The United States finances healthcare through a confusing hodgepodge of payment programs that send distorted signals to employers, insurers, providers and the general public.
Every program—Medicare, Medicaid and the tax subsidies that support the private employer-based insurance market—is desperately in need of reform. Wouldn't it be nice during this presidential election cycle if the candidates debated potentially beneficial changes to those different sub-systems?
Don't hold your breath. When candidates hoping to emerge from the pack are busy championing favorite hobbyhorses that have no chance of enactment (single-payer on the left versus tax deductions for everyone on the right), there's little incentive for the others to raise what could become achievable reforms if only they were publicly debated with an eye toward building consensus.
That leaves the field wide open for special interests to nibble away at the taxes that make the subsidies offered through the Affordable Care Act's insurance exchanges possible.
The medical device industry took the lead by mounting a high-profile, bipartisan campaign to repeal the 2.3% device tax. The next target in the lobbyists' crosshairs is the 40% surtax on a portion of so-called Cadillac health plans, which will hit some large employers and major unions starting in 2018.
Given the high cost of running for office and the unlimited amounts of cash that these special interests and their lobbyists can pour into campaigns, repealing both taxes likely will prove very popular during campaign season, even though both moves would drag the system even further away from significant long-term reform.
So what financing issues should candidates and Congress debate over the next 15 months? Here are a few ideas for starters.
Why not federalize Medicaid? States still considering the ACA expansion claim they don't want to be burdened with paying what will eventually be 10% of the costs on the subset of Medicaid beneficiaries who earn up to 138% of the federal poverty level.
That's small potatoes. The real burden on states is the 50% or so match on the bulk of Medicaid, 40% of which goes to long-term nursing-home care. Medicaid consumes a third or more of most state budgets, which are dependent on regressive sales taxes.
Federalizing Medicaid through the more progressive federal income tax could even out benefits across the country and raise payments to providers closer to Medicare rates. It would provide a tremendous lift for the states, which could use their new fiscal capacity to invest in education, infrastructure and sales tax relief, all of which would boost local economies.
Medicare financing also needs reform. Last week, CMS actuaries issued their latest outlook for the Medicare Part A trust fund, which pays for hospital care. Good news: it can still pay full benefits until 2030. But it's largely a symbolic report. Parts B and D, the larger shares of Medicare that go to doctors, drug companies and others, is paid for out of a general revenue fund that is in chronic deficit.
Why not combine all parts of Medicare into a single benefit with a single, sliding-scale premium? And if the payroll tax, shared by employers and workers, is going to remain the backbone of the program because it links a lifetime of work to a retirement benefit, shouldn't it be progressive like the income tax and raise enough money to cover the entire cost of the program?
Finally, instead of debating the Cadillac plan tax, the entire tax subsidy for employer premiums should be put on the table. Why are employer premiums treated differently from individual premiums, which are paid out of taxed wages?
That indirect tax subsidy—the largest the federal government makes—reached $250 billion in 2013. Like the home mortgage deduction, the healthcare premium tax exclusion is more valuable to people in higher tax brackets.
If that subsidy was ended, the general public would have a far greater stake in keeping health insurance premiums down. The government could use its windfall for more equitable tax relief. And it could be done in a revenue-neutral manner.
There are enormous political and technical hurdles to achieving any of those reforms. Yet they—or something else equally bold—will never happen unless someone starts talking about them.
When the inside-the-Beltway political class talks about tax reform, it's always about lowering the corporate income tax rate. That agenda needs to expand to include changing the healthcare finance system so it is more equitable and fiscally sustainable.
