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From Brainstorms To Headaches


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FROM BRAINSTORMS TO HEADACHES

President Clinton briefly considers, then rejects, then reconsiders a value-added tax to help pay for his health-care reform plan. Hillary Rodham Clinton rules out taxing employee medical benefits early on, only to be contradicted in a blizzard of leaks suggesting that they may be taxed after all.

With less than 30 days to go on its ambitious mission to remake America's health system, the White House reform drive is in serious trouble. The cause: a benefit scheme so generous that Clintonites can't figure out how to finance their plan without jeopardizing the middle-class support so vital to enactment. After cruising along for weeks, piling up promises without regard to costs, the task force suddenly finds itself with a huge gap to fill and only one option with any public appeal at all: more taxes on alcohol and tobacco. "There's a train wreck waiting out there for this process," says a congressional health aide.

The White House's latest flip-flop over the VAT spotlights the Administration's dilemma. Although the President had been backing away from the VAT since February, Health & Human Services Secretary Donna E. Shalala and Deputy Budget Director Alice M. Rivlin praised the notion on Apr. 14--just as many Americans were filing their tax returns. Vice-President Al Gore tried to dampen the speculation. But the White House had to admit the levy was being mulled, giving Republicans a fresh chance to paint Clinton as a tax-and-spend Democrat.

The confusion over financing health-care reform won't end soon.After months of brainstorming over what the blueprint should contain, Hillary Clinton's health-care task force tried to plug in the cost figures--and the computers nearly blew up. The health consulting firm Lewin-VHI Inc. figures that the Administration will have to hike taxes by $47 billion to pay for a basic version of its "managed competition" reform. And that doesn't include the generous treatment some task-force members propose for mental illness. Nor does it tally expensive payouts to the elderly--coverage for prescription drugs, nursing homes, and home health care--that may be required to get the reform through Congress. Add it all up, and the tax bill could be pushing $100 billion.

GROUSING. And the costs go far beyond new taxes. Task-force sources say preliminary estimates show that requiring all employers to offer health insurance could cost as many as 500,000 jobs--the same number the Administration claims its original $16.5 billion stimulus package would have created. Clinton is paying a political price on Capitol Hill, too: Lawmakers, including fellow Democrats, grouse about the scraps of information they're handed by task-force staff chief Ira Magaziner. House aides charge that task-force number-crunchers were low balling some figures: Their estimate for the surge in medical costs from covering 37 million uninsured Americans, for example, was well below the $30 billion estimated by the Congressional Budget Office.

Administration officials argue that the final plan will vindicate their approach. Magaziner ordered health mavens to consider a wide range of ideas--damn the expense or political risk--to ensure they didn't overlook any aspect of the $900 billion medical industry. Economic aides didn't begin to figure the costs until late in the game. "Now, we're at the point where we can see the big picture and determine the size of the effects," says a senior official. But the process created huge public expectations that the White House now must moderate to make the program affordable.

Clinton started out with only the finest of intentions. Early in 1992, he rejected his campaign advisers' plan for controlled prices and heavy regulation in favor of a managed-competition scheme presented to him by fellow Rhodes scholars Magaziner and Labor Secretary Robert B. Reich. Based on his study of medical costs in Rhode Island, Magaziner argued that 24 to 48 of every health-care dollar is spent on paperwork and unnecessary procedures. Managed competition--individuals picking their own health plans through large purchasing cooperatives--could squeeze out that waste and eventually save up to $200 billion a year, he claimed. Those savings could be used to provide coverage for all Americans.

After the election, the rosy projections began unraveling. Congressional estimators and health economists on Clinton's team argued that managed competition would produce little of the savings for expanded coverage. But polls found that middle-class Americans most wanted "health security"--assurance that they would be covered if they changed or lost jobs. That increased pressure on Clinton to put a higher priority on expanding access than on controlling costs.

BASICS. Political concerns are driving up the cost of another piece of managed competition--a standardized benefits package for all. Such a "basic benefit" would help consumers shop and force health plans to compete on price and quality. But to garner support from well-insured Americans, the task force has to ensure that they don't lose much of their current coverage.

Lewin-VHI estimates that the proposed package would boost employers' average annual cost of health insurance from $1,488 per covered person to $1,674. That estimate is based on a plan that would require 85% of all employees to pay higher deductibles. The Clinton team, by contrast, is leaning toward low deductibles--which could boost spending by an additional $5.6 billion--and is still adding benefits to the package. And as the package's costs rise, so does the need to subsidize premiums for small companies, low-wage workers, and the unemployed. Lewin-VHI estimates that such subsidies could total $97.7 billion.

Lost in the task-force draft proposal may well be Magaziner's best selling point: a long-term reduction in administrative costs. The plan would indeed streamline insurance claims. But to enforce the overall cap on medical spending that Clinton has called for, the task force may propose new bureaucracies. Among them: a federal trust fund that would collect all health premiums and taxes, then reallocate the money to purchasing cooperatives in the states. The machinery to allocate those funds must be built from the ground up. So, too, must be mechanisms to enforce any direct controls, such as premium caps.

Administration officials insist the plan will be cleaned up in time for its unveiling in mid-May. Clinton is meeting daily with task-force leaders to chip away at hundreds of decisions. A crucial choice will be how quickly to phase in the new system: Fast implementation will extend coverage in time for the reelection campaign, but a slower pace will spread out the new tax burdens (chart, page 27 29 ).

The VAT has long been popular in Corporate America. A sales-based tax that's assessed at each stage of production and distribution, a VAT would penalize consumption and favor savings and investment. But business support for a VAT hinges on using its revenues to replace existing income taxes, not on layering a VAT on top of current levies. And efforts to ease the VAT's disproportionate impact on the poor would either create many exemptions--cutting into revenues--or open up a broader tax debate that Clinton can ill afford to add to the health-care brawl.

Advocates of managed competition argue for a cap on tax breaks for employer-paid health-insurance premiums. Such a cap would raise revenues and push Americans toward cheaper, more efficient health plans. But with medical costs and premiums varying across the U. S., a tax cap would be hard to administer. And unions are dead against it.

No matter how sharp his pencil, Clinton will face a sizable tax gap, with few attractive options for filling it. In years past, Franklin D. Roosevelt and Lyndon B. Johnson just ducked the question: Both Social Security and Medicare were launched without the funding needed for long-term soundness. In these deficit-ridden times, though, that option isn't open to Clinton. With so little room to maneuver, the collision between his health promises and the nation's tax phobia could turn into a national train wreck.Mike McNamee and Susan B. Garland, with Paul Magnusson, in Washington


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