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A Red State Booster Shot

By Alec MacGillis
Sunday, May 31, 2009

Those in the red states still smarting over Barack Obama's election victory can perhaps take solace in this: The Democrats' No. 1 domestic policy initiative, universal health care, is likely to help red America at the expense of blue.

Health-care reform may be overdue in a country with 45 million uninsured and soaring medical costs, but it will also represent a substantial wealth transfer from the North and the East to the South and the West. The Northeast and the Midwest have much higher rates of coverage than the rest of the country, led by Massachusetts, where all but 3 percent of residents are insured. The disproportionate share of uninsured is in the South and the West, the result of employment patterns, weak unions and stingy state governments. Texas leads the way, with a quarter of its population uninsured; it would be at the top even without its many illegal immigrants.

Then there is the matter of paying for universal health care. The plan picking up steam on Capitol Hill is to cover much of the $1.2 trillion cost over 10 years by taxing employer-provided health benefits. And who has the highest benefits? People in the North and the East, thanks to pricier health care markets, higher state standards for health coverage and stronger labor unions. Depending on how such a tax were designed, it could land hard not only on corporate executives but also on union workers whose compensation gains show up as health benefits instead of wages.

It would not be the first time that the historically more affluent part of the country has subsidized the less prosperous one. Long before jobs flowed to Mexico and China, they flowed from Massachusetts and Michigan to North Carolina and Tennessee, where unions were weaker and employers could pay less and provide fewer benefits.

The people followed, moving to a Sun Belt where taxes were lower because states offered less in the way of safety nets -- nets that the North and the East will now pay to stitch up via universal health care.

"The cost of health care benefits was very much a factor in plant relocations in the eighties," said Gary Chaison, a professor of industrial relations at Clark University in Worcester, Mass. "And now we end up paying for [Sun Belt health care] anyway? It's incredible."

So far, though, the health-care debate is not talked about much in regional terms. In the fight over regulating carbon emissions, regional self-interest is plain, with Republican and Democratic lawmakers from coal-dependent Midwestern and Southern states trying to blunt the legislation. But pushing universal health care are Northeasterners such as Ted Kennedy and Chuck Schumer, and pushing against it are Sun Belters such as John Cornyn and Jon Kyl.

It is a rare triumph of principle over parochialism -- or maybe no one is looking at the numbers.

Nationally, about 15 percent of Americans lack health insurance. But in the North, many states in addition to Massachusetts have less than 11 percent uninsured. They include Pennsylvania, Connecticut, Michigan, New Hampshire, Ohio, Iowa, Wisconsin and Minnesota. In the South and the West, where small businesses dominate, many states other than Texas have more than 17 percent, including Arizona, Florida, California, Louisiana, Georgia, Arkansas, Mississippi, Oklahoma, Nevada and New Mexico.

The disparities extend to the value of employer-provided benefits. It is highest in the Northeast and the Midwest, lowest in the South and the West.

That means a big regional slant if the plan raises money by ending the tax exemption for employer health benefits or by taxing the value of above-average benefits, which is what Congress is leaning toward. Critics have long argued that exempting employer-provided benefits from taxes is unfair to self-insured people who have to use after-tax dollars to buy coverage, and that the exemption drives health costs higher by encouraging generous benefits plans.

But opponents of taxing health benefits say that it would hit many middle-class families whose packages are worth more than average simply because they live in high-cost markets. They argue that much of the Northeast has high health-care costs partly because the cost of living there is high, not because medical spending is out of control. Indeed, when it comes to Medicare spending, some of the top spending areas are in the South and the West, such as Miami and McAllen, Tex., while some of the most efficient areas are in the North. Better, some say, to raise revenue through other routes -- reducing tax deductions for the wealthy, taxing sugary sodas, raising the capital gains tax or expanding the Medicare tax to unearned income.

"There's a big regional backdrop to this," said Harvard health policy professor Robert Blendon. "Those who are the beneficiaries of all this money that's going to be floating around is one group of states, and who's going to have to pay for the taxes if they lift this exemption is another group."

For example, he said, if you're a New York policeman married to a nurse and your combined salaries are $80,000, your health insurance will be taxed to pay for a family in Mississippi. "I'm trying to figure out how Chuck Schumer can raise his hands and say this is a good thing if New York workers are going to be such losers based on taxes," he said.

Now, if national reform really does restrain health-care costs over the long run, it would help employers and consumers in the Northeast and the Midwest just as it would those elsewhere. And to lessen its effect on the middle class, the plan could limit taxes on employer benefits to wealthier taxpayers, or it could adjust the subsidies for the uninsured to reflect the higher cost of health care in certain areas. But that would complicate the tax code, cut into the needed revenues and arguably undermine the effort to reduce health-care costs.

Meanwhile, not everyone in a state such as Texas will gain from health-care reform. Larger employers will face a mandate to cover workers or pay a fee. Residents will probably face a mandate to buy coverage and not all will qualify for subsidies to do so. New federal standards for health benefits will mean that self-insured residents of states with loose standards will get easier access to coverage and better benefits, but they'll have to pay more.

Still, the regional tilt is clear. One of the likeliest options for reform is to increase coverage among the working poor by expanding Medicaid eligibility in Southern and Western states that now limit it, even though, with their lower per-capita income, they receive a higher federal match to cover the cost. Texas, for instance, has not updated the Medicaid eligibility rules for parents of poor children in 23 years -- most working parents qualify only if they earn less than $308 per month.

But to persuade stingier states to expand eligibility, the federal government may cover the full Medicaid cost of their newly eligible residents for at least a few years. This will draw howls from states that long ago expanded their eligibility rules and have been paying a large share of the cost of having done so. Again, the plan could try to mollify these states with extra aid, but that adds to the price tag.

"Do you penalize those that have been good in the past by only putting the new federal dollars into where the problem exists, or do you try to equalize the playing field to help the states that have been the best?" asked Diane Rowland, executive vice president of the Kaiser Family Foundation.

To conservative health-care experts, a westward and southward wealth transfer is welcome and long overdue. Exempting health benefits from taxes, they say, has meant a big tax break for employers and workers in the wealthier and more unionized regions. And for union members to complain about being taxed for their good benefits just shows that they, too, have been hurt by the system, because health care absorbs too much of their compensation.

"No one should assert that what we have now produces some grand equitable solution," said Joseph Antos of the American Enterprise Institute. "We're going to be moving from imperfect to imperfect."

Then there are staunch advocates for universal health care, like Anne Dunkelberg of the Center for Public Policy Priorities, who reject outright the regional point-scoring mindset, arguing that health-care reform is a national need. "We should be motivated by the fact that [the current system] is unsustainable for the whole country," she maintained.

Of course, that's easy for her to say: She's in Austin, Texas.

macgillisa@washpost.com

Alec MacGillis is a reporter on the Post's national staff. He will be online to discuss this article on Monday at 11 a.m. ET. Submit your questions and comments before or during the discussion.

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