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'Cadillac' tax plan shrinks in Obama-union deal

Saturday, January 16, 2010; A16

THE OBAMA administration's deal with labor unions on taxing high-value health insurance plans is a disappointment. To understand how big a disappointment , consider: The optimal way to pay for health-care reform would have been to eliminate the tax-free treatment of employer-provided health care. That would have generated some $250 billion--a year!--that could have been used to pay for health reform even as it helped put a brake on costs. The fallback proposed by Senate Finance Committee Chairman Max Baucus (D-Mont.) would have generated $215 billion between 2013 and 2019. The latest revision shrinks that to somewhere around $90 billion. That's a lot less curve bending for something touted as one of the legislation's key mechanisms to constrain the growth of health-care costs. The tax does not kick in until 2013, but labor unions wangled an extra five-year pass for health benefits they negotiate as part of collective-bargaining agreements. In other words, union members would be spared until past the end of a second Obama term. How is that fair?

There are, however, some saving graces that aren't evident in the numbers. The new threshold at which the tax kicks in will be $24,000 for a family plan -- up from Mr. Baucus's original $21,000 and the $23,000 contained in the version that passed the Senate. That plus other changes -- dental and vision benefits aren't calculated in the total, for instance -- loses about $60 billion from the Senate-passed version. More important, though, is what wasn't lost: the rate at which the $24,000 threshold is adjusted for inflation. That will stay at the Senate-passed level of the overall inflation rate plus 1 percent. Because health-care costs have been rising far more rapidly than that, over time the tax will hit more and more beneficiaries -- exactly what is needed to help discipline spending.

In the second 10 years, the difference between the Senate-passed plan and the latest agreement will be far smaller. Of course, that assumes that when the tax starts to pinch, a future president and future Congresses will resist pressures to ease up. The example of the perennially adjusted alternative minimum tax does not generate much confidence in politicians' ability to resist the inevitable howls of outrage. Then again, the alternative is to assume that the political system is so broken that it can never summon the will to get costs under control. We're not quite at that level of cynicism or despair.

The second chief element of would-be cost control is the Medicare commission contained in the Senate-passed version but absent in the House measure. This entity would be empowered to make recommendations, subject to a fast-tracked congressional vote, if tight spending targets are not met. It is not perfectly structured -- among other flaws, too many entities (hospitals and doctors, among others) are exempted from its mandate, and lawmakers should remove these exemptions in the final package. As the negotiations wind down, it's imperative that this mechanism be maintained and that its effectiveness not be diminished.

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