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Health Care Reform and the Unpopular T-Word

David Leonhardt|The New York Times
Wednesday, 29 Jul 2009 | 10:25 AM ET
Healthcare coverage and the hastle of forms
Healthcare coverage and the hastle of forms

The many-headed Hydra, with breath poisonous enough to kill, is one of the more gruesome beasts in Greek mythology. In Hercules’s great clash with it, he would cut off one of its heads, only to have two more appear. No matter what he did, he couldn’t keep up.

You can think of Congress’s efforts to pay for health reform as being a little bit like a battle to slay a many-headed Hydra.

Members of Congress have come up with one idea after another to pay for covering the uninsured. But they still haven’t put together legislation that could pass. And that’s in large part because most of those ideas have a basic flaw.

They do not raise revenue as quickly as health costs rise. The plan to impose a surtax on top earners, for instance, pays a decent chunk of the bill over the next few years. But the revenue from the tax rises only as fast (roughly) as the United States economy grows. The same is true of most taxes.

Health costs, on the other hand, are growing much more quickly than the economy. Over the last decade, the economy has expanded by about 20 percent, and health spending has ballooned 50 percent. The gap isn’t about to start closing, either.

So no matter what Congress has done to pay for its plans, it can’t keep up.

The numbers show there is only one sure way out of the problem, and, after months of roundabout discussion, that solution has re-emerged: It’s a tax on health care.

If Congress taxes health care, the revenue has a chance of rising with health spending. A health tax will also create an incentive for workers and businesses to slow the growth of health spending — thus reducing the amount of taxes needed to pay the nation’s health bill.

The health care debate is now in one of those calm-before-the-storm moments. After a flurry of activity last week, everybody is waiting for the Senate Finance Committee to release its bill.

That bill will immediately become the reference point for all the other big players. Republican leaders will take shots at it, hoping to keep moderate Senate Republicans from supporting it. Conservative Blue Dog Democrats will argue that the bill makes their case for a less expensive plan than the current House version, with less generous subsidies for the uninsured. Liberals will take their own shots at the bill. Most intriguing, President Obama will have to decide whether to make the bill his own.

The rest of us will want to focus on two questions. How serious is Washington about slowing the soaring the growth in health costs? And will Washington figure out a way to cover most of the uninsured?

As it happens, there is one policy that can help with both issues. It’s the same policy that will allow Congress to solve its herculean budget problem: Taxing health care.

In recent days, the Finance Committee has been considering precisely such a tax, on the health benefits that Americans receive from their employers.

The fact that these benefits are not taxed, as the Massachusetts Institute of Technology economist Jonathan Gruber notes, stems from “nothing more than an arbitrary administrative decision made 60 years ago.” Unfortunately, that decision created all kinds of economic damage. Because health care — unlike food, clothing and most other things — isn’t taxed, it’s effectively on sale. And when something is on sale, people often buy more of it than they need.

In the case of health care, they buy — or their employer buys for them — insurance plans that don’t make much of an effort to control costs. Rather than putting pressure on hospitals to root out administrative waste, the plans cover the cost of that waste. They also cover the costs of brand-name drugs that are no more effective than generic alternatives and other kinds of expensive care that do little to improve health.

As a result, the tax exclusion ultimately raises your tax bill, via wasteful Medicare spending. Indeed, if there is a single health care idea on which liberal and conservatives agree — including Douglas Elmendorf, director of the influential Congressional Budget Office — it’s scrapping the exclusion.

Yet many politicians are loath to come out against the exclusion, for the obvious reason that it makes them sound pro-tax. The Blue Dogs may be the best example. They have rightly pushed House leaders to be tougher about holding down cost growth. But most Blue Dogs have not been willing to get specific, on the tax exclusion or most everything else.

To deal with this political reality, the Senate Finance Committee has become intrigued by a version of a health care tax, being pushed by the Massachusetts Democrat John Kerry, that comes dressed up with a whole lot of lipstick. The tax doesn’t fall directly on workers. It doesn’t even fall on employers. It falls on everyone’s favorite villain: health insurance companies.

Insurers that offered policies that cost more than a certain amount — perhaps $25,000 a year — would face a tax. The resulting tax revenue would help pay for covering the uninsured. Presumably, insurers would pass the cost of the tax onto companies, which would then become less willing to offer expensive plans. They would instead shift some of the money they are now spending on health insurance into cash compensation, which would, of course, be taxed, raising more revenue.

But packaging the plan as a tax on insurers still may not be enough to make it palatable. So Congress would also probably have it apply only to the most expensive sliver of plans. David Axelrod, the Obama adviser, recently mentioned the $40,000 plans at Goldman Sachs (a firm that is now apparently about as popular as health insurers).

With this narrow approach, the tax would raise only a small share of the revenue needed to cover the uninsured, and Congress would still need to rely on a hodgepodge of other tax increases and spending cuts. But starting to lift the exclusion would still help — especially if Congress set the threshold for the tax to rise more slowly than health costs have been rising. That way, more and more of the most expensive, least efficient plans would eventually be bumping up against the tax.

For all the budgetary elegance of the tax, though, its real importance is much larger. It would begin to chip away at the perverse incentives in our medical system.

That’s what matters. The idea isn’t to punish Goldman traders or, for that matter, unionized workers who have their own generous plans. The idea is to give companies and workers more incentive to choose medical plans that try to reduce unnecessary costs. Without that incentive, is there any wonder our health care system is so troubled?

This brings us back — and you knew this was coming, didn’t you? — to the many-headed Hydra. Eventually, Hercules realized his strategy wasn’t working. So he brought in his nephew, Iolaus, who torched the open wounds that Hercules inflicted on the Hydra, preventing any new heads from growing. And that worked. Hercules and Iolaus slew the beast.

How did they do it? By getting at the root of the problem.

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