Why Nixing The Employer Deduction Is A Shame

Am I the only one who finds it weird for media types and Congress to be freaking out over the timing of the health care bill? If lawmakers don't get their August recess or have to work a weekend, I think the Republic can survive. The point is not to get it soon, but get it right.

That said, Jon Cohn does make a good point about the employer deduction.

According to several sources on and off Capitol Hill, Reid’s primary message was about the financing of reform. Baucus had hoped to get around $300 billion in funding over the next ten years by capping the tax exclusion on group health benefits. I’m not sure what the exact parameters of the cap were supposed to be, but it's safe to assume they would either have hit a small number of people, hit people with a small tax hike, or some combination of the two.

This apparently was unacceptable to several members of the Democratic caucus. Highly unacceptable. If reform included a cap on the exclusion, Reid warned, between ten and fifteen Democrats would oppose it. That's why Baucus and his colleagues on Finance are back to looking for money.

What sparked this Democrats' resistance? Unions like the American Federation of State, County, and Municipal Employees (AFSCME) have been up in arms about the idea, because some of their members would end up paying slightly higher taxes. But the polls showing widespread opposition to the idea may have been more influential.

I’ve discussed the merits of the capping the exclusion in this space before, many times. Like many health care experts, I think it achieves two important policy goals: It helps raise the large sums of money necessary to pay for expanding coverage and it fixes some of the poor incentives in our health care system. But the public skepticism is real, even if the polls phrase the questions in leading ways. And there are other, perfectly reasonable ways of financing reform.

It's a shame that the unions knee-capped this deal, though politicians deserve some of the blame for failing to sell it to the public in the way that Cohn describes. Capping the tax exclusion would reverse some of the incentives in the health care system. It would eliminate the kind of bargaining for better health care in such a way that drives up costs. What's more, like Willie Sutton said, it's where the money is, and one can envision a scenario where enough votes exist for the structure of reform and not the funding, and the whole thing breaks apart, a fatal blow to the progressive agenda.

I do know one thing, though. It’s going to cost at least $1 trillion over ten years to accomplish these goals, probably a bit more if we want to do it right. And if somebody doesn’t put together 50 votes in the Senate, let alone 60, for a combination of new revenue and spending cuts equal to that amount, the goals will not be realized.

To be clear, the situation is not dire. (See, no panic light today!) The legislative process is messy. As sure as there will be bad times, there will be good. Just a week ago, the Senate Health, Education, Labor, and Pensions (HELP) Committee put out a bill that showed how you could cover most people, providing mostly good insurance, for between $1 and $1.3 trillion, give or take. Previous CBO estimates suggested that might not be possible. So this was no small thing.

And while the structure of reform may look like a mess if it went through reconciliation, certainly the funding could travel through that gauntlet virtually intact. Funding mechanisms and offsets are, after all, the POINT of reconciliation. So 50 votes are required for that element of it, in my view.

We may end up with Obama's initial idea of capping charitable deductions, which I find perfectly reasonable. But Ezra Klein makes an important point. Losing the elements of the policy that would change the system of health care delivery and funding leaves you possibly with expanded coverage, but not with anything you can really call reform:

There are certain policies under consideration right now that could significantly change how the health-care system functions. A tax on employer benefits, for instance, that begins to reduce the primacy of employer-sponsored health coverage. A public plan that's accessible to all Americans. A Health Insurance Exchange that's open to everyone and can offer an alternative to both the employer and the individual markets. An individual mandate creates the expectation of universal coverage and a mechanism for achieving it.

But if those elements -- and maybe a few others I'm forgetting -- are stripped from the final legislation or significantly weakened, then the bill will not be a reform of our health-care system. It will be a coverage expansion. It might make certain improvements to the current system through insurance market regulations and delivery system changes. That might be, on balance, a hefty improvement against the status quo. But it will not be health-care reform. It will not change the fundamental dynamics of our current system. It might even strengthen them.

In other words, keeping the employer-based system in place, failing to increase competition for insurance, keeping a health amount of the uninsured - I don't see how all of these things can stay in place and, simultaneously, the cost of health care lowers over time, for individuals, businesses and government. And I don't see how quality improves, either.

It's almost not worth the effort if the dynamics of the system remain constant.