September 30, 2014

Might Health Care Reform Be the 'Grand Bargain'?

Last Thursday, the Bipartisan Policy Center’s (BPC) Health Care Cost Containment Initiative released a comprehensive plan to increase efficiency and reduce costs while reorienting the nation’s health care system to become more patient-centered. That combination would ideally lead not only to a more sustainable fiscal future but to better health care as well.

The plan targets the largest health care levers that federal policymakers have: Medicare and the tax code -- specifically the exclusion of employer-provided health care from taxation. The plan, as scored by health policy experts, would reduce budget deficits over the next 10 years and then continue to lower the trajectory of the federal debt.

Medicare would be transformed into a system that rewards value and coordination instead of the quantity of services, and the tax code would no longer encourage overspending on health care. Furthermore, these changes at the federal level are meant to encourage and incent a more rational private health care system.

These lofty goals were heralded by BPC’s health care leaders: former Senators Tom Daschle, Bill Frist and Pete Domenici, along with Dr. Alice Rivlin. Their agreement after a year of discussion, painstaking research and stakeholder outreach suggests that their scrupulously bipartisan conclusions might be more than just a legislative pipe dream.

In fact, in the context of the current budget debate in Washington and the recent budgets from the President, Senate Democrats and House Republicans, the BPC plan might itself be a great “grand bargain” if a more comprehensive one can’t be reached.

Nearly all of the BPC plan’s Medicare changes that save money within the 10-year budget window (totalling about $300 billion) have also been included in at least one of the three other budget plans. The proposed changes have also been included in recent reports by Simpson-Bowles and the National Coalition on Health Care.

Reforming the tax code to limit tax expenditures is an idea proffered by the President’s budget, the congressional budgets, and supported by nearly every think tank in Washington. While a complete reform of tax expenditures would be optimal economic and fiscal policy, you could do worse than starting with dramatic changes (increasing revenue by about $260 billion over 10 years) to the largest of them all -- the health care exclusion, which currently reduces revenue by $250 billion a year. The exclusion also encourages excessive health care spending, is dramatically regressive and favors certain employers over others.

While the new Simpson-Bowles framework offers a complete guidepost for deficit reduction and debt stabilization in the short term, and a substantial reduction of federal debt in the long-term, policymakers may be unable at this moment to do the big, grand bargain that touches all areas of the federal budget. 

Discretionary spending is already scheduled to be reduced well below historic norms, making further cuts to such spending unlikely. Comprehensive tax reform or tax rate hikes leading to a large increase in revenue also seem to not be in the cards, given that none of the three budgets from the President and Congress appear to have any appetite for either step.

Major reductions in mandatory spending programs other than Medicare and Social Security likewise seem destined to be off the table given substantial disagreement in the budgets on the desirability of such changes. These programs, save for Medicaid, are already scheduled to shrink in the future, and Medicaid is likely off-limits for cuts in the near-term due to its centrality in the upcoming implementation of the Affordable Care Act.

That leaves three primary areas of focus possible in our current political environment for deficit reduction in the near term and fiscal stabilization over the long term.

One, comprehensive reform of Social Security, was left out of all three budgets both because it is still a “third-rail” and because it would not produce short-term deficit reduction. The Obama proposal to adopt a chained CPI does lower Social Security costs and is a good idea with some bipartisan backing, but that is more properly thought of as governmental reform, not Social Security reform -- and it does not make Social Security sustainably solvent.

The other two primary areas of focus are the items from the BPC plan -- tax expenditures and Medicare reform. Passing a compromise measure with just the BPC plan would lower deficits in the short term while leaving us substantially better off economically and fiscally over the long term due to a more productive and efficient health care system.

It is true that the budgetary “score” would be lower than could be achieved through a Simpson-Bowles type grand bargain, but this smaller bargain would still reflect the core values and essence of their plan, and would leave a much smaller lift towards fiscal responsibility facing the nation down the road.