insurance (the latest estimate from the Census Bureau) benefit from the largesse in today's system and will resist change. But in protecting today's decaying system, we sow the seeds that will bankrupt our own health care coverage in the very near future.
While a move to protect one interest group's benefits is expected from union leaders, it is disappointing to see "progressive" leaders support this reverse-Robin Hood policy under the guise of reform. Instead of taxing health care benefits for all who receive them (or at least above-average benefits), Obama is proposing to raise federal revenues by reducing tax deductions for people who earn more than $250,000 a year. The solution in the House, a surtax of as much as 5.4 percent on couples with more than $1 million in income, is even worse. These two non-solutions add to the federal debt, fail to address the health care equity issue, and do nothing to control health care costs.
Over the next few weeks, liberal lawmakers will insist on the public option; conservatives will reject it, and both will probably continue to ignore the critical issue of containing costs. There are hints of real leadership in the Senate, though. If we are fortunate, the Senate plan might actually tax health care benefits.
If that occurs, we will end the subsidy for the wealthiest and help fund health care for the neediest. In doing so, we will build a foundation for long-term health care reform.
Joe Nation, an economist and a former state Assembly member, teaches public policy at Stanford University.