Can This Health Care Reform Plan Win?

Health care will likely be a top domestic policy issue in 2008. The ranks of the uninsured have swelled to over 45 million. Costs are rising at twice the rate of inflation. Employers are pushing more and more of the costs onto individuals and their families. With the Republicans pushing tax breaks for personal health savings accounts, the field for Democrats who want to offer comprehensive solutions is wide open.

Over the next several days, I'll be taking a look at proposals from leading Democratic Party-oriented think tanks. The first, from Democracy Journal, a new quarterly edited by former speechwriters for candidates Al Gore and John Kerry, sees tax reform as the key to providing health insurance for all.

Most Americans are not aware that hidden health care subsidies in the tax code makes the public sector (which includes Medicare, Medicaid, the Veterans Administration, and government health insurance premiums for its own workers) the largest payer in the health care system. The subsidy comes from the fact that employer-provided health insurance benefits are not taxed as income. That amounts to a $200 billion annual tax break for everyone with employer-provided health insurance. When added to existing public sector programs, the “public” tab for health care rises to nearly 60 percent of the nation’s $1.9 trillion tab.

The tax break portion of the public’s bill is regressive in the same way the home mortgage deduction is regressive. When General Motors offers its $100,000 engineer (with a 30 percent marginal tax rate) the same $10,000-a-year family health plan as its $50,000 assembly line worker (with a 15 percent marginal tax rate), the government forgoes $3,000 in taxes from the engineer but only $1,500 from the assembly line worker. In addition, health care benefits for high-income workers are usually more generous than those offered low-income workers. That makes this tax subsidy even more regressive.

The reform plan outlined in Democracy Journal would redraw this subsidy to create a universal plan. Jason Furman, a former special assistant in the Clinton administration, called for capping the tax break for high earners and using the new tax collections to pay for health insurance for the uninsured. Furman sees this plan as a transition to scrapping deductibility entirely and replacing it with a progressive tax credit that would enable individuals and families to buy insurance, which would be mandatory as in the Massachusetts plan. “The principal goal of universal insurance is to provide more health care for the uninsured and to reimburse them for more of the costs they are currently paying themselves,” he writes. Estimated price tag: $50 billion to $200 billion.

I see several major problems with this idea. Furman would provide the poor with the same inefficient and non-preventive health care offered to the 84 percent of Americans who already have insurance. His plan does nothing to hold down costs. And he would make those on the upper end of the income distribution pay for it. This is redistributive tax policy at its worst – taxing the upper third to pay for benefits for the lower third.

It may be “fair.” But it’s a political loser. It wouldn’t take a Karl Rove to write Republican talking points attacking such a plan.