Baucus, Grassley Release Policy Options for Financing Comprehensive Health Care Reform

United States Senate
Committee on Finance
News Release
May 18, 2009

The options released today are the third and final round of policy options for discussion before the Finance Committee marks up legislation in June. The options for financing health reform follow the release of policy options for reducing costs in the health care delivery system and for expanding quality, affordable health care coverage to all Americans. Three areas of potential funding sources explored in the financing options are: savings achieved from within the health care system from reductions in current levels of spending; reevaluating current health tax subsidies; and changing non-health tax provisions.

Reducing Geographic Variation

Researchers at Dartmouth and elsewhere have found that health care spending varies widely across the United States. Moreover, higher health care spending does not correspond to better quality care of care. The portion of total spending on health care items and services that do not produce better health outcomes is estimated to be as high as 30 percent of Medicare spending. The policy options explore ways to reduce geographic spending variation by reducing Medicare payments in areas where spending is above the national average. Adjustments would be made to reflect differences in input prices and beneficiary health status.

Exclusion for Employer-Provided Health Insurance

Under current law, employer-provided health insurance is not counted as income for tax purposes and the amount of health care benefits that are counted as tax free is unlimited. This tax-free status encourages employers to offer “Cadillac plans,” or overly generous health care plans that promote the overuse of health care services and drive up health care costs. Moreover, the plans are subsidized by taxpayers as a result of being tax free. The policy options explore five changes to make the exclusion more equitable and efficient. These options include capping the exclusion based on the value of health insurance policy or the income level of the employee eligible for the exclusion. A third option would be to cap the exclusion based on both the value of the health insurance policy and income level. Another option would be to convert the employer-provided health insurance exclusion to an individual tax deduction or credit. The options also consider whether to grandfather in existing plans so that benefits provided under existing collective bargaining agreements are not limited.

Financing Comprehensive Health Care Reform: Proposed Health System Savings
and Revenue Options (41 pages):

The two previous reports:

Transforming the Health Care Delivery System: Proposals to Improve Patient
Care and Reduce Health Care Costs (52 pages):

Expanding Health Care Coverage: Proposals to Provide Affordable Coverage to
All Americans (63 pages):

Tomorrow the members of the Senate Finance Committee will retreat to a closed-door session, taking this report with them to walk through their options for financing comprehensive health care reform. Sen. Baucus and others have said that the success of the reform effort is dependent on their ability to find ways to pay for it. What are their prospects for success?

Most of the options discussed in this report are merely tweaks to our current system of financing health care and can have very little impact in overall health care spending. Some of the changes would be beneficial and some are problematic, but most would fall far short of the financing needs of the multi-payer model that the committee has selected.

There are two potential sources that involve real money, though one is quite explicit and the other is not much more than an abstraction.

Reducing the 30 percent of spending in Medicare that does not improve outcomes (Dartmouth Atlas) would seem like a logical source of funds to pay for reform, but recapturing those funds would be very difficult. Merely reducing payments in regions where spending is above average is a very blunt instrument that can have serious negative impacts even if there were some reduction in waste. Also, no mention is made in this report of the Medicare underpayment in other regions.

A much more appropriate use of any wasted funds that could be recovered would be to increase payments in regions that are underfunded, and to shift funds to services that would improve the quality and efficiency of the system, especially by expanding primary care. If these changes were made not only in Medicare, but in our entire health care system, that would entail a large shift in spending, but only as a redistribution of funds. It is merely an abstraction to think of this as a new source of additional funds to finance the other components of the reform proposal.

The real money is in the tax subsidy we provide by making employer-sponsored insurance a tax deductible benefit. That amounts to about $137 billion. A table in the report lists many other tax subsidies for a total of $194 billion, plus another $93 billion for reduced payroll taxes to make a grand total of $287 billion. It is really the $137 billion that is important since the other numbers are primarily accounting issues. For instance, the $93 billion in reduced payroll taxes must be offset by payroll taxes on the balance of income and/or by other taxes if the Medicare and Social Security programs are to remain solvent.

Can we simply eliminate the tax deductibility of employer-sponsored plans and shift that $137 billion to the reform proposals? No. Since premiums for employer-sponsored plans are paid by employees in the form of forgone wage increases, workers could not collectively afford to pay the additional 137 billion in premium costs. If the deductibility is eliminated, that $137 billion would have to be returned to the workers in the form of tax credits,vouchers, or personal tax deductions. Poof! There goes the real money that the committee is counting on finding somewhere.

The report suggests that since the tax deductibility of employer-sponsored coverage represents a regressive tax policy (the wealthy have more of their premium subsidized with taxes than do lower-income individuals) some of the $137 billion could be recovered from higher-income individuals, even if it would result in more administrative complexities. But then how much are you recovering to pay for reform? Maybe $20 billion? That doesn’t help much with our $2.5 trillion health care budget.

The tragedy is that the report that they are taking into closed session gives them very little to work with. At the hearing leading up to this report, they had arrested the individuals who would explain that we very easily could free up maybe $400 billion in pure waste merely by replacing our dysfunctional multi-payer system with a single payer national health program. Even for those who contend that the amount would not be that great, it would still be far, far more than any other proposal on the table.

To keep single payer off the table, to exclude it from their report, and to slam the door on it as they retreat to their secret sessions constitutes legislative malpractice. We should sue them for triple damages. $1,200 billion would certainly pay for a lot of health care. We can pretend that they can come up with $1,200 billion just as they are pretending that they can come up with the funds to pay for the most expensive model of health care reform ever devised, and, at that, one that falls far short on equity, efficiency and universality.