Obama Reiterates Support for Public Insurance Plan, Pushes Affordability

President Barack Obama lined up squarely behind the creation of a government-run health plan today. At the same time the White House has fully engaged on the financing of his health care reform plan.

Whether a public health plan should be created to compete with private sector carriers is among the most controversial issues in the current health care reform debate — and will be one of the most difficult on which to find common ground.  While many Democrats, especially those on the left, are insisting a public plan be a part of whatever reform package emerges from Congress, Republicans are equally firm — and united — in opposing them.

During his campaign for president, then-Senator Obama included a government-run health plan in the health care reform plank of his platform. Lately, however, there were indications there might be flexibility in his position. In a letter sent today to Senators Max Baucus and Edward Kennedy, President Obama removed any doubts as to where he stands. “I strongly believe that Americans should have the choice of a public health insurance option operating alongside private plans. This will give them a better range of choices, make the health care market more competitive, and keep insurance companies honest.”

Senator Kennedy, Chair of the Senate Health, Education, Labor and Pensions Committee, is a strong advocate of a public plan. Senator Baucus, the Chair of the Senate Finance Committee, has been less supportive. It is these two committees which will draft the Senate version of reform. The House bill is all but certain to call for creating a public plan.

The mere fact that President Obama supports a government-run health plan does not mean it will be in the final bill. Republicans appear to be unanimously opposed to the idea and so are some moderate Democrats. Together they could block passage of legislation unless the public plan is removed. Or there could be a compromise. One possibility being discussed would prevent the entry of a government-run plan into the market unless “triggered” by certain (yet to be determined) events.

The President’s letter to the committee Chairmen also conveyed the Administration’s support for a health insurance exchange to help consumers obtain coverage. “I agree that we should create a health insurance exchange — a market where Americans can one-stop shop for a health care plan, compare benefits and prices, and choose the plan that’s best for them, in the same way that Members of Congress and their families can.” Interestingly, this describes an exchange as an information clearinghouse. This falls short of Senator Kennedy’s call for a gateway that would, among other things, “”… negotiate with insurance companies to keep premiums and copays low….”  The Senator is describing something akin to a purchasing pool.

President Obama’s letter addressed market reform, but concentrated on cost cutting measure. “I want to stress that reform cannot mean focusing on expanded coverage alone. Indeed, without a serious, sustained effort to reduce the growth rate of health care costs, affordable health care coverage will remain out of reach. So we must attack the root causes of the inflation in health care. That means promoting the best practices, not simply the most expensive.”

This is part of an Administration-wide effort to focus on making coverage more affordable. For example, Peter Orszag, the Director of the White House Office of Management and Budget, has written two blog posts on the fiscal effects of health care reform (here and here).  In his most recent post he writes of “game changers” that, while not reducing costs immediately, are critical for long term savings. Among the changes he calls for are “patient-centered quality research and re-orienting financial incentives through bundling and payment for quality rather than quantity of services delivered.” Both the President’s letter and the Director’s postingemphasize the Administration’s desire to make health care reform “deficit neutral even over the next five to 10 years, through scoreable offsets such as savings within Medicare and Medicaid and (as necessary) additional revenue.” (“Scoreable” offsets are those recognized in the federal budget. The Congressional Budget Office recently provided guidelines on how they would go about determining the impact various health care changes will have on the budget.)

I expect we’ll be hearing a lot from the White House on health care reform with greater frequency in the next few weeks. While the Obama Administration has been content to lay out broad principles and let Congress hammer out the details, it cannot afford to be completely hands-off. The President has consistently expressed his hope for bi-partisan legislation, but he has been even more vocal that health care reform needs to happen this Fall. The President will need to spend a great deal of political capital to get a bill on such an expensive and complex issue to his desk for signature. He is clearly willing to make that expenditure.

It would have been foolish for the President to back off or even water down his call for a public plan at this stage. My guess is that he will need to push liberals into accepting a reform package that doesn’t go as far as they would like. By siding with them now he’ll be in a better position to do just that when the time for compromise arrives. We’re not there yet, but we’re getting closer.

Is Taxing Health Care Coverage on the Way?

Ideas percolate through the political process in interesting ways: editorials in authoritative publications, important speeches, and more recently, blogs.

For example, the Director of the Congressional Budget Office maintains a blog and it includes an entire section concerning “Health.” The CBO will have a great deal of influence on the health care reform debate. They will provide the benchmark analysis of whatever plans emerge. What they’re thinking matters and, presumably, what their Director is thinking is what the agency is thinking.

For example, former CBO Director, Peter Orzag, now the Director of the Office of Management and Budget, have long warned of the need to reign in health care costs. According to Jonathan Cohn, writing in the New Republic, Mr. Orzag was one of those within the Obama Administration pushing hard for addressing health care reform now, as opposed to later. Clearly what the budget folks think matter. To gain an insight into Mr. Orzag’s thinking, the CBO Director’s Blog is a good start.

The same holds true for the thinking of the CBO’s new director, Douglas Elmendorf. Consider his recent post concerning reigning in medical care costs. In it he notes that “a substantial share of our national spending on health care contributes little if anything to overall health.”  He calls for providing incentives to control costs and sharing of information concerning the effectiveness of treatment. Then he makes an interesting comment: “… the current unlimited tax exclusion for employment-based health insurance dampens incentives for costs control. Those incentives could be changed by restructuring the tax exclusion in ways that would encourage workers to join health plans with higher cost-sharing requirements and tighter management of benefits.”

This opens up a host of interesting worm-filled cans. During the presidential campaign, Republican Senator John McCain called for taxing the value of health care coverage (along with offsetting tax credits). The Democratic nominee, now President Barack Obama castigated the idea, calling it the biggest tax increase on the middle class in history. However, many in Congress of both parties are reviving the idea. OMB Director Orzag has indicated that all ideas, even taxing the value of health care coverage, needs to be on the table. Few other comments on the topic have been forthcoming from the Administration, but realistically, paying for the cost of universal coverage will require at least a strong look at this revenue option.

On the surface, this makes a lot of sense. The current system is regressive, meaning it is a better deal for the wealthy than for lower income Americans. The higher your tax bracket and the richer your benefits, the better the current system works for you. For example, a CEO earning $500,000 a year, paying an effective tax rate of 40 percent (state and local) and receiving health insurance benefits worth $10,000 per year. If the coverage was taxed, our hypothetical CEO would pay $4,000 in taxes. Instead, she gets a “gift” from the tax code of this amount. Working for this CEO is a clerk, earning $40,000 per year and paying 15 percent in taxes with the same coverage. If the value of health insurance was taxed the employee would pay $1,500 in taxes — his gift is less than half of the CEO’s.

You might think Democrats would be jumping all over this loophole. After all, they’re the party of progressive taxes. Instead, those few who are willing to raise the issue are demonstrating real political courage. Because unions, who contributed millions of dollars and armies of foot soldiers into the election of a Democratic Congress and President, are adamantly opposed to taxing benefits.

For decades, unions have negotiated rich health care benefits for their members in lieu of salary increases. Their members valued the coverage, which was received tax free. It was a reasonable trade-off for employers — they can deduct the cost of health insurance just as easily as they deduct the cost of salaries. Changing the rules of the game would, in essence, punish union members for doing what economists say everyone should do: pursue economic self-interest based on the rules of the game.

There are ways to mitigate the pain unions will feel if health insurance is taxed. As Mr. Elmendorf notes, the tax rules can be modified rather than eliminated so as to encourage consumers to choose cost effective plans. Or the value of union negotiated health benefits could be exempted from the tax for a transitional period, allowing unions and employers to negotiate new contracts under the new rules.

Health care reform is going to be expensive — covering all Americans will cost over $1 trillion. We’re already spending large sums to salvage the tattered economy (and, apparently, to enrich the AIG traders who helped get us into this mess). Yes, the government can print the dollars it needs, but that leads to another problem which goes by the name of  inflation.

If health care reform is going to be enacted in the next 12-to-18 months, which I think it will, the money for reform will need to be identified. My guess is taxing health care coverage will be one of those sources. It won’t be a straight repeal of the current exemption, it may be offset with subsidies and credits, some coverage may be grandfathered for awhile, but the tax is coming. 

Meaningful health care reform will change a lot of the rules we’re used to. This is just one of them.