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CCH® BENEFITS — 02/25/09

Limiting Or Eliminating The Tax Exclusion For Employment-Based Health Insurance Could Help Reduce Health Care Costs And Fund Coverage Expansion

from Spencer’s Benefits Reports: In testimony on February 10 to the Senate Budget Committee, Douglas W. Elmendorf, director of the Congressional Budget Office (CBO), reviewed issues related to the policy goals of simultaneously pursuing health insurance coverage expansion and improving the cost-effectiveness of both the health care system and health insurance.

“Without changes in policy, a substantial and growing number of people under age 65 will lack health insurance,” Mr. Elmendorf said. “The CBO estimates that the average number of nonelderly people who are uninsured will rise from at least 45 million in 2009 to about 54 million in 2019.” This estimate “largely reflects the expectation that health care costs and health insurance premiums will continue to rise faster than people’s income.”

Near universal health insurance coverage could be achieved by combining the following three key features, Mr. Elmendorf explained:

1. A mechanism for pooling risks to ensure the availability of affordable coverage for people who develop health conditions and for people to be able to obtain health insurance before they get sick. Among the options that could assist with establishing this feature are strengthening the employment-based system, modifying the individual health insurance market, and establishing a new health insurance exchange.

2. Subsidies to make health insurance less expensive, a task that is difficult to implement without also subsidizing those who already have health insurance or who would have bought the insurance anyway.

3. An “enforceable” individual mandate with “meaningful” subsidies or an “effective process to facilitate enrollment in a health plan.”

Implementing the premium subsidy and individual mandate designs would require some trade-offs, Mr. Elmendorf noted. Attaining near universal coverage through subsidies alone would be expensive and policymakers might be reluctant to establish the penalties and enforcement measures necessary for an effective mandate. The single-payer option was not included in the CBO review.

Controlling costs and improving efficiency of the health care system involves addressing the following key issues:

1. Development of expensive new treatments and other medical technologies—health insurance can influence the timing and reach of these new technologies.

2. Health care costs are an increasing burden on public and private payers—unless policies change, federal spending on Medicare and Medicaid will rise from about 5% of the gross domestic product (GDP) in 2009 to about 12% of the GDP in 2050, mostly from per-person cost growth, rather than from the aging of the population.

3. Evidence that a substantial share of health care spending adds little or no benefit to the overall health of the population—currently, there is little incentive for medical providers and patients to control costs. To address this issue, policy must implement “substantial changes” in incentives and lower the pace of adoption of new treatments and procedures or limit their application.

The following measures might help control health care costs and improve efficiency, Mr. Elmendorf said:

1. Shift payment from the current, fee-for-service-based system, and provide strong incentives to medical providers and patients to control costs and reward value. Some options to achieve this measure include fixed payments per patient; pay for performance, including penalties for substandard care; and some cutbacks on the number and types of services.

2. Replace or restructure the current tax system for employment-based health insurance, which, due to its open-endedness, lowers incentives for cost control, and encourages workers to enroll in health care plans with higher cost sharing and tighter management.

3. Develop more information on the effectiveness of treatments and providers’ quality of care. The federal government can play a crucial role in researching comparative effectiveness, developing quality-of-care measures, and distributing information to medical providers and patients, coupled with strong incentives to control costs and improve effectiveness.

4. Address the forces underlying cost increases.

Even if all of these measures were adopted, reduction in national spending for health care might not be achieved within a ten-year window because of the phase-in time for initiatives; costs of implementing initiatives and of incentives for adoption; and lack of incentives.

In conclusion, Mr. Elmendorf said that substantial expansion of coverage would raise total spending, and depending on the number of people receiving subsidies, the amount of the subsidy. To finance the cost of the coverage expansion, Congress could limit or eliminate the tax exclusion for employment-based health insurance and thus gain from resulting revenue; and reduce spending for Medicare and Medicaid.

For more information about the testimony, entitled Expanding Health Insurance Coverage and Controlling Costs for Health Care, visit http://www.cbo.gov.

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