A 9-1-1 for Health-Care Reform: Send Leadership Now

By Steven Pearlstein
Wednesday, July 15, 2009

There are moments in the life of any important policy debate when things hit a dead end. There aren't any easy answers, any options that don't involve real political risk. And it's at those moments when you discover who the real leaders are.

We are at just such a moment with health-care reform. The roadblock right now is finding a way to pay for the short-run costs of reform before the benefits of longer-run cost containment begin to kick in. There's general agreement that those initial costs should be no more than $1 trillion over the next decade, and that the money should come from some combination of increased revenue and reductions in the growth of spending for existing government health programs.

Nearly all health experts agree about where to begin this search: the tax break for employer-paid health insurance. Unlike most other forms of compensation, health benefits are not subject either to income or the payroll taxes. Because people prefer untaxed compensation, there's been a natural tendency for health benefits to grow at the expense of cash wages. As a result, we've bought so much insurance that we've become cavalier not only about the price of health care, but the amount of it that we consume. The result: The cost of health insurance has risen nearly twice as fast as the cost of everything else.

The other thing to say about this tax break is that it is incredibly unfair -- a transfer of $250 billion each year from people who have no health insurance, or less-generous insurance, or who have to buy their own insurance with after-tax dollars to workers with generous policies paid for by their employers. Even worse, because this tax break is worth twice as much to a person in the 35 percent tax bracket as someone with the same health insurance policy in the 15 percent bracket, it is profoundly regressive. All in all, nearly half the tax benefits now go to the richest quarter of all households.

All of which explains why limiting the amount of health-care benefits that anyone can receive tax-free is a no-brainer if you're looking to pay for health reform. We can have a good wonky debate about where the cap should be set (the average price for all private health-care plans, the 75th percentile, the 90th), how much the cap should go up each year (with incomes, overall price inflation or medical cost inflation) or whether the cap should be adjusted to take into consideration age or regional cost variations. We can even debate whether the cap should apply to the income tax, the payroll tax or both.

What's crazy is not to use some cap to raise $30 billion to $50 billion over the next decade in additional tax revenue to pay for health reform. That's why it was pushed so hard by Sens. Max Baucus and Charles Grassley, the chairman and ranking Republican on the Senate Finance Committee who together offer the best hope of fashioning a bipartisan consensus on reform. And that's why it was such a setback when the rug was pulled out from under them over the past week by Senate Majority Leader Harry Reid and then President Obama.

Labor unions are the main culprit here. One reason organized labor is in such bad odor these days is that, while they claim to represent the working class and the downtrodden, they are often about protecting wage and benefit packages that most nonunion workers can only dream about. Now they're at it again.

It requires a special sense of social justice to issue a call to the barricades to defeat a modest tax on health insurance plans that alone cost more than the average worker without health insurance earns each year. It also requires a certain sophistry to calculate the cost of this additional tax on middle-class households to pay for health reform without also calculating the benefits those households would realize from reform in terms of lower premiums and improved coverage.

Earlier in the week, I spoke with a top lobbyist for the American Federation of State, County and Municipal Employees, which has been particularly vocal on the tax issue. I noted that under most reform plans, some sacrifice would be required of almost every interest group -- drug companies, doctors, insurers, hospitals, employers that don't offer insurance and workers who don't now buy it.

What, I asked, was organized labor willing to throw into the pot? All I got was an angry retort about how strapped local governments were laying off workers and cutting back on pay, as if gold-plated fringe benefits had no role in creating the fiscal crisis in the first place.

There is nothing surprising in a union position that hasn't changed since the last failed round of health reform. What is disappointing is that Obama and Democratic leaders have allowed themselves to be hemmed in by it even when they and their advisers know it is wrong.

The latest excuse is that it's not just the unions, but large majorities of the public that oppose any taxation of health benefits, according to the latest polls. Let's put aside, for the moment, the deliberate framing of those poll questions, which pretty much ensured a negative reaction. More telling is the admission by supposedly sophisticated politicians that they don't have what it takes to persuade the public to accept a modest, progressive tax increase on less than half of all households as a price of fixing the country's biggest social and economic problem.

The truth is that even good politicians can't sell comprehensive health-care reform by trying to convince the public that it won't cost them a dime and nothing that they like about the current system will ever change. Republicans tried a similar approach with their wars and tax cuts and it proved to be their undoing. Democrats risk the same fate if they try to convince Americans that they can have all the health care they want and tax only rich people to pay for it.

The country is hungry for a credible call to shared sacrifice and open to the idea that if everyone gives a little, we can all be better off. All it would take right now is a little leadership.

Steven Pearlstein will host a Web discussion today at 11 a.m. at http://washingtonpost.com. He can be reached at pearlsteins@washpost.com.

View all comments that have been posted about this article.

© 2009 The Washington Post Company