As Congress returns this week, no task before it looms larger than reforming a health care system that costs more than any other country's yet leaves 46 million people uninsured.
Policymakers are converging on the idea of using a health insurance "exchange," in which insurers compete for business and can't reject people with medical conditions or charge them higher rates, and lower-income people receive subsidies to make coverage affordable. But policymakers also will have to make progress on the toughest issue - how to pay for health reform so it doesn't make the troubling fiscal picture even worse.
Nothing is more important for long-term fiscal stability than slowing the growth rate of health care costs in both the public and private sectors. Major changes in medical practice will be needed. But we don't yet know that much about what specific changes will slow cost growth without reducing quality. Even with such changes, savings will materialize slowly over many years.
So, Congress must find specific savings now to offset the substantial cost of health reform over the next 10 years, as the nation moves toward universal coverage (itself a necessary condition for restraining costs over time). To find the savings, policymakers will have to stand up to interest groups and make tough choices on both spending and revenues. What should they do?
President Obama has proposed $295 billion in savings over 10 years from Medicare and Medicaid. A bipartisan paper from Senate Finance Committee staff provides more options. Policymakers should adopt virtually all of these proposals, which include:
• Curbing Medicare overpayments to private insurers. As Congress' bipartisan expert advisory body on Medicare has recommended, Congress should "level the playing field" by paying the private insurance companies that cover millions of Medicare beneficiaries through the Medicare Advantage program the same amount it would cost to cover these people through traditional Medicare, rather than paying them an average of $1,000 in overpayments per beneficiary per year.
• Charging higher-income seniors more for Medicare prescription drug coverage, as various Republicans have long proposed.
• Lowering the cost of Medicaid and Medicare drug coverage through reforms in how the programs pay for drugs.
• Reducing Medicare overuse by reforming the "Medigap" market so that policies that supplement Medicare coverage no longer pay every dollar of Medicare deductibles and co-payments, which leads beneficiaries to overuse Medicare services.
These proposals and others under consideration, however, would finance half or less of health reform's cost. More revenues will be needed.
The tax system provides hundreds of billions of dollars a year in health-care subsidies. Congress should reform the tax treatment of health care - creating a new tax credit to help people of modest means buy coverage through an insurance exchange, and paying for it by scaling back inefficient tax subsidies and by raising the cost of products that jeopardize people's health and increase the nation's health care bill.
For example, policymakers can:
• Cap the amount of employer-provided health benefits that is tax-exempt. The employer tax exclusion drives up costs by encouraging some employers and individuals to select more generous coverage than they otherwise would purchase. Congress could impose a cap based on the cost of insurance (making contributions only to the most expensive insurance plans taxable), adjusting it to reflect regional differences in health costs and the age of a firm's work force.
• Scale back flexible spending accounts. These accounts, which enable employees to use pretax dollars to pay out-of-pocket medical costs, promote wasteful health care spending. Employees can use FSA funds for nearly any health care service or item, including elective items that no insurance policy would cover. And because funds left in the accounts at the end of the year revert to the employer, employees often indulge in year-end consumption binges of health products and services they don't need and otherwise wouldn't buy.
• Taxing products that undermine good health and raise health care costs. The average American consumes nearly three times as many high-sugar soft drinks as a few decades ago. This helps raise the nation's obesity rate and health care costs. A tax on soda, heavily sweetened "sport drinks" and similar products would help both finance health reform and fight obesity.
Congress also can address the erosion in alcohol taxes, which have fallen 37 percent in inflation-adjusted terms since Congress last raised them in 1991. Alcohol abuse costs the country hundreds of billions of dollars a year in direct medical costs, lost productivity and earnings, and increased crime. Restoring the tax to its inflation-adjusted 1991 level would barely affect people who drink in moderation.
Supplementing these measures, Congress can close tax shelters, curb wasteful and inefficient tax subsidies, and consider a variant of the president's proposal to cap itemized deductions at a 28 percent rate. If, for instance, the top income-tax rate returns to 39.6 percent in 2011, Congress could cap deductions at the current top deduction rate of 35 percent. That would generate savings without changing the current tax incentives to give to charity.
These proposals won't please many. Many liberals won't like measures like capping tax-exempt health benefits and raising regressive taxes on soda and alcohol. Many conservatives won't like scaling back Medicare Advantage and limiting itemized deductions.
But unless both parties make these sorts of tough choices, either Congress will not enact health reform or it will do so without offsetting the costs, thus imposing even larger deficits and debt on future generations.
• Robert Greenstein is executive director of the Center on Budget and Policy Priorities.