Since the release of the president’s budget in February, the national health reform policy process has entered its “underground” phase. While we wait for details to emerge from secret meetings on Capitol Hill, the president’s financing plan for health reform is in increasing difficulty.

We should take President Obama at his word that he is deadly serious about enacting health reform this year. However, finding funding sources in an increasingly bleak fiscal environment is proving challenging. During the campaign, health reform was supposed to be financed by ending the Bush tax cuts and an Iraq war “peace dividend,” as well as by an employer mandate.

As the economic crisis deepened, and it became clear that Iraq war funding would be reallocated to Afghanistan, a search for a more realistic financing strategy began. In the fiscal year 2010 federal budget, the president “reserved” some $634 billion in ten-year funding for reform, 50% of which would be financed by reducing the value of tax deductions for the ever-handy “wealthiest 5%” of Americans. The other half was to be financed mainly by cutting Medicare spending.

There was an immediate negative response from Democratic leadership to the tax part of this proposal, and congressional Democrats declined to include it in the budget resolutions passed last week. One suspects that the administration’s real intent was to open a dialog with Congress on tapping the logical alternative funding source: limiting the deductibility of health insurance premiums. Placing the burden on Congress to make this change solves a political problem for the president, who promised not to tax health benefits during the campaign.

However, if the economy continues to deteriorate, relying on tax increases of any kind to support health reform becomes less feasible as a financing strategy, making it far more likely that increased “savings” from the current Medicare funding base will be required instead. Total Medicare savings of a little more than $300 billion over ten years on $6.4 trillion spending base barely deflected spending from a trajectory that both Office of Management and Budget (OMB) Director Peter Orszag and his boss have argued is not sustainable.

Obama Medicare Savings: Only A “Noogie” For All But Plans And Home Health 

The “savings” portion of the president’s plan focused the majority of the pain on only two sectors. The much-reviled (by Democrats and the single-payer advocates) health plans who contract with Medicare Part C and home health care account for 74% of the spending cuts. Hospitals and physicians, who were bracing for far worse, were barely grazed. For these tempting targets, the budget was not even a “flesh wound,” as Orszag put it, but more like a rope burn or a noogie.

One suspects that, here too, the Obama administration may have been leaving the dirty work to Congress. If Congress felt uncomfortable raising half of the “rainy day” fund from taxes, it could always make a deeper incursion into the Medicare funding base by attacking hospital and specialty physician payments.

The world is not standing still, however, and the deteriorating economy is narrowing the president’s fiscal policy options almost weekly. The FY 10 budget assumed 8.1% average unemployment rate for calendar year 09 and 7.9% for CY10, and gross domestic product (GDP) growth of -1.3 % this year and 3.2% next. In March, unemployment topped 8.5%, rising briskly. We can also expect a 4-6% decline in first-quarter GDP, placing a heroic burden on second-half growth to get us anywhere near a -1.3% yearly decline.

A Worsening Economy Threatens To Produce An Unpalatable Scenario

If we continue losing between 600,000 and 700,000 jobs a month for another quarter, the contours both of spending and revenues contained in the president’s budget will be economically indefensible and politically untenable, because we will end up with a deficit of 13-14% of GDP.

At some uncomfortable point this summer or fall, foreign investors may slow their purchases of Treasury debt, dollars, and dollar-denominated U.S. stocks. Then interest rates and energy prices rise, cancelling out the stimulus. Congressional Democrats attempting to appropriate FY10 funds will be forced to acknowledge that not all federal spending is equally good for the economy (“stimulative,” “ job creating or preserving,” etc.) and begin the inevitable task of sorting out strong from weak fiscal claimants far earlier than they had planned.

Federal health spending — the balancing item in the budget — will inevitably come under renewed scrutiny, and the “Don’t Wake the Dragon” phase of health reform will be over. How much of health spending reductions will need to be devoted to deficit control and how much will be left over for the “rainy day” fund will be a challenging issue for OMB and congressional budgeteers.

While all this is going on, however, a more serious problem exists with the president’s health reform plan (besides the existential question of what we’re actually buying with the “rainy day” fund). The most significant funding source in President Obama’s campaign proposal was to be a de facto payroll tax on employers that do not now offer health insurance. Mandating that employers offer health insurance to their workers if they do not already do so is, in effect, taxing them. Those that do not play would be asked explicitly to pay an equivalent amount (6-8% of payroll?) to a fund that would help finance those not covered by employer plans.

The president recently reaffirmed his support for the so-called Employee Free Choice Act, which would also increase employment costs by rapidly accelerating unionization. How you can heap these two economic burdens on employers, which are laying off 650,000 workers a month, and expect to get back to 7.9% unemployment next year or even the year after, beggars the imagination. If you actually want an economic recovery, the last thing you do is to make it more expensive to hire new workers.

Federal funding for small employers, and for self-employed individuals who are ineligible for Medicaid but who cannot afford to buy private coverage, will be required from some source, or we will not meaningfully reduce the numbers of uninsured people. Less reliance on an employer mandate will increase pressure to subsidize individuals from federal sources.

Health Reform Funding Possibilities: Ending The Tax Exclusion For High Earners, And A National Value-Added Tax

So one strongly suspects the most pressing agenda item in the subterranean health reform dialog under way is the search for money — realistically, $120-150 billion a year at full phase-in. Indeed, it may be the financing issue, rather than the Medicare-like “public plan” or individual mandates, that causes the most political trouble for Congress and the Obama administration. Trial balloons have begun wafting westward from the Hill. Max Baucus opened the door to considering the health insurance tax exclusion for high earners. Harry Reid floated another: dedicating new federal revenues from a “cap and trade” energy scheme to health reform.

And waiting in the wings is the scariest but perhaps most sensible of all (as yet a political orphan): the Zeke Emanuel/Victor Fuchs idea of a dedicated national value-added tax (VAT), shifting the health reform financing burden off the wage base altogether. A VAT also places the financing burden on the wealthy, but in a more satisfying way than simply grabbing some of their earnings off the top. Each time you saw someone driving a new Bentley, instead of grinding your teeth, you could smile and realize that at least one or two more families got health coverage.

The other option, of course, is to delay phasing in health reform until the economy is out of intensive care and off the Keynesian respirator — an idea that, unfortunately, has its own political cost.

Show Us The Money!

Is this to argue that we cannot “afford” health reform? Categorically not. We have a $14 trillion economy, and a $2.5 trillion health sector, richly supported both by federal spending and tax subsidies. It’s just that finding the money to pay for health reform is going to require much more difficult choices than anyone in Congress or the administration has yet acknowledged. Details on how to make health coverage more affordable for individuals and businesses would also be reassuring.

Opaque, faith-based financing was a major ingredient in sinking the Clinton health reforms. “Believable fictions,” “Don’t Look at the Man Behind the Curtain,” and “We can do this without raising taxes” did not cut it with Congress or the voters in 1994. Unless there is a secret vein of platinum running under Capitol Hill, there will not be a subterranean solution to paying for health reform. It’s time to show us the money.

Tags: Health Reform