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Lawmakers Grapple With Costs of Health Care Reform

July 15, 2009 at 4:25 PM EST
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As health care reform legislation moves forward, lawmakers are grappling with the thorny question of how to cover the costs of such an overhaul, including a possible new tax surcharge on the wealthy. Two analysts discuss the issue.
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JIM LEHRER: And still to come on the NewsHour tonight: the mounting casualties in Afghanistan; and a double suicide by a British couple.

That follows our health care debate. NewsHour correspondent Betty Ann Bowser begins with a report for our Health Unit, a partnership with the Robert Wood Johnson Foundation.

BETTY ANN BOWSER With a 13-10 vote along party lines, the Senate Health Committee today became the first of five congressional committees to approve a massive overhaul of American health care.

Connecticut Senator Chris Dodd, who stood in for ailing Committee Chairman Senator Edward Kennedy, spoke to reporters.

SEN. CHRIS DODD (D), Connecticut: This bill, because of what we’ve done, we think is going to increase access, it’s going to reduce costs to individuals, and it’s going to improve the quality of health care in our country. We’re going to have to make some investments to achieve those results.

BETTY ANN BOWSER: The $600 billion Senate measure would set up a new government-run insurance program to compete with private insurers, a so-called public option, and require most Americans to get health coverage. It would also provide subsidies for many uninsured Americans earning up to four times the federal poverty level — or nearly $90,000 a year for a family of four — to buy insurance. And it would mandate employers contribute to the cost of coverage for their employees.

But left unanswered is how the health care reform overhaul would be paid for. The Senate committee announcement came one day after House Democrats unveiled a $1 trillion dollar-plus bill of their own which contained many of the same provisions.

To pay for its plan, the House measure relies in part on a new tax surcharge on the wealthy, individuals who earn more than $280,000 and families who earn more than $350,000 a year. The surcharge would begin at 1 percent and could go as high as 5 percent.

In a push to get legislation to his desk by October, President Obama has scheduled regular health care events at the White House. Today, he was flanked by nurses in the Rose Garden as he praised both bills.

BARACK OBAMA, President of the United States: Both proposals will take what’s best about our system today and make it the basis for our system tomorrow, reducing costs, raising quality, and ensuring fair treatment of consumers by the insurance industry.

Lawmakers debate paying for reform

BETTY ANN BOWSER: Senate Republicans were quick to argue today that the Health Committee bill would add to the country's spiraling deficit. Arizona Senator John McCain.

SEN. JOHN MCCAIN (R), Arizona: This legislation has not one single provision that is aimed at reducing the cost of health care. We have now, again, committed another act of generational theft of laying an unsustainable fiscal burden on future generations of Americans.

BETTY ANN BOWSER: And while President Obama continues to press for legislation from both houses before their August summer break, all eyes now are on the Senate Finance Committee, which is reportedly struggling to find a way to pay for health care overhaul in its as-yet-unreleased bill.

JIM LEHRER: Ray Suarez takes the story from there.

RAY SUAREZ: Well, now that specific legislation has been unveiled, lawmakers are coming to terms with the biggest question of all: how to pay for it.

There are many parts to that question, which we'll continue to tackle ourselves in the months ahead, such as curbing costs, slowing inflation, and reducing payment rates to providers. Tonight we focus on ways of raising new revenue.

And here to talk about that are Bob Carroll of the Tax Foundation, a not-for-profit research group. He worked at the Treasury Department's Office of Tax Policy during the Bush administration.

And Ron Pollack, the executive director of the consumer advocacy group Families USA.

Well, Bob Carroll, the Congressional Budget Office estimates that this is a trillion-dollar program over the coming decade. Where do you get the money, if the intention stays to cover tens of millions of currently uninsured people?

BOB CARROLL, Tax Foundation: Well, I think that's the million-dollar question. Where do you get the money to pay for this?

And one thing I think you do have to be careful about is the idea, you know, as Republicans have sometimes been accused of saying that tax cuts pay for themselves, we have to be careful that spending increases pay for themselves, as well. That seems to be some of the mantra coming out from some of the ideas out of the Obama administration and the Democratic Congress.

And in terms of how do you pay for health care, I think there are important parts of the tax system that may have contributed to the problem that I think we do need to take a very close look at. The exclusion for employer-provided insurance, I think, is a provision that has contributed to the problem by creating an incentive for individuals...

RAY SUAREZ: When you say "exclusion," you mean exclusion from being taxed?

Tax exclusions create incentives

BOB CARROLL: Exclusion from being taxed, that's right. Currently, an employee who receives their health insurance through their employer is not taxed on that compensation, and that creates an incentive for individuals to finance as much of their health care spending through an employer-provided health insurance policy as possible.

And it's a fairly large tax subsidy. It's the single largest tax expenditure in the Internal Revenue Code. It amounts to about $300 billion to $400 billion per year. According to the joint committee, the latest estimates I've seen, about $3.6 trillion over 10 years.

And it contributes to spending on health care in important ways. It encourages individuals to use low-deductible plans, to use overly generous plans, to use first-dollar plans. All of those things reduce the sensitivity of individuals to price when they're making health care decisions.

RAY SUAREZ: OK, I get you there. If you started to tax those very benefits that you've been describing, would that raise enough money to pay for the plans that both the Senate and House bills have for insuring Americans?

BOB CARROLL: It could. It could easily pay for them. As I said, it's a tax expenditure or tax subsidy that amounts to $300 billion to $400 billion a year. It's both an income tax subsidy, as well as a payroll tax subsidy. It's $3 trillion to $3.5 trillion to $4 trillion over 10 years, so there is a lot of money there.

And I think Senator Baucus has expressed some interest in looking at the exclusion, perhaps capping it in some way, as a starting point to chip away -- as a source of revenue, first of all, and, second, to chip away at the bad incentives that come along with the exclusion for employer-provided health insurance. And what's particularly...

RAY SUAREZ: Ron Pollack, where do you get the money to pay for the plans that the House and Senate are coming up with?

RON POLLACK, Families USA: Well, I think what you're going to see in each of the committees is there's going to be some balance here. The first part of that balance is to try to get some efficiencies in the health care system.

Let me give you several examples. First, you're going to see some reduction in payments to insurance companies that are serving people in the Medicare program. Every agency that's looked at it has said they are overpaid, they have windfall payments. That's probably going to save somewhere between $150 billion, $170 billion in that 10-year period.

RAY SUAREZ: But we've agreed from the outset you have to raise revenue. Where are you going to get it?

Surtax for wealthiest Americans

RON POLLACK: You do have to raise revenue, but I just want to be clear that this is going to be something like half and half. Half of it is going to be by cost efficiencies in the system, and the other half is through revenues.

Now, with respect to revenues, what the House is proposing is the House is proposing to have a modest surtax on the richest taxpayers. And, by the way, what CBO tells us is that only 1.2 percent of taxpayers are going to get a tax increase by what the House has proposed.

So, for example, a family that is making $400,000, they will pay an increase in taxes of $500. A family that is making $1 million will see a tax increase of approximately $9,000.

And the key thing to say about this is, if you remember in the 1990s when President Bush was able to get significant -- or, in the early 2000s, when President Bush was able to get these major tax deductions, the overwhelming majority of those benefits went to the most affluent taxpayers. The highest income, 1 percent of taxpayers, got 25 percent of the tax benefit.

So this is designed to create some equity so that those people who came off really well in the early part of this decade, they will now pay a more equitable share.

RAY SUAREZ: Bob Carroll, what about that, taxing the highest earners, you know, the 1 percent, 1.5 percent, 2 percent at the very top of the pyramid?

BOB CARROLL: It's a really interesting proposal. You have to remember that -- kind of some of the history on this going back just the last year during the campaign, as Senator Obama was hit during the campaign, was hit very hard on how much he would raise the top tax rate, and his response was basically that he was not going to extend the Bush tax cuts for those making more than $250,000 and that the top rate would not go beyond the 39.6 percent.

As you recall, President Bush had lowered the top rate from 39.6 percent to 35 percent, and so we would just simply go back to where we started from in 2000.

And this proposal goes much further than that. And I think that's something that the Obama administration will need to explain, how this matches up with what it said during the campaign.

RAY SUAREZ: But that's politics. What's the economic impact of taking it from that small pool of American earners the money to pay for this program?

Tax rates could rise to 50 percent

BOB CARROLL: I think it's problematic. I think, when you get to tax rates for the highest income-earners in the mid-40s, this would push the top tax rate effectively up to about 45 percent, 46 percent, 47 percent due to some other issues, if you add in state rates, the average state rate is 5.5 percent, 6 percent, you're talking about tax rates on the order of about 50 percent, those are tax rates we've not seen since Ronald Reagan was president.

Tax rates distort decision-making. They discourage people from supplying labor. They affect investment decisions. They encourage people, when they purchase a house, to leverage more of it. There's a lot of distortionary effects associated with high tax rates. These are very high tax rates, and I think that's real problematic.

RAY SUAREZ: Ron Pollack?

RON POLLACK: Well, first of all, when the Bush administration said they were going to have these tax cuts that went disproportionately to the wealthy, we heard similar kinds of arguments. "This is really going to stimulate the economy." And, of course, the economy really did not improve, and you saw that President Obama inherited a real economic recession.

This restores equity in the system. And, by the way, Bob was talking about President Obama's promises during the campaign. He promised that he was not going to increase taxes for people, families with incomes below $250,000. Even though this is not the president's proposal, this is consistent with the president's promise.

And one other thing: The president initially offered a proposal to reduce the tax benefit of deductions that people have. And that clearly was designed to make sure that people who get 35 percent of the benefit of the tax deductions would go down to 28 percent.

In other words, it would have affected the wealthiest taxpayers. This is a different proposal, but it really has the same purpose. It creates greater equity in the tax system. And, together with the savings that are achieved by making the health system more efficient, it will pay entirely for the health reform proposal.

RAY SUAREZ: Does that make sense to you?

BOB CARROLL: It doesn't quite make sense to me.

RAY SUAREZ: Very briefly, please.

BOB CARROLL: Yes, very briefly. Yes, high tax rates cause a lot of economic harm. They affect business decisions and household decisions in important ways.

I think, generally speaking, we would -- as a matter of tax policy and good economic policy, we'd want rates as low as possible and broaden the base. I think the two proposals that Ron mentioned that were in the Obama administration budget are good proposals because they broaden the base and they hold the rates down somewhat.

This goes in exactly the opposite direction. A better way to broaden the base would be to go after the exclusion. That's a twofer. You keep rates a little bit lower, they don't have to go up, and it addresses some of the harmful effects that that exclusion has had on the health care market.

RAY SUAREZ: Bob Carroll, Ron Pollack, thank you both.

RON POLLACK: Good to be with you.

BOB CARROLL: Thanks so much.