Crafting Health Reform

On October 11 the trade group America's Health Insurance Plans took a page from North Korea--in hopes of strengthening its bargaining position, it showed the world it had nuclear weapons. AHIP's weapon of mass destruction was a report that threatened dramatic premium increases if reform legislation passes, a charge that could blow up healthcare reform. The report was based on a bogus analysis that selectively ignored the provisions that would make coverage more affordable, and it was quickly discredited. It also won the insurers a scathing response from President Obama, who called them "deceptive and dishonest" in his weekly radio address.

After the Senate Finance Committee approved a reform package, healthcare reform finally looks less like a fantasy than a political probability. Whatever is in the legislation has a good chance of becoming law, and AHIP may not be the only group willing to fight to the death in order to shape the details to its liking.

Broadly speaking, there are three big things progressives should worry about. The most important is affordability. Sadly, Obama made himself a major impediment to providing needed subsidies to moderate-income Americans when he arbitrarily capped the cost of reform at $900 billion. That is simply not enough money to make healthcare affordable to everyone. In an ideal world, Congress would buck the president on this number; lawmakers should fight any effort to further trim the price tag.

The second question is how the bills will be financed, and there is a big gulf between the House and Senate. The largest source of new revenue in the Senate proposal is a tax on high-cost health insurance plans. This is more than just a funding mechanism--many economists believe that it will slow the growth of healthcare spending because it will reduce the incentive for employers to offer increasingly generous benefits packages. The House rejected such a tax on benefits, instead opting for a tax on families earning more than $350,000 a year.

Unions have long opposed any new tax on benefits and have launched an ad campaign decrying it as "a new tax on the middle class," most likely to hit "people who are older or sicker." There are problems with the Senate's proposal, but the unions' blanket opposition unjustifiably protects a regressive tax provision. Under current law, workers who receive employer benefits get them tax-free, but those who have to buy insurance on their own get no such tax break. This disproportionately benefits wealthier workers--almost half the benefits of this tax break go to the 24 percent who earn more than $75,000, while only 6 percent goes to those earning less than $20,000.

MIT economist Jonathan Gruber has a proposal that would address the unions' concerns by restricting the tax on above-average benefits to high-income workers. The best outcome might be to redesign the Senate's tax along Gruber's lines to make the tax code more progressive. This tax would collect less money than the Senate's more heavy-handed approach, and the House's new income tax could make up lost dollars.

Finally, of course, there is the public option, which has a dubious future in the Senate. The Finance Committee sacrificed a public option to win support from moderate Democrats and Maine's GOP Senator Olympia Snowe, whose votes may still be important to block a filibuster. Snowe has long argued for a compromise that triggers the creation of a public plan if the market leaves too many Americans without affordable healthcare. Other senators have floated proposals that allow states to decide for themselves whether to offer an alternative to private insurance.

Although giving states the option to create their own public plans is better than nothing, a trigger compromise might be a better option if it is enforceable and will create a national plan, ideally one tied to Medicare. State public plans may do some good in their local markets, but they won't have a national plan's muscle to slow the overall growth of medical spending.

Of course, the insurance industry's bogus report gives a powerful argument to the public option's champions: if the insurers are already predicting that premiums will rise under healthcare reform, they are admitting that they will not be able to achieve the savings necessary to slow overall cost growth. And the House may call their bluff--Speaker Nancy Pelosi has reaffirmed her support for a strong public option that would reduce costs by paying rates tied to the Medicare program. If the insurers are already pulling out their big guns, there is no reason Congress shouldn't fire back.

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