Sane talk on the health care reform bill

From National Journal's Jonathan Rauch, who says that the Senate bill passes the "Thune test":

"Doing nothing would be better than doing what they are proposing to do," Sen. John Thune, R-S.D., told CNN in December. Regardless of what you think of Thune's answer, he raises the right question about the Democrats' health care reform. Is it better than nothing?

Republicans think that doing nothing this year might yield a GOP House majority in 2011 and a better bill in 2012. Maybe. But after the last attempt crashed in 1994, it was 15 years before Congress was willing to try again. If the current effort fails, the next chance for comprehensive reform might not arrive for years.

In the meantime, piecemeal changes might make matters worse instead of better. Absent broader reforms, legislative scrambles to cut Medicare would mostly shift costs to private payers, and requirements to cover all comers could price private insurance nearly outof existence. A few more years of ad-hockery and Band-Aids might leave the public in the mood for exactly the kind of single-payer socialized medical system that Republicans dread. Doing nothing, in other words, is not a risk-free proposition, even for the John Thunes of the world.

The Democrats' shocking loss this week of the late Edward Kennedy's Senate seat in Massachusetts certainly increases the odds that Republicans will block the bill. Still, even without a filibuster-proof majority, House Democrats could finish the job by swallowing their pride and simply passing the Senate bill. Should they?

I think the answer is yes. The Senate health bill, though flawed, passes the Thune test.

True, it could have been so much better. If, for example, it were bipartisan (but Republicans chose to boycott it). If its "pay-fors" were more solid (but this is the U.S. Congress we are talking about). If it were serious about malpractice reform (but these are Democrats we are talking about).

The expansion of health care coverage to many, though not all, of the uninsured may prove to have found the exact sour spot: enough new beneficiaries to increase demand for health services and so raise system costs, but not enough to deliver the risk-spreading and efficiency-capturing benefits of true universality. Despite mandates, many people will manage to free-ride, and some who don't free-ride will pay more in premiums. There is plenty to worry about here.
So what's to like?

First, the expansion of insurance coverage to tens of millions more Americans and the abolition of the "pre-existing conditions" insurance exclusion are changes for the better. A friend of mine made a full recovery from prostate cancer, only to find that he could not get health insurance at any price. Stories like his are common -- too common to be politically sustainable, let alone morally acceptable.

On paper, Congress might have found better ways of making insurance available to high-risk individuals than by requiring insurers to cover them and by creating government-regulated markets ("exchanges") where these individuals can buy insurance; the alternatives, however, are complicated, lack political support, and in the end might make government even bigger. (Indeed, one striking feature of the reform bill, given its all-Democratic provenance, is the extent to which it leaves the existing infrastructure of private health insurance intact. In a few years, the public might be less willing to do that.)

Second, the bill is probably as close to paying for itself as the political system is likely to manage. It would be great if Congress made up-front reductions in other programs, rather than counting on, for example, Medicare savings that may or may not materialize. But, given the political unacceptability of horror stories like my friend's, the real-world alternative to plausible-maybe-almost-sort-of fiscal neutrality is something more like the Republicans' 2003 Medicare prescription drug bill, which made no attempt at all to pay for itself.

Although long-term budget projections are squishy, the Congressional Budget Office's are the best we have to go on. Notably, CBO scored the Senate bill as deficit-neutral (actually, it would slightly reduce the deficit) over the reform's second decade after enactment, which is well beyond the window of cost-shifting and timing gimmicks. We could do worse, and possibly will do worse next time around.

And what about bending the cost curve? Health care inflation devours wages, burdens employers, and could eventually bankrupt the government. A reform that fails to grapple with the cost problem, the critics say, is not worth having. I agree.

So how does the reform score on cost control? The original House bill does poorly. However, the Senate-passed bill is better on cost control than many people realize. Although far from optimal, it contains a potential pathway to a restructured health payment system that gets incentives right instead of wrong.

I'll return to that weasel word "potential," but first the major elements. Most economists believe that two pervasive market distortions fuel health cost inflation. The first is Medicare's fee-for-service payment system, which pays providers based on the number of procedures they perform, rewarding inefficiency. The second is the tax deductibility of employer-provided health insurance, which subsidizes high-cost policies, hides the costs of those policies from employees, and denies employees the opportunity to shop around.

Both distortions inhibit market discipline, and both originate with bad government policy. If socialized medicine is state payment for most health care, then the country is there already: When the value of the employer tax subsidy is included, the government (federal and state) pays for almost 60 percent of all U.S. health care, according to Paul Van de Water, an analyst with the Center on Budget and Policy Priorities. Dealing with Medicare and the employer tax deduction is therefore crucial to cost control.

Medicare is a tough problem, both because of the politics and because no one really knows how to fix it on a national scale. The reform bill includes programs designed to identify better payment methods, and it establishes a special commission that could, theoretically, help push through worthwhile Medicare reforms. There is no guarantee, obviously, that those schemes would work. But they might well improve the situation, and they are unlikely to do any harm.

As for the employer tax break, the Senate bill docks it. Not a ton. Only high-premium policies covering a minority of workers would be taxed. But even the limited tax is very important, for several reasons.

Crucially, the threshold for taxation would not rise as fast as health inflation. Translation: Gradually more and more employer-provided policies would be taxed. The change would be incremental, even glacial -- but slow seems to be the only pace with which Americans are comfortable.

Moreover, after reform is enacted, the taboo on taxing employer-provided health benefits will be shattered once and for all. From then on the question will be how much to tax, not whether. A door that had been welded shut will have been pried open. The country will be able to have a new kind of discussion, one in which the tying of health insurance to employment -- which is insane, when you think about it -- is no longer sacrosanct.

Meanwhile, the reform also includes a provision quietly inserted by Sen. Ron Wyden, D-Ore., that allows a narrow band of workers to cash out their employer's health insurance tax break and use it to buy a policy of their own choosing. In other words, instead of being captured by the employer, the tax subsidy would flow to the employee.

Again, the provision applies only to a few workers -- at first. However, as rising costs push up premiums, more workers would qualify. No less important, the provision puts in place both a precedent and a mechanism for rewiring the system so that consumers, not employers, can make the choices.
Taken together, these measures could set in motion a virtuous cycle. As health costs rise, more employer-provided health plans become taxable, giving employers an incentive to find cheaper plans. As employer-provided plans grow less generous, more employees have an incentive to take a tax credit and shop around, and, as premiums rise, more qualify to do so. Little by little, insurance coverage shifts toward an individual-based, consumer-driven market. And the faster health insurance costs rise, the faster the transition happens. The disease triggers its own antibodies.

Again, no guarantees. The transition would be very gradual, and political blowback could easily disrupt it. But the point is that the reform contains a pathway to sanity. No one can say that about the status quo.