As discussed in recent editions of WBR, one of the key challenges of this year's health care reform is determining how to pay for the enormous costs of covering the uninsured, with estimates as high as $1.2 trillion over 10 years.

This year's congressional budget resolution requires that health care reform legislation must be deficit neutral, i.e., the costs must be fully offset. The President proposed to partially pay for health care reform by reining in Medicare and Medicaid costs, and placing a cap on itemized deductions for high income earners.

The latter proposal -- capping itemized deductions -- has not been well received on Capitol Hill, with some nonprofits arguing it would reduce charitable contributions.

An alternative proposal -- which has been frequently discussed among Members of Congress is capping the tax exclusion of employer provided health benefits. Background: Millions of employees in the U.S. receive health insurance benefits from their employers. Even though health benefits are a form of compensation, the tax code specifically excludes health benefits from taxation. This exclusion will cost the Treasury $155 billion in lost revenues in 2010 alone and more than $2 trillion over 10 years. Taxing only "high-end" health benefits would still bring in nearly a half trillion over 10 years.

Administration officials have been saying the President is opposed to taxing health benefits--and during the presidential campaign he strongly attacked Sen. John McCain (R-AZ) for proposing exactly that.

However, this week, following a meeting with the President, Senate Finance Committee Chairman Max Baucus (D-MT) said taxing health benefits "was discussed. It's on the table."

According to the Washington Post, "White House officials moved quickly to clarify that taxing the health insurance provided by businesses is not Obama's first choice, but aides refused to rule out the possibility."

There are some challenging complexities in fashioning a "fair" cap on the tax exclusion of employer-sponsored health benefits. Earlier this week, the Tax Policy Center hosted a forum to consider ways to fashion a "fair cap." Click on the links below to listen to the forum and read a policy paper.

Policy Paper (by Stan Dorn): "Capping the Tax Exclusion of Employer-Sponsored Health Insurance: Is Equity Feasible?"

Tax Policy Forum on the Capping the Exclusion of Employer-Sponsored Health Insurance

Earlier this week President Obama met with Senate Democrats working on healthcare legislation. In his prepared remarks, released by the White House, he underscored the importance of controlling health care costs at the same time coverage is expanded:

"I want to just make mention of something that I've talked to many of you privately about. I want to say this publicly. As we move forward on health care reform, it is not sufficient for us simply to add more people to Medicare or Medicaid to increase the rolls, to increase coverage in the absence of cost controls and reform. And let me repeat this principle: If we don't get control over costs, then it is going to be very difficult for us to expand coverage. These two things have to go hand in hand. Another way of putting it is we can't simply put more people into a broken system that doesn't work.

"So we've got to reform the underlying system. And this means promoting best practices, not just the most expensive practices. And one of the things I'm going to be discussing with the health and the finance committees is how can we change incentive structures so that, for example, places like Mayo Clinic in Minnesota are able to provide some of the best health care services in the country at half or sometimes even less of the costs than some other areas where the quality is not as good. What we should be--and by the way, that's not just unique to Mayo. The Cleveland Clinic in Ohio, same thing: top-notch quality, lower costs."

During the meeting with Senators from the Finance and HELP (Health, Education, Labor, and Pensions) Committees, the President also mentioned his interest in a proposal by Senator Jay Rockefeller (D-WV) to beef up the role of MedPAC--the Medicare Payment Advisory Commission. MedPAC is an independent congressional agency established in 1997 to advise Congress on payment and other issues affecting Medicare.

The Rockefeller proposal would reestablish MedPAC as an independent executive agency -- similar to the Federal Reserve -- with enhanced authority to establish and implement Medicare reimbursement rules.

Rockefeller proposal to enhance MedPAC

According to the Congressional Research Service, with enactment of the FY 2009 Supplemental Appropriations bill, ongoing war costs (budget authority) will reach nearly a trillion dollars:

• Operations in Iraq since FY 2003 total $684 billion;


• Operations in Afghanistan since FY 2002 total $223 billion;


• Related military expenditures such as enhanced base and embassy security total $34 billion;


• Total war funding since FY 2002: $941 billion.

The Obama Administration has requested $130 billion in war funding for FY 2010, although this is likely to be inadequate given the FY 2009 costs of $149 billion (including the supplemental).

These cost totals are only the tip of the proverbial iceberg. Additional costs, not reflected in the totals above include: lifetime health care and disability benefits for returning veterans; substantial costs of replacing military hardware (sometimes called "re-setting" the military); and long-term interest costs on the substantial increases in the public debt due to the war. (This is the first time in U.S. history that taxes were decreased during wartime--necessitating heavy borrowing to pay for the war.)

The House-Senate conference on the FY 2009 Supplemental Appropriations Bill has been delayed due to several developments:

• Most House Republicans are now opposing the supplemental funding bill because it includes increased U.S. support for the International Monetary Fund. House Republican Letter on IMF


• Without Republican support for the bill, House leadership will need to convince some anti-war Democrats to vote for the supplemental funding bill (which consists primarily of supplemental funding for Afghanistan and Iraq).


• The Administration has requested additional pandemic flu funding, on top of their recent request.


• Conferees will need to decide whether to include Senate language barring release of photos depicting U.S. abuse of detainees.


• Discussions are under way on whether to include a "cash for clunkers" provision to stimulate the auto industry.