The $64,000 Question: Can Health Care Be Paid For Without Breaking the Bank?

Democratic leaders, worried that high price tags might derail their health care plans, are looking at a raft of ideas, both old and new, to salvage their legislation. But each proposal carries risks of its own, lawmakers and outside experts say.

House Democrats, for example, acknowledge they are looking at a value-added tax, which is used widely in Europe but has never gone anywhere in the U.S. Also on the table are a 2 percent surtax on the income of the wealthy, and a hike in soda taxes. “The average American is already worried about government intrusion,” says Mark V. Pauly, an economist at the Wharton School of the University of Pennsylvania, and the soda tax “sounds like the school nurse.”

Rep. Robert Andrews, D-N.J., chairman of an Education and Labor subcommittee, acknowledges that “every revenue raiser is something someone doesn’t like.” But he adds, “What we’re going to have to find is the right, equitable mix of policy and politics to get this done.”

In the Senate, Democrats are scrambling to shrink the Finance committee legislation, following a preliminary estimate from the Congressional Budget Office that put the bill’s cost at $1.6 trillion over 10 years. They’re scaling back subsidies for families to buy insurance–one of the most expensive parts of the bill. Lawmakers in both chambers are trying to bring their bills’ price tags to below $1 trillion over 10 years.

Besides considering new taxes and scaled-back subsidies, lawmakers are turning to employers to help pay for the costs of insuring their workers. And they are coming up with new ways to restrain outlays in federal entitlement programs. Here’s a rundown of some of the ways they’re trying to crack the cost problem:

Raising Taxes

The VAT, which taxes goods at each stage of production, has been floating around as a potential revenue raiser for decades. But it has been considered politically radioactive since House Ways and Means Committee Chairman Al Ullman, D-Ore., was defeated in 1980 after talking up the levy. The VAT, which is essentially a consumption tax, is regressive-it hits lower income people harder than upper income people-which makes it unpopular among liberal economists and labor and consumer groups.

Nevertheless, the VAT has gotten a lot of attention as a funder of health care overhaul from academia and think tanks, and has some influential proponents. Ezekiel J. Emanuel, a special adviser for health policy in the Office of Management and Budget, has written favorably about using a VAT tax to finance health care overhaul. He is the brother of White House Chief of Staff Rahm Emanuel. Leonard Burman, director of the Tax Policy Center, a joint project of the Urban Institute and Brookings Institution, also has advocated the VAT tax.

A value-added tax of 1 percent to 1.5 percent could raise the entire $600 billion over 10 years, according to estimates circulating on Capitol Hill. If necessities such as housing, education and medical care were exempted to soften the blow for lower income people, then the rate might have to be increased slightly to raise the same amount.

Many are skeptical that Congress would ever approve a VAT. Jonathan Oberlander, who teaches health policy at the University of North Carolina at Chapel Hill, says he would be surprised if the VAT made the final cut of revenue raisers. “Health care reform has enough problems as it is without taking on the VAT,” he says. Still, he says, at this point in the process, “It’s basically a question of which poison or poisons do you want to drink?”

To raise money, the Ways and Means panel also is discussing a 2 percent surtax on the income of the wealthy. Such a surtax would target taxpayers who earn more than $200,000 annually or households that earn more than $250,000. It would raise an estimated $256 billion over a decade, according to the estimates floating on the Hill. Unlike some of the other tax proposals on the table, this proposal would meet Obama’s campaign promise of no new taxes for Americans earning under $200,000 a year.

Oberlander says the surtax is the “most straightforward way to finance reform from a Democratic perspective”–although it opens Democrats up to accusations of “class warfare.”

Pauly agreed that such a surtax is “probably the way you have to go,” but added that it wouldn’t raise enough money. “You have to be honest and say if we’re going to have to go down the income distribution to get the money,” he says.

Another possibility: Increasing the Medicare payroll tax, which is paid by both the employer and the employee. An increase of 0.65 percentage points which would raise $600 billion over a decade, according to the estimates.

Some economists support another idea under consideration-raising “sin taxes.” Such penalties, they say, could help discourage unhealthy behavior. Jonathan Gruber, a professor of economics at the Massachusetts Institute of Technology, says he prefers sin taxes to a VAT or a payroll tax. In addition, he’d rather see a tax on alcohol than on sodas.

Still, he says, the revenue from sin taxes would be relatively small and wouldn’t rise with the cost of health care. Overall, he hopes that a health care overhaul is primarily financed by making changes in the health-care system, and taxing employer-provided health benefits, as well imposing a sin tax.

Making Employers Chip In

Lawmakers in both the House and Senate are looking to employers to help pay for a health revamping, but they go about it in different ways. House Democrats, in a draft released Friday, proposed an 8 percent payroll tax on employers who don’t offer insurance. Some small businesses would be exempt.

A Finance committee outline that leaked last week details a variety of options for employers, including one that does not require employers to offer coverage. In that case, employers would be required to shoulder half of the cost if their workers ended up on Medicaid, the state-federal program for the poor, or 100 percent of the cost if their employees received tax credits to subsidize buying insurance on the newly created exchanges.

The provision is designed to assuage critics who say that, given the chance, some employers would simply shift the responsibility for their employees’ insurance to the federal government.

The amount of the potential Medicaid charge isn’t spelled out, but in 2006, the annual average Medicaid cost per adult was about $2,100, according to the Urban Institute and the Kaiser Commission on Medicaid and the Uninsured. (The commission, like Kaiser Health News, is part of the Kaiser Family Foundation.)

“They’re saying, if you shift your employees onto us (the government health plans), you’ll still have to pay for them,” says Paul Fronstin of the Employee Benefit Research Institute, a nonpartisan research organization in Washington.

Requiring employers to help finance Medicaid and the tax credits helps solve the financing problem, but it mainly affects companies with low-income workers, raising concerns that it will discourage their hiring.

“It will affect their (companies’) decision to hire,” says James Gelfand, senior manager of health policy at the U.S. Chamber of Commerce. “If they need to hire a janitor or a sales clerk, in addition to paying them $7 an hour, they’re going to have to assume they will have to pay these other costs.”

Other options in the Finance committee document include imposing a penalty on employers who don’t offer insurance. “The Finance bill is still a work in progress,” says Frank McArdle, who heads the Washington office of the benefits firm Hewitt Associates. “They’re trying to find a way of keeping employers in the game of providing health care coverage without having an exodus from employer plans.”

Reducing Subsidies

To lower the cost of its bill, the Finance committee is ratcheting back the government subsidies that will be available to moderate-income families and older people to purchase insurance in the new exchanges.

Last November, Sen. Max Baucus, D-Mont., chairman of the committee, recommended that tax credits be provided to people with incomes up to four times the federal poverty level, or $43,000 for individuals and $88,000 for a family of four. But the committee draft would limit the subsidies to those with incomes that are no more than three times the poverty level–single people making $33,000 a year and families earning $66,000. The House Democrats’ bill also would limit the subsidy to those with incomes at three times the poverty line.

By lowering the threshold in that manner, lawmakers potentially would leave out about 4.6 million people, says John F. Holahan, director of the Urban Institute’s Health Policy Research Center.

Lowering the threshold to three times the poverty level is too low, says Judith Solomon, a senior fellow in health policy at the Center on Budget and Policy Priorities. “I would say the top income levels for the subsidies should be set high enough to make sure everyone can afford coverage.”

Automatic Cuts

The Finance committee will likely try to pay in part for their bill by carving savings from Medicare, the federal program for the elderly. A congressional advisory committee could play a big role in guaranteeing those savings, if one of several proposals about the committee makes it into the final bill.

In a recent speech to the American Medical Association, President Obama said the committee, the Medicare Payment Advisory Commission, made payment recommendations that would have saved $200 billion if adopted by Congress. “These recommendations have now been incorporated into our broader reform agenda,” he says.

Baucus suggested to committee members last week that Congress set savings targets – such as 1.5 percent a year – and instruct MedPAC to make recommendations to meet them. Congress would choose to adopt MedPAC’s advice with a yes-or-no vote. If Congress rejects the savings recommendations and doesn’t meet the target, Medicare payments would automatically be cut across the board.

– Chris Weaver and Mary Agnes Carey contributed to this story.