Health Care Update

Looks like lawmakers are gradually expanding the puny subsidies in the Baucus health care bill:

The chairman of the Senate Finance Committee, Max Baucus, said Monday that he would modify his health care bill to provide more generous assistance to moderate-income Americans, to help them buy insurance.

In addition, Mr. Baucus said he would make changes to reduce the impact of a proposed tax on high-end health insurance policies.

Mr. Baucus, Democrat of Montana, disclosed his plans in an interview a day before the committee is to begin meeting to debate and vote on the sweeping legislation, which is intended to remake the nation’s health care system and guarantee insurance for millions of Americans.

Mr. Baucus said the changes showed that he had heard the criticism of his bill from colleagues, who asserted that many people would be required to buy insurance who could not afford it — even with federal subsidies to help defray the cost of premiums.

“Affordability — that, I think, is the primary concern,” Mr. Baucus said. “We want to make sure that if Americans have to buy insurance, it’s affordable.”

Affordability to Baucus means reducing the limit of policies from 13% of total income to 12% of total income, through subsidies up to 400% of the poverty level. That's at least a start, though still short of what's in the House bills.

As it says above, responding to changes Baucus will reduce the impact of taxing insurance companies, basically by raising the threshold when plans start to hit the tax. But this is paradoxical. Raising the subsidy levels costs money. Raising the tax threshold takes away money. Lawmakers want the bill to protect more people on affordability while taking away some of the money that would pay for those protections. There is a late and familiar entry here, however, and that's Jay Rockefeller's idea to add back in a variation of what the Obama Administration sought all along:

In fairness to Rockefeller, he's got some ideas along those lines.

He's said many times he would be perfectly happy with the sort of financing they have in the House--i.e., a straight-up tax on the rich. And while such a scheme might have trouble in the Senate, Rockefeller is trying gamely to intorduce a more scaled-down version.

Among the amendments he's introduced for this week's Finance Committee hearings is a proposal to cap the deductability of charitable contributions at 35 percent--which would, in effect, reduce the deductability of contributions that very, very wealthy people make to charities. It seems to be a version of what President Obama proposed at the beginning of this process, an idea that still has a lot of merit even though many Senators rejected it out of hand.

Would they reject it again? Maybe not in scaled-back form, which might be enough. In the end, the most likely solution to the funding problem is some sort of combination strategy--a tax that hits expensive health benefits, a tax that hits the wealthy, and, maybe, some sort of tax sugary drinks or tobacco. The new Rockefeller proposal, according to Capitol Hill sources familiar with it, will probably raise about $90 to $100 billion--which is a decent chunk of change and could pay for a lot of new subsidies.

The President wanted to roll the charitable deduction credit back to 28% - exactly where it was during the Reagan Administration, at a savings to the government that could easily top $300 billion over ten years, enough to make the subsidies big enough to make health care truly affordable for everyone. And it would only hit those who make enough money to take advantage of the charitable deduction to begin with. It's really a no-brainer.

Of course, there are more areas of conflict in the bill beyond affordability and financing. There are various amendments in the Senate Finance Committee to add a public option, as well as Olympia Snowe's amendment to add a trigger, and a weak trigger to boot. Obama went on the record saying “I absolutely do not believe that (the public option is) dead," although his close colleague Dick Durbin said today that only a "variation" of it could make it through the Senate. Nancy Pelosi continued her public statements that the public option must be included to pass the House, though House liberals, wary of a bait and switch, asked the Speaker to stand with them when the bill reaches a conference committee. Jerry Nadler reiterated the seriousness of the threat from the progressive side:

Rep. Jerrold Nadler (D-N.Y.) said Monday he is optimistic that any healthcare bill from the House will include a public (or "government-run") option, and are undertaking a whip count to test lawmakers' commitment to that measure.

"The public option is still very much alive only because the progressives have stood together and held our ground and said that, regardless of what the President or Leadership says, we won't vote for any bill [without] a public option," Nadler said in a chat online hosted by the liberal AMERICAblog.

Nadler told the blog that 60 lawmakers had pledged to vote against any healthcare bill lacking the public plan, and that liberal Democrats are "undertaking a whip count now to see how firm these pledges are."

While affordability and financing may come to some compromise position that is at least passable, the statements above show that there's no such middle ground for the public option. This may vex the White House, but they will eventually have to show their cards.

Soaking The Rich Or Adding Brackets?

I still think that reducing the charitable donation deduction makes more sense than adding a surtax for the rich in paying for health care reform. Both hit similar groups of people but the talking points are much easier with capping the charitable deduction - you mean people don't give out of the goodness of their hearts, but to get a tax break? It's just an easier sell.

But as the House appears to be moving toward a surtax, let's be clear about it:

The proposal calls for a surtax on individuals earning at least $280,000 in adjusted gross income and couples earning more than $350,000, said the chairman, Representative Charles B. Rangel of New York.

It would generate about $550 billion over 10 years to pay about half the cost of the legislation, Mr. Rangel said. As the proposal envisions it, the rest of the cost would be covered by lower spending on Medicare, the government health plan for the elderly, and other health care savings [...]

But emerging from daylong committee negotiations Friday, Mr. Rangel said the income surtax would take effect in 2011 and begin at 1 percent of adjusted gross income — earnings before deductions like those for mortgage interest and charitable contributions — and would apply to individuals earning more than $280,000 and couples earning more than $350,000.

The surtax would be increased for individuals earning more than $400,000 and couples earning more than $500,000, and step up again for individuals earning over $800,000 and couples earning above $1 million. The precise extent of these increases has not been announced.

This looks like adding tax brackets, in effect. And we need to add tax brackets, especially at the higher end - I would like to see tax brackets at $3 million and $5 million as well. If you really want to stop the bonus culture on Wall Street, you tax income at the highest levels with brackets that discourage those lump sum payments over a certain level. A surtax like this will seem like a micropayment to people at this level, experiencing the lowest marginal tax rate in the history of America currently.

Like I said, I prefer the charitable deduction cap, but if this leads to emphasizing the importance of higher marginal tax brackets, I can live with it. And yes, this is true:

With this small tax bump for the relatively wealthy being proposed, look forward to the following bad press coverage:

Confusion between total and marginal tax rates.

Confusion between small business revenue and small business profits.

Stories about how in some places $350,000 isn't all that wealth.

...by the way, I'll sign up for Club Wagner, too.

With this post, we announce the formation of Club Wagner. It’s a (fictional) organization of people willing to acknowledge a basic economic reality: Taxes in the United States must rise.

At their current levels, taxes are too low to cover the kind of government that Americans have made clear they want — a government that includes Medicare, Social Security, a strong military and numerous other programs.

Our club is named after Adolf Wagner, a 19th-century German economist who predicted that taxes would rise as societies became wealthier. “As people grew more affluent,” as the writer Matt Miller has explained Wagner’s Law, “they’d want more of what only government could provide — a strong military, public order, good schools and assorted welfare benefits, services that private citizens would have trouble arranging for on their own.”

A Thousand Or So Words Of Despair On Health Care Reform

I may have dismissed the difficulties in paying for health care and the time frame a little prematurely. To be sure, it's a problem. Not the nature of the revenue ideas themselves - a surtax on the wealthy may work, although I'd prefer to go back to President Obama's idea to lower the charitable deduction, and Matt Yglesias explains why:

When possible, it’s better to raise money by broadening the tax base—curbing loopholes, deductions, and exemptions—than by simply raising the rates. The reason is that higher rates on a narrow base do a lot to encourage people to shift income into loopholes, which both undermines your revenue-raising efforts and also distorts the economy. Both the employer tax exclusion proposals and the itemized deductions proposal fit that good model.

The problem is that we're pretty far down the road on the various bills and we're still trying to figure out how to pay for it, which suggests to me that Congress doesn't want to make any hard choices on it. They have a bunch of ideas, but no real strategy. And they've taken the employer deduction off the table because unions don't want to give back what they already have, which makes sense for them but not necessarily the country.

One related point I'd make on this is that there is, in progressive circles, a tendency to confuse the interests of labor unions and the interests of progressivism. The two things often overlap. But they are not, in fact, the same. And that's okay. But this is very much one of those cases. The employer tax exclusion is regressive. It gives employers more power over workers. It reduces choices, fractures the system and increases health-care costs (which in turn decreases wages). Unions are protecting what they have, and that's their right. But protecting the employer-based health-care system, particularly at the expense of a regulated and integrated alternative, is not a terrifically progressive thing to do.

And without changing the incentives in health care and reversing the dynamic of doctors ordering more, insurance companies trying to pay for less and employers still paying the bulk of the costs in an inefficient way, we're not reforming health care. We're just expanding coverage and heading toward the same fiscal iceberg. Which is important in its own way, but not a full solution.

And meanwhile, as the timing of the bill slips, conservatives get emboldened and start running ads in the districts of key Senators. Blue Dogs and Conservadems get cold feet and start looking for ways to deep-six the bill. The problem in that case is that the answer to the Blue Dogs' entreaties would be more reform, which they don't want either.

The emerging bill "lacks a number of elements essential to preserving what works and fixing what is broken," 40 members of the Blue Dog Coalition of moderate to conservative Democrats wrote in a letter to party leaders. To win their support, they said, any legislation would need to be much more aggressive in reining in the growth of health care.

A public option and capping the employer deduction would go a long way for that, but they're against that, too.

Meanwhile, the White House is making all these deals with stakeholders that may have strings attached that would preserve their revenue streams and fail to rein in health care costs. Take a look at this, for example:

The Wall Street Journal reports: "Industry representatives met at the White House Tuesday with officials to consider specifics of a cost-saving agreement the industry reached last month with health-care negotiators and to discuss other concerns that the pharmaceutical industry has with the larger health-care overhaul being considered by Congress. As a presidential candidate, President Barack Obama endorsed re-importation, an idea the industry opposes. White House officials have told the industry if the larger health care bill passes, the cost savings will be so great that reimportation will be unnecessary, according to Billy Tauzin, president of the Pharmaceutical Research and Manufacturers of America." Some of the pharmaceutical companies represented at the Tuesday meeting included Merck & Co., Pfizer Inc., Amgen Inc., Abbott Laboratories and AstraZeneca.

The Wall Street Journal notes: "Sen. Bernie Sanders, an independent from Vermont, said he disagrees with any move to drop the reimportation idea. He has pushed to import drugs from Canada, where they are cheaper because of price controls" (Mundy, 7/7).

Are we going to side-deal ourselves to death here? Will we assure medical equipment makers that we will not ensure comparative effectiveness research that would align costs with results instead of the mish-mash we have today? Will we deal with hospitals but leave the full picture of how they rein in costs unanswered? Who will decide the limits to the system, and the tough choices around end-of-life care, now managed by insurers?

The major problem we are running into with health care is that the political class is so obsessed with allowing everyone to keep what they have, and not putting enough emphasis on the system's unsustainable course, that they risk wringing all the benefit for real people out of the bill, and at that point, it can tip over and die.

This isn't terribly surprising: it's not obvious what health-care reform will do for the average American. I could give you a long answer about delivery system reforms and so forth because it's my job to know these things. But it would have to be a long answer. The basic structure of health-care reform has been specifically built to avoid changing people's existing arrangements. The hope was that Americans would be convinced that their health-care coverage wouldn't change for the worse. But that's also made it hard to explain why it will get better.

One of the president's health-care reform principles is that everyone must be able to keep what he or she currently has. But that means we're not really going to change, or improve, what they have. And that means they're not getting much in the way that's new. Higher taxes aren't buying them obvious benefits. Instead, they seem to be paying the health-care bills of poorer Americans.

If support for the overall effort were more robust, the polling on the tax exclusion would matter less. People are willing to pay for things they want to buy. But though they might abstractly favor health-care reform, it doesn't seem directly related to their lives.

This is the problem of liberalism since the Great Society - people don't feel like they're getting anything for their payments to government, because Democrats have stopped pushing for anything tangible for everyone. A reform constructed to expand coverage for the poor without something tangible for everyone - like a public option to bring down premium costs and not wed people to their job for the health benefits - just will not pass. It has no shot. Because the public needs convincing that they have something at stake in this reform.

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.

Blood Sausage

It's probably easier just to not parse every statement coming out of the Congress on health care. This is the sausage-making period, and it's rarely pretty. But everyone is reporting that, a day after Harry Reid asked his caucus to support the majority's goals by not supporting a filibuster and told Max Baucus to drop bipartisan efforts on the health care bill that would lose Democratic votes, he reached out to a limited group of Republicans and asked them for help on the bill. And Max Baucus and Charles Grassley, according to the LA Times, continue to move forward on their centrist bill in the Senate Finance Committee.

Well, sure. This is the talking phase, and I wouldn't expect a stonewall of silence at this point. Chasing exactly what will remain in the bill or not is like chasing a rainbow.

However, a couple elements to the chatter seem significant. Politico adds up the numbers:

But taxing health benefits to pay for an overhaul? That's still dead, Democratic leaders made clear again Wednesday.

And another thing that's increasingly in doubt: any hopes of getting a health reform bill voted out of the Senate by August, a byproduct of the leadership's decision to lay down the law on finding a new way to pay for it.

Reid's move blows a gigantic hole in efforts to find $1 trillion to pay for health reform - and set off a scramble Wednesday to come up with a replacement for the suddenly missing $320 billion over 10 years.

And if Democrats thought taxing health benefits was unpopular, the second-least-popular idea might be a tough sell, too - a straight-up income tax hike on people making more than $250,000 a year. That idea gained new currency in the Senate and the House Wednesday in part because it would not divide the Democratic base as much as taxing health benefits, which could hit the middle class, and unions strongly oppose it.

Sin taxes on sugary sodas and drinks were back on the table - despite being dismissed weeks ago as too small to be worth the fight it would take to pass them. A few Democrats were talking again about resurrecting President Barack Obama's plan to lower income tax deductions for wealthy Americans, an idea that died barely weeks after Obama first floated it earlier this year.

It does look like changing the employer deduction is right out (which is kind of a shame - I support capping that deduction). But if we're only talking about $320 billion to go, then they should just adopt the Obama Administration's plan to return the rate of deductions for charitable donations to where it was in the Reagan Administration. It's the most defensible (I envision rhetoric like "you mean you give charity for the tax break, not out of the goodness of your heart?") and has already been vetted by the White House.

Now, to get a bill that spends more than $1 trillion a year, you might need something else. But add in the charitable deduction piece and you're up to $1 trillion, which is definitely a better place than I thought.

There's also the wrangling over whether Democrats will join Republican filibusters. Dick Durbin implored the caucus on this:

If they will stick with us on the procedural votes, we at least know that we can move forward.... They may vote against final passage on a bill, they may vote with Republicans on an amendment. That's entirely their right to do. But this idea of allowing the filibuster to stop the whole Senate.... We ought to control our own agenda.

Just making this public is probably part of the strategy. Sadly, plenty of Democrats have swallowed the notion that procedural votes equal the votes themselves:

"Most Senators vote their conscience and they do what they think is right. They didn't come here to be told what to do by somebody else," moderate Sen. Evan Bayh (Ind.) said [...]

"You know how this place operates. Very often, it's the procedural votes that determine the substantive outcome. Sometimes not, but it's not uncommon that that is the case. So those votes on procedural issues will be cast as if they are the ultimate substantive vote," he said.

That's really only true if someone like Evan Bayh believes it. He can separate procedure and the final vote to his constituents if he wanted to. So we can only conclude that he'd rather not.

Good to know.

Why Can't We Have A Better Media?

I'm a bit late to this party, but this brain-dead ABC News report, wherein they show no ability to understand the concept of marginal tax rates, is truly unbelievable.

According to ABC, one attorney "plans to cut back on her business to get her annual income under the quarter million mark should the Obama tax plan be passed by Congress and become law." According to the attorney: "We are going to try to figure out how to make our income $249,999.00." ABC also quotes a dentist who is trying to figure out how to reduce her income.

This is stunningly wrong.

The ABC article is based on the premise that an individual's entire income is taxed at the same rate. If that were the case, it would be possible for a family earning $249,999 to have a higher after-tax income than a family earning $255,000, because the family earning $249,999 would pay a lower tax rate.

But that isn't actually how income tax works.

In reality, a family earning $255,000 will pay the higher tax rate only on its last $5,001 in income; the first $249,999 will continue to be taxed at the old rate. So intentionally lowering your income from $255,000 to $249,999 is counter-productive; it will result in a lower after-tax income.

The people ABC quoted don't seem to understand that. Worse, ABC doesn't seem to understand it, either.

ABC has now corrected the article, after it ran for a full day, saying this:

Editor's Note: Yesterday ABC News published a version of this story which some readers felt did not provide a comprehensive enough analysis of Obama's tax code for those families making $250k or more. ABCNews.com has heard those concerns and after review has decided to post an updated version of the story below.

It didn't provide ANY analysis the first time. In fact, it did nothing but mislead.

But this is the media landscape we live in. Any objections from the rich are covered with serious deference toward their views. And any objections from the poor aren't covered. This tips the balance of what is expressed, particularly on taxes, to the point that even Democrats start to worry about the effect of limiting deductions for the rich on charitable donations, even though the facts are that the proposal would at most reduce charitable contributions by 1% (to help pay for universal health coverage, which would lessen the, you know, NEED FOR CHARITABLE GIVING), and in the short-term it would increase charitable giving because tax policy really only makes a difference in the very near-term, motivating people to give to charity now while their deductions aren't capped, which would provide AN ADDITIONAL ECONOMIC STIMULUS. I don't expect the subset of John Galt wannabes to understand Economics 101, and I know it's too much to ask for the traditional media to understand it, but it shouldn't be.

...Let's also note that Obama's proposal is to let expire the Bush tax cuts, which would raise the top marginal rate to 39.6% from 35%, which is historically very low. But of course, it will ring in a Marxist-Leninist Valhalla.

Just Raise Charity For Charities

There's a simple solution to all of this. When politicians want to use their influence to raise money for charity, the money shuld go directly to the charity. They get the credit, the charity gets their money, everyone's happy. But that's not what's happening, and too many questions are being raised about just what the politicians are doing with the money.

The chairman of California's political watchdog agency says the growing practice of politicians soliciting millions for pet causes apparently is being abused for self-serving gain and needs to be reined in.

"If I could, with the stroke of a pen, I'd do away with it," said Ross Johnson, chairman of the Fair Political Practices Commission.

"It's a huge end run around the contribution limits that the people of California voted for" in Proposition 34 seven years ago, he said.

Payments "at the behest of" should clearly be abolished. There's absolutely no reason for them. If you want to look like a good politician by raising money for charity, let the charity have it directly. Otherwise, you get stuff like this.

More than $5 million has been donated at politicians' request both this year and last – far more than any year since disclosure began nearly a decade ago.

The money is meant for public benefit and cannot be used for campaigning, but some has been spent in ways that enhance a politician's image, such as for billboards or television ads.

Days before a fiercely contested Democratic primary last year, for example, John Garamendi solicited $300,000 in public-benefit funds for a TV advertisement in which he touted his performance as insurance commissioner without specifically asking voters to support him in his bid for lieutenant governor, a post he ultimately won.

Just cut it out. It's nonsense.