A Health Bargain That Will Address The Debt

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July 18, 2011 | Health Care Law Implementation, In The Courts, Medicaid

The author writes that both sides can declare victory if they agree on health care finance.

By STEPHEN T. PARENTE | 7/17/11 9:30 PM EDT

A frustrated President Barack Obama last week reportedly declared “enough is enough” during one debt limit discussion with Republicans. Frustration aside, the problem is that both parties have been using the wrong tools to try to fix the right problem.

Arguing about the scale of Medicare cuts or size of tax increases on unrelated industries pushes both parties into their respective ideological trenches. They should focus instead on a “grand bargain” for health care finance, which could allow both sides to declare victory well before the debt bomb explodes.

The goal of this grand health bargain is to generate trillions in savings through laser-focused policy changes designed to help the government balance its budget in the short term — by increasing revenues and decreasing expenditures. In addition, these policies could help “bend the curve” of health care spending in the long term, by encouraging consumers to be more cost-sensitive.

Such a bargain would rely mostly on clearing the national balance sheet of poor public policy choices made in the 1940s and 1960s, based on demographic assumptions that have turned out to be ruinously incorrrect.

In fact, just three relatively simple changes could give the president and Republicans the $4 trillion of budget savings they need over the next 10 years, and far more beyond.

First, eliminate the tax exemption for employer-provided health insurance. This reduces revenues by more than $250 billion a year — 2.5 times more than the home mortgage deduction. It also creates a tax distortion by penalizing entrepreneurs in small businesses, who don’t have access to the same tax break.

The health insurance deduction was created in 1943 to offset a wage freeze during World War II. Newsflash: The war is over — move on.

It should be replaced with a much smaller individual tax credit. The Affordable Care Act already breached this “sacrosanct” policy with a 40 percent “Cadillac tax” on high-end insurance plans — so the president has precedent for change and a statute Congress can amend to bring the savings forward.

Second, make Medicare a defined contribution plan for everyone age 54 and younger today, and make the contribution equivalent to the Medicare expenditure baseline in 2022 (when it goes into effect). After that, the contribution should be pegged to general inflation plus half of the U.S. productivity rate in the three previous years.

Why three previous years? This encourages Congress to focus on productivity reforms to help expand the economy, since a wealthy nation that is growing rapidly can continue providing high-quality care for its seniors. Leaving Medicare as an open-ended, defined-benefit plan, with overflows financed through debt or significantly higher taxes, remains the most economically irresponsible option for policymakers.

Finally, readjust four elements of Obama’s health reform law that fiscal conservatives who vote in 2012 care about. These are: First, cap the subsidy for health insurance at 300 percent of the federal poverty line rather than the current law’s 400 percent — nearly $90,000 for a family of four. Second, let states take their Medicaid transfers from the Treasury and make their own solutions within a fixed budget constraint. Third, eliminate the tax on medical device manufacturers — after aerospace, it’s the strongest U.S. technology export. Fourth, let unused balances in Health Savings Accounts be counted toward the minimum actuarial value of high deductible health insurance plans, so the fastest growing insurance product of the past decade can survive and thrive to insure even more.

To my tea party friends, this falls far short of repeal and replace. But the congressional tea party class of 2010 must realize that a government default will be a far greater blow to everything they stand for as fiscal conservatives — since government grows most during times of crisis. In any case, the tea party’s fiscal stewardship should begin with protecting the economy for their children and grandchildren.

This health bargain is likely to yield a savings of $4 trillion over 10 years, extrapolating from existing Congressional Budget Office estimates, and more than twice that amount over 20 years. Because these policies are based on existing CBO estimates, legislation can be gift-wrapped and delivered to the president’s desk by the Aug. 2 deadline.

This deal could give the “no debt limit deal” tea party House members some fiscal conservative meat to match their rhetoric. It could give the president a fiscal achievement to tout to independents and moderates.

It can also focus the 2012 presidential election on the ideas and policies that the U.S. can use to re-establish the economic growth that made the nation so extraordinarily successful in the previous 100 years.

Stephen T. Parente is a finance professor and director of the Medical Industry Leadership Institute in Carlson School of Management, at the University of Minnesota. He served as a senior health adviser to Sen. John McCain (R-Ariz.) in 2008 and a legislative fellow for Sen. Jay Rockefeller (D-W.Va.).

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