Raising Revenue for Healthcare Reform

When discussing the costs of various healthcare reform proposals, it’s crucial to keep one thing in mind: doing nothing would be a financial disaster. If we don’t change the rate at which healthcare costs are growing, total health spending is projected to double over the next 11 years, from an expected $2.6 trillion this year to $5.2 trillion in 2020. Medicare and Medicaid will eat up a growing share of the federal budget; employers will stop offering insurance as premiums become harder to afford; and families will struggle to pay for needed healthcare. These problems all exist today, and they’ll only get worse if we don’t “bend the curve” – that is, do something to slow the rate of healthcare-cost growth.

President Obama doesn’t just want to control healthcare costs, though. He wants to make insurance coverage universal, and that will cost even more money. Expanding coverage can save some money over the long term – for instance, people can get health problems treated early, instead of putting off care until they end up in the emergency room. Such savings won’t come close to covering the cost of coverage expansion, though, and they certainly won’t show up in the 10-year horizon that Congress is considering. Really, the main reason to expand coverage is that it’s simply not right for 46 million people in the world’s richest nation to lack healthcare coverage.

Due to Congressional pay-as-you-go rules, new proposals must be either offset with savings or funded through increased revenues. (Although the amount to be saved and raised will vary depending on the specifics of each healthcare proposal, $1 trillion is a good ballpark figure to keep in mind.) Here are some of the ways to raise more money for health reform:

Raise taxes – In his budget blueprint, Obama proposed bringing in more than $300 billion by reducing tax deduction opportunities for taxpayers in the highest tax brackets. Taxes on soft drinks, alcohol, and other substances that can contribute to health problems would raise revenue while discouraging unhealthy behaviors. A New York Times article suggests that a value-added tax, which is collected at each stage of the production and sale of consumer goods, might be considered, but Ezra Klein points out that such a tax is palatable in European countries that use it to fund healthcare only because the people who are paying it are getting something in exchange (namely, healthcare). Although all of us will benefit in some way from seeing the rate of uninsurance fall, those who already have insurance coverage might resent paying more taxes in order to extend it to the other 15% of the population.
 
Limit favorable tax treatment of health benefits – Right now, the government foregoes $125 billion in revenue each year by allowing employer-provided health benefits to go untaxed. (This helps employers, who don’t pay payroll taxes on the money they use to give health benefits to employees, as well as the employees receiving the benefits.) This is actually a regressive tax policy, because higher-income taxpayers gain the most from it. During the campaign, Obama criticized McCain for proposing to eliminate the tax exclusions and deductions for health benefits, but he now seems to be open to the idea. AFSCME (the American Federation of State, County, and Municipal Employees) opposes this idea, and has already run ads attacking Senator Ron Wyden of Oregon, who proposed replacing the current tax exclusion with a progressive tax deduction for all.

The tax could be limited to employees whose insurance premiums top a certain amount, or to taxpayers with incomes above a certain level. Since employers’ insurance premiums currently vary widely depending on location, firm size, and the age, sex, and health status of the firm’s employees, it would be hard to set a dollar limit on premiums. Employees of a big Midwestern firm with many young, healthy employees might get extensive coverage for $5,000 a year per individual, while a small Northeastern company with several older employees suffering from chronic health conditions could spend the same amount on premiums but get far fewer benefits for it. If healthcare reform prohibits insurers from varying premiums based on these kinds of characteristics, it will be much easier to cap the tax exclusion for health benefits in an equitable way. The more people who get to keep their tax exclusion, though, the less revenue it raises for healthcare reform.

Impose fines for noncompliance with mandates – Healthcare reform will likely include an individual mandate, requiring all U.S. residents who can afford it to have health insurance, and may also require employers to provide health insurance to their employees. Fining those who don’t meet the requirements will improve compliance and raise revenue at the same time. Fines will likely vary based on the size of an employer’s payroll, and businesses below a certain size may be exempt. 

All of these options will be politically difficult – and I haven’t even gotten into the proposed cuts to healthcare spending that would take money away from powerful interest groups. But Congress has to find the money somewhere if healthcare reform legislation is going to move forward.

Comments

  1. #1 laborlawguy
    June 17, 2009

    Right, tax high-priced insurance plans, and the companies and individuals will just move to below-taxable-threshold policies or switch to the “public plan” (which is the goal of all this nonsense anyway–to get everyone on a government-run program; “reform” has nothing to do with saving money and everything to do with buying votes for Democrats).

    I can’t believe how many people are deluding themselves about what’s going on. (I also can’t believe how many people out there equate “reform” with “free.”)

  2. #2 Liz
    June 18, 2009

    The point of reform is to achieve universal coverage, improve quality, and slow the growth of costs. Doing all of this is certainly going to require finding money somewhere – that’s the point of this post.

    The public plan is designed to be one among several options that people can choose from. If it turns out that it’s able to offer better value than private plans – for instance, because it saves money on administrative and marketing costs – it will probably attract more customers. If it can’t offer better value, it won’t. If people get better value for their healthcare dollars and as a result vote for the members of Congress who made the improvements possible, I don’t see that as a terrible outcome.