Step 2 on cost-cutting

DURHAM -- The U.S. House of Representatives passed the Senate bill Sunday night and the president signed it into law Tuesday. The House also passed a reconciliation bill (designed to avoid a filibuster) that will now be considered by the Senate, and if passed would amend the new reform with a mixture of political (remove Nebraska Medicaid deal) and substantive (delay tax on high-cost insurance) changes. However, the essence of this reform is contained in the Senate bill, which is now law.

The Senate bill does six main things.

First, it creates an individual mandate to buy health insurance.

Second, it reforms insurance laws to ban pre-existing conditions.

Third, it sets up a market in which individuals and small businesses can purchase private health insurance.

Fourth, it provides income-based subsidies to help the middle class purchase private insurance, and expands Medicaid to cover those with lower incomes. All told, more than 30 million persons will be insured in 2019 who would otherwise be uninsured.

Fifth, it cuts planned Medicare spending and increases taxes to offset increased spending; all told, the CBO says it will reduce the deficit.

Sixth, it employs a variety of strategies to slow the rate of health care cost inflation. Some of these have remained relatively strong against all odds (Independent Medicare Advisory Commission) while others will be weakened if the reconciliation bill passes the Senate (delaying the tax on high-cost health insurance). But the big ideas for how to slow cost inflation are included in the Senate bill.

Many critics say reform won't do enough to control costs. This is true as compared to an ideal version of reform (there are 535 such versions in Congress), but it is certainly false as compared to the status quo. If this reform were the last act, we would not have a sustainable health care system. As a first step, it moves us in that direction.

Deleting a Tax Subsidy from the EquationThe good news for all the brave cost-cutters in Congress is that the second step toward a sustainable health care system could be announced soon: on Dec. 1, 2010. That is when the Deficit Commission created by President Barack Obama will release its recommendations. There is no way to have a discussion about the deficit without focusing on health care, even with the reform just passed.

The commission - co-chaired by Erskine Bowles, president of the UNC system - has 18 members: 10 Democrats and 8 Republicans, but 14 of the 18 must agree on any recommendation, ensuring bipartisanship.

Most of the Republicans named to the commission have advocated ending or capping the tax exclusion of employer-paid insurance. The current tax code (whereby the premiums paid by an employer for an employee's insurance are not taxable as income to the employee) means that most of the 160 million Americans with job-based health insurance have no idea how much their insurance costs. That cannot be a good idea. The CBO estimates that capping the tax exclusion at the national average (premiums of $13,500 for family cover; premiums above this would be treated as income) would reduce the deficit by around $500 billion over 10 years, and would slow the rate of health cost inflation.

Obama fought to maintain the tax on high-cost health insurance plans in reform. While a straightforward capping of the tax exclusion would be a better policy, a tax on high cost insurance plans - even as delayed by the proposed reconciliation bill - is the proverbial camel's nose under the tent, because it represents a de facto capping of a heretofore unlimited federal subsidy of private insurance.

The most bipartisan cost-control approach among health policy experts is ending, or limiting this subsidy. Democratic politicians are slower to convert, but I suspect some of the Republican support is strong because it is easy to be for something that seems impossible. The commission could help change that sense.

Capping or ending the tax exclusion would greatly improve the cost-saving potential of the newly passed reform. And such a policy is flexible, and would work well alongside any imaginable change (either to the right or left) to the framework enacted by the Senate bill.

Many say that nothing will come of the commission and that we will never take such hard steps. Maybe. And it is true that if the past is a perfect predictor of the future, we will not get our fiscal house in order. However, moving to limit or end the tax exclusion of employer-paid insurance via momentum created by the Deficit Commission is a plausible Step 2 toward a sustainable health care system. The politicians in both parties who said they would have been for reform "if only there were more cost control" will have their chance soon enough.

Donald H. Taylor Jr. is an assistant professor of public policy. His blog www.donaldhtaylorjr.blogspot.com is available for discussion of this article and health care reform in general. This is part of a series of articles by Donald Taylor exploring aspects of the health care reform issue originally published in the News & Observer