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In the Nation's Interest

Reality Bites Health-Care Reform

Last week, reality hit the health-care reform process in the Congress. The bad news is that it slowed the push toward enactment of legislation. The good news is that, in the long run, reality is unavoidable - and in the legislative process, recognizing reality is always beneficial.

The Senate Health, Education, Labor and Pensions (HELP) Committee released an incomplete version of its draft bill. The Congressional Budget Office (CBO) released a partial and tentative scoring of that bill. The headline results were that the bill would cost about $1 trillion over the next ten years, and would cover only about one-third of the currently uninsured population. One provision not yet included in the bill, an expansion of the current Medicaid program, would almost certainly further reduce the number of uninsured, but just as surely would add to the bill's cost.

The Senate Finance Committee, writing its own bill, reportedly received a CBO cost estimate for its draft of $1.6 trillion over ten years. The Finance Committee postponed the release of its bill, possibly to after the July 4th Congressional recess.

On the other side of the Capitol, the three House Committees of jurisdiction released their discussion draft of a bill on Friday. That draft, unlike the two Senate bills, was not accompanied by a CBO score - meaning that the House does not know, at least formally, what its bill would cost. However, it included several provisions that clearly would make it far more expensive than either of the Senate proposals. The House included provisions that would pay only a part of the cost of expanding health-insurance coverage.

The press unanimously saw these developments as setbacks in the rush toward health reform. Unidentified Administration and Congressional sources concurred in press reports. Beyond the confirmed developments, such as the Senate HELP bill draft and its CBO evaluation, there followed rumors and leaks of the reactions and responses of the various Congressional Committees and the Administration.

From the perspective of CED, the news of the week confirms our recommendations on health care, and even on budget policy more broadly. We believe that careful consideration of this information could resolve policy dilemmas through action much closer to our position.

Following are some of the lessons of the week:

Cost. Expanding insurance coverage under the current inefficient health-care system is extremely expensive. All of the legislative players reportedly were shocked by the $1-trillion-plus price tags of the draft bills, even after all of the time they already had spent working on the issues and preparing for the estimates with CBO.

The broad financing approach contemplated by the President had been to pay for expanded health care coverage largely through savings in Medicare and Medicaid, the largest federal health-care programs, with smaller additional savings from increased tax revenues. Thus, the President identified $309 billion in Medicare and Medicaid spending cuts in his budget, and $313 billion more in a subsequent supplement, for a total of $622 billion in Medicare and Medicaid spending reductions. With another $326 billion in proposed additional revenues (largely through a limit on the value of itemized deductions under the individual income tax, which was not well received by the Congress), the President listed a total of $948 billion of budget savings which he said would be nearly sufficient to pay for expanded health-insurance coverage. It was expected that the Congress would follow a generally similar financing approach.

However, with the new CBO cost estimates, it appears that the policymakers' health-coverage reach far exceeds their fiscal grasp. The reported Senate Finance estimate, at almost twice the amount that the President set aside, probably is indicative of the scale of the cost involved in extending coverage at today's insurance prices.

Administrative complexity. Because of this higher-than-expected cost, the Congress is reported to be looking at broadly based taxes to cover part of the excess. The House is said to consider a tax on highly sweetened soft drinks, and even a value-added tax and an employer payroll tax. If the Congress must resort to broadly based taxes, one might wonder why it cannot instead finance a more straightforward system such as that recommended by CED.

To hold the cost down, the Congress reportedly is discussing mechanisms that would prevent businesses from choosing to drop, or individuals from choosing to leave, employer coverage - in favor of individual coverage with public subsidies, which would drive up the budgetary cost. The mechanisms to restrict such choices would be highly administratively complex. We might expect to hear complaints from firms that will fear that they could eventually pay more for coverage, taxes and penalties than they pay to provide coverage for their employees now.

Coverage. With the Senate HELP and Finance estimates thus far indicating that the kinds of systems that the Congress wants would cost well over $1 trillion over ten years, the Congressional Committees reportedly are considering lowering their sights on coverage. Among the alternatives are reduced subsidies for low- and moderate-income families seeking coverage. These reductions in subsidies would have unfortunate consequences. For example, if insurers are to be required to offer coverage to all applicants at community rates regardless of pre-existing conditions, then individuals must be required to buy insurance. Insurers cannot bear the cost of covering the very ill unless those not yet sick are required to buy insurance and bear their share of the risk. However, if low- and moderate-income families are to be required to buy insurance, there must be adequate subsidies. The smaller and the less-available the subsidies, the harder it is to require that they purchase insurance, and thus the harder it is to guarantee issuance of coverage at community rates. The Congressional proposals already would excuse individuals from buying insurance and paying penalties in instances of "hardship;" the smaller the subsidies, the more "hardship" exemptions would be given, and the more people who would not have insurance.

Budget savings versus health-cost savings. Health-care costs are a burden on the federal budget, but also on state government budgets, businesses, and families. When the Congress and the President try to pay for this legislation, however, they consider only federal budget savings.

One side-effect of this perspective is that health-care costs could be shifted onto the states. For example, current Congressional plans would extend coverage in substantial part by expanding eligibility for Medicaid, with the federal government picking up the incremental cost that under current law would be borne by the states. However, with the unexpectedly large CBO cost estimates, there are reports that the Congressional Committees are considering terminating federal coverage of those costs after a few years to reduce the impact on the federal budget. State budgets are already suffering because of the economy. Shifting the burden to the states could alienate Governors and state legislators and complicate the path to legislation.

True structural reform. Another side-effect of the narrow federal-budget perspective is that there is to date insufficient attention in the legislation to slowing the growth of health-care costs broadly, rather than just those costs paid by the federal government. Thus, there are substantial proposed cuts in Medicare and Medicaid, but little of the emphasis in the CED proposal on fundamentally reordering incentives in the broader health-insurance market. Some advocates of the Congressional plans and of the President's budget proposals might dispute that interpretation. They might say that the proposed cuts in Medicare and Medicaid are chosen to increase efficiency in the delivery of health care under those programs, and that improved practices there would spread into the private health-care system. However, other analysts would contend that the reduced provider revenues through reimbursement reductions under the public programs would simply be shifted into higher billings under private insurance, with no real innovation and process improvement overall.

Another claim by Congressional advocates might be that their subsidies and regulatory requirements for health information technology (HIT) and comparative effectiveness research will lead to better and more-efficient practices in health care broadly. However, it is not clear that those subsidies and regulations will lead to true incentives for health-care providers and insurers to pursue real process improvement, rather than merely those actions necessary to meet the letter of the law or the regulation.

Still further, advocates of current Congressional plans might place their confidence in proposals for additional research on comparative effectiveness of medical treatments. Such research is necessary, and CED made an Institute for Medical Outcomes and Technology Assessment a part of its proposal. However, past research already has made clear that much higher health-care spending in some parts of the country has had no impact on outcomes, but this research has had little or no effect on the practice of medicine. Stronger incentives are needed.

The CED proposal would turn the incentive structure of the current health-care system by 180 degrees. With its fixed-dollar contribution, it would make every individual purchaser of health-insurance a cost-conscious consumer, and thereby would force health insurers and providers to seek both higher quality and lower cost. The Congressional proposals thus far show little evidence of such significant changes in fundamental incentives. We believe that command-and-control regulation, even financed with subsidies, will have much less effect on the basic structure of the health-care system.

Tax policy. As noted above, press reports indicate that the House Committees are considering the use of a value-added tax (VAT), at a three-percent rate, to finance a part of their proposed coverage expansion. This echoes not only the CED health statement, which identified a VAT as one potential source of financing for health care, but also the earlier CED tax-reform statement, which recommended a VAT to reduce the budget deficit and finance a reform of the federal individual and corporate income taxes.

Tax policy specialists will recommend that the House reconsider a three-percent rate for a VAT. The administrative cost of a VAT is invariant with the rate charged, and tax experts generally believe that a rate as low as three percent would not be cost-effective. CED recommended a ten-percent VAT for tax reform and deficit reduction. Putting part of the revenue yield of such a VAT toward health reform would be consistent with CED's tax-policy recommendations.

An additional option for financing health reform would be a limit on the amount of the income tax exclusion for employer-paid health-insurance premiums. Assuming that employer coverage is continued indefinitely or even for a limited transition period, capping the exclusion makes policy sense. With an unlimited exclusion, it is in the interest of both employers and employees to enrich health coverage rather than to pay simple taxable cash wages. In general, as coverage expands in this way, it makes individual consumers increasingly cost-unconscious. The result is further impetus to the rapid growth of health-care costs that the nation has seen over recent decades. The tax exclusion should be a part of the current health-care debate.

Conclusion. The recent surprising CBO cost estimates have slowed the current Congressional process at least to some degree. The soul searching that has resulted could be a net positive, if it leads the Congress and the President to consider policy options that would fundamentally restructure our current unsustainable health-care system. CED's proposal should be high on the list of new ideas to consider.

Commentaries are the views of the authors and do not necessarily represent policies of the Committee for Economic Development.