Today, I have submitted comments for 4 separate hearings before 3 committees. One of them is a fairly important economic study on deficits and their relationship to growth that relies a lot on graphics. As I have not yet mastered the graphics tools on this platform, I will publish the text and simply refer you to my blog to see the full presentation.
Comments for the Record
United States Senate Committee on Finance
Hearing: Dually-Eligible Beneficiaries: Improving Care While Lowering Costs
September 21, 2011, 10:00 AM
215 Dirksen Senate Office Building
by Michael G. Bindner
The Center for Fiscal Equity
Chairman Baucus and Ranking Member Hatch, thank you for the opportunity to address this topic. We offer our comments on three areas of this topic, program organization, program parity and program funding.
Separating Medicaid into a program for retirees and the disabled and a program for the non-retired working and non-working poor will allow the retiree program to be fully federalized and managed with Medicare, rather than the separate management that occurs now under CMMS, which is part of the problem. That simple step will add clarity to this issue as the senior and disabled Medicare and Medicaid populations can be managed by the same offices, rather than separately. The question then shifts from parity to effective consolidation – at least on the Medicare side. All retirees and the disabled would be treated under parts A, B and D all the time, including while in nursing home care (part E). Rates would require parity in all settings, however.
The issue of parity is especially important in the area of provider limits. It is useful to compare the impact of how provider limits have been dealt with between the Medicare and Medicaid programs.
Medicare provider cuts under current law have been suspended for over a decade, the consequence of which is adequate care. By way of comparison, Medicaid provider cuts have been strictly enforced, which has caused most providers to no longer see Medicaid patients, driving them to hospital emergency rooms and free clinics with long waiting periods to get care.
The Affordable Care Act works toward increasing funds for Medicaid providers, which is necessary to get people out of emergency rooms. The same act, however, counted on assuming that Medicare provider cuts would be implemented – a heroic assumption – in order to pass according to budget rules. Now that the Act is passed, however, the fiction that current law will be maintained can be dispensed with.
Parity between Medicare and Medicaid is desirable, although without mandatory sick leave, it will not keep poor people from having to use emergency room care, although it will benefit nursing home patients who will be able to see a doctor without hospitalization.
There are many ways of achieving parity, however great care must be used so that these don’t constitute a race to the bottom. Cost shifting should not be used as a substitute for cost saving, especially if such shifting violates the tenants of social insurance.
The whole purpose of social insurance is to prevent the imposition of unearned costs and payment of unearned benefits by not only the beneficiaries, but also their families. Cuts which cause patients to pick up the slack favor richer patients, richer children and grand children, patients with larger families and families whose parents and grandparents are already deceased, given that the alternative is higher taxes on each working member. Such cuts would be an undue burden on poorer retirees without savings, poor families, small families with fewer children or with surviving parents, grandparents and (to add insult to injury) in-laws.
Recent history shows what happens when benefit levels are cut too drastically. Prior to the passage of Medicare Part D, provider cuts did take place in Medicare Advantage (as they have recently). Utilization went down until the act made providers whole and went a bit too far the other way by adding bonuses (which were reversed in the Affordable Care Act). There is a middle ground and the Subcommittee’s job is to find it.
Resorting to premium support, along with the repeal of the ACA, have been suggested to save costs. Without the ACA pre-existing condition reforms, mandates and insurance exchanges, however, premium support will not work because people will have no assurance of affordable coverage. This, of course, assumes that private insurance survives the imposition of pre-existing condition reforms. If it does not, the question of both premium support and the adequacy of provider payments is moot, since if private insurance fails the only alternatives are single-payer insurance and a pre-emptive repeal of mandates and protections in favor of a subsidized public option. The funding of either single-payer or a public option subsidy will dwarf the requirement to fund adequate provider payments in Medicare and Medicaid.
Resorting to single-payer catastrophic insurance with health savings accounts would not work as advertised, as health care is not a normal good. People will obtain health care upon doctor recommendations, regardless of their ability to pay. Providers will then shoulder the burden of waiting for health savings account balances to accumulate – further encouraging provider consolidation. Existing trends toward provider consolidation will exacerbate these problems, because patients will lack options once they are in a network, giving funders little option other than paying up as demanded.
Shifting to more public funding of health care in response to future events is neither good nor bad. Rather, the success of such funding depends upon its adequacy and its impact on the quality of care – with inadequate funding and quality being related.
Ultimately, fixing health care reform will require more funding, probably some kind of employer payroll or net business receipts tax – which would also fund the shortfall in Medicare and Medicaid (and take over most of their public revenue funding).
We will now move to an analysis of funding options and their impact on patient care and cost control.
The committee well understands the ins and outs of increasing the payroll tax, so we will confine our remarks to a fuller explanation of Net Business Receipts Taxes (NBRT). Its base is similar to a Value Added Tax (VAT), but not identical.
Unlike a VAT, an NBRT would not be visible on receipts and should not be zero rated at the border – nor should it be applied to imports. While both collect from consumers, the unit of analysis for the NBRT should be the business rather than the transaction. As such, its application should be universal – covering both public companies who currently file business income taxes and private companies who currently file their business expenses on individual returns.
The key difference between the two taxes is that the NBRT should be the vehicle for distributing tax benefits for families, particularly the Child Tax Credit, the Dependent Care Credit and the Health Insurance Exclusion, as well as any recently enacted credits or subsidies under the ACA. In the event the ACA is reformed, any additional subsidies or taxes should be taken against this tax (to pay for a public option or provide for catastrophic care and Health Savings Accounts and/or Flexible Spending Accounts).
The NBRT can provide an incentive for cost savings if we allow employers to offer services privately to both employees and retirees in exchange for a substantial tax benefit, either by providing insurance or hiring health care workers directly and building their own facilities. Employers who fund catastrophic care or operate nursing care facilities would get an even higher benefit, with the proviso that any care so provided be superior to the care available through Medicaid. Making employers responsible for most costs and for all cost savings allows them to use some market power to get lower rates, but no so much that the free market is destroyed.
This proposal is probably the most promising way to arrest health care costs from their current upward spiral – as employers who would be financially responsible for this care through taxes would have a real incentive to limit spending in a way that individual taxpayers simply do not have the means or incentive to exercise. While not all employers would participate, those who do would dramatically alter the market. In addition, a kind of beneficiary exchange could be established so that participating employers might trade credits for the funding of former employees who retired elsewhere, so that no one must pay unduly for the medical costs of workers who spent the majority of their careers in the service of other employers.
The NBRT would replace disability insurance, hospital insurance, the corporate income tax, business income taxation through the personal income tax and the mid range of personal income tax collection, effectively lowering personal income taxes by 25% in most brackets.
Note that collection of this tax would lead to a reduction of gross wages, but not necessarily net wages – although larger families would receive a large wage bump, while wealthier families and childless families would likely receive a somewhat lower net wage due to loss of some tax subsidies and because reductions in income to make up for an increased tax benefit for families will likely be skewed to higher incomes. For this reason, a higher minimum wage is necessary so that lower wage workers are compensated with more than just their child tax benefits.
The Center calculates an NBRT rate of 27% before offsets for the Child Tax Credit and Health Insurance Exclusion, or 33% after the exclusions are included. This is a “balanced budget” rate. It could be set lower if the spending categories funded receive a supplement from income taxes.
Thank you for the opportunity to address the committee. We are, of course, available for direct testimony or to answer questions by members and staff.
Comments for the Record
U.S. House of Representatives
Committee on the Budget
The Broken Budget Process: Perspectives from Former CBO Directors
210 Cannon House Office Building
September 21, 2011, 10:00 AM
By Michael G. Bindner
Center for Fiscal Equity
Chairman Ryan and Ranking Member Van Hollen, thank you for the opportunity to submit comments for the record on this issue. These comments were first published on our web page in 2003 and are as equally valid now as they were then.
For most of recent memory, especially in years where large deficits loom, the Congress and the President have been unable to reach consensus on a budget in time for the start of the fiscal year on October first. This is almost scandalous, given the impact of the federal government on the economy. The lives of millions of hardworking public servants and contractors hang in the balance while Congress debates, or more likely stalemates. While it is healthy to debate the nature of government from time to time, holding the nation hostage to stage it is not.
When the government is divided between the parties, budgets are submitted "dead on arrival.” This leads to a series of missed deadlines and a likely impasse that threatens to shut the government down at the beginning of the fiscal year. Often, the impasse leads to the need for an Omnibus Appropriation Act, with its attendant pork barrel spending to assure passage (a practice which further undermines citizen confidence in the Federal Government). The same wasteful programs and tax benefits get funded and the budget crisis goes on. This goes on because each side gains political points for blaming the other, while no one has any stake in lessening their own role.
The federal budget process is broken. It must be replaced with a new budget process that allows for agreement on broad issues and a continuation of government while the details and controversies at the programmatic level are worked out. The solution must include incentives to keep the process moving. To force congressional movement on overall priorities, the administration withholds detailed appropriations proposals until a general solution is passed in both houses of Congress and signed by the President (a Joint Budget Resolution). After this is passed, detailed proposals are submitted and acted upon by the authorization and appropriations committees. A two-year budget process is suggested to assure the process is completed on time.
Phase One: The Joint Budget Resolution
The first phase of the budgetary process is high-level budget enactment. The budget message, revenue estimates and increases, departmental, independent agency and functional spending totals, and deficit projections are included in the Joint Budget Resolution proposal. Until the resolution is enacted the Executive withholds detailed spending estimate or authorizing language. The proposal is submitted to Congress during mid-January, with passage of the Joint Budget Resolution by the July 4th recess.
A Joint Committee on the Budget considers the resolution. The Committee consists of members of the leadership of both houses, various committee chairs and members, and members not assigned to any major authorizing or appropriations committee (who shall be a majority). The Chair alternates between chambers. Such a committee is necessary to expedite action.
After the Committee reports the resolution it is considered in an expedited fashion. If there are differences between the amended versions of the resolution it goes back to the Committee one final time, and acts as a conference committee in this case.
The Executive Branch uses the totals enacted in the Joint Budget Resolution as the totals in its detailed authorizations and appropriations submissions.
Phase Two: Authorization
The second phase of the budgetary process is authorization, which begins after the Joint Budget Resolution is signed, in July of the first session. Most of the authorization process is accomplished before the appropriations process begins. To guarantee this, no appropriations bill is marked up in committee in either house until the authorization bill has secured floor passage in that house, including tax and entitlement adjustments. This occurs by February of the second session. At the start of a new President's term honeymoon authorizations changes are submitted by February, with enactment by September so that they take effect October first.
Authorization legislation addresses changes to current law, revised spending ceilings and floors (which the marked up appropriations bills does not exceed or fall short of subject to a point of order), any new programs or program elimination (the only time these occur), changes to agency regulations, adjustments to any entitlement, and estimates of their effect on the next fiscal period.
The revenue committees examine the progressivity of both taxation and spending to assure that the middle class pays for itself and the upper 20% pay for the benefits they receive plus a lions share of the benefits for the bottom 20% of income earners. Corrections in the tax code are enacted as a result of this review. The revenue committees also examine the level for cost of living adjustments (COLAs) and indexing. COLAs and indexing are adjusted so the public sector neither looses or gains as the result of inflation.
As part of this process, authorizing committees consider major regulations enacted since the last authorization. Doing so avoids the practice of appropriators playing games with the funding of regulatory agencies, since Congress has the opportunity to work its will during the authorization process. Before continuing on to the appropriations phase, I briefly discuss ways in which regulatory power is exercised in such a way as to not appear illegitimate by the vast majority of the public.
Increasing Congressional Review of Regulation
A major theme in modern political life is the popular protest against regulations enacted by unelected bureaucrats. This anti-Washington theme aided the campaigns of many recent administrations, including the current one. Other reforms in the regulatory review process increased regulatory accountability to the President. However, these did little to improve the position of Congress.
On June 30, 1983, the Supreme Court ruled the legislative veto unconstitutional in an immigration case, In re Chada. Since that time a Joint Resolution of Disapproval legislative veto has been enacted as a general case. Several other legislative vetoes have also been acted into law. However, many of these cannot survive the standards imposed by the Chada decision. Therefore, Congressional control of agency regulation remains an open question.
To regain control of regulations, authorization committees review the body of regulations under their purview during consideration of the President’s budget. The President or Independent Agencies submit any changes to their major regulations (enacted since their last authorization) as an appendix to their authorization proposals. If the authorizing committees approve of the changes they do nothing. However, if they are unsatisfied with the changes, or wish to make changes of their own they can at this juncture. These changes are made one of two ways. The first way is to write the change into law, which restricts subsequent action. If circumstances change the agency then seeks legislative relief or waits until the next authorization cycle. This option limits the ability of agencies to deal with emergencies, making it undesirable. The second way is to change agency regulation by law, allowing for further change as circumstance changes. This almost superficial difference preserves flexibility in the regulatory process, making it desirable.
Enactment of this proposal firmly places regulatory initiative with the Congress. This approach gives the people say in the regulatory process through Congress, strengthening representative government. In doing so it helps the less well organized (who know how to reach their Congressman, but not the administrative agency). The regulatory review provisions have two more advantages over the status quo. First, they bring the regulatory review process into sharper view, allowing for more involved citizen input. Second, they avoid the constitutional pitfalls of the legislative veto.
Phase Three: Appropriations
The third phase of the budgetary process is appropriations. The Executive Branch begins preparing its detailed appropriation submissions after passage of the Joint Budget Resolution in July of the previous year. It modifies its targets when Authorization legislation is marked up. The Appropriations submissions clear OMB and go to the Hill by March 15th of the second session. The submissions for each program are between the ceiling and floor listed in the authorization legislation. The total for the agency or department matches the total found in the Joint Budget Resolution. Agency submissions reflect program financial performance. Agency personnel defend the submission.
Appropriations sub-committees do not mark up legislation until after the authorization has cleared the full chamber. The full Appropriations Committees reports by June 15. If the total for an appropriations bill exceeds the total specified in the Joint Resolution the bill must clear the Joint Budget Committee before going to the floor. Legislation gets to the President's desk by Labor Day.
If an appropriations bill is not enacted prior to the start of the fiscal period (October 1) the current distribution of spending within current law is maintained, minus programs cancelled in the authorization phase, at the total set in the Joint Budget Resolution. This prevents the government from stopping at the end of the fiscal year.
Enactment of this proposal restores discipline to the budget process. Every actor in the process has specific responsibilities and incentives to meet them. Each actor maintains his share in the process, but not more than his share. The Executive Branch is forced to offer realistic proposals. The Legislative Branch meets its deadlines. The Federal Government then stops arguing about the budget and gets on with the business of governing.
There is support for these propositions in the academic and professional literature. Thomas Lynch of Florida Atlantic University also advocates a two-step budget process in "Federal Budget Reform," beginning with passage of a Joint Budget Resolution, which sets overall spending priorities. After this resolution passes agencies submit their requests, which are considered in detailed budget and bills. The strength of this approach is that it forces Congress to decide on overall priorities before they can begin to consider their local interests. Rudolph Penner and Alan Abramson, in their landmark book Broken Purse Strings, support the establishment of a Joint Budget Committee (echoing Senator Pete Domenici), a Joint Budget Resolution and multi-year budgeting.
Thank you for the opportunity to address the committee. We are, of course, available for direct testimony or to answer questions by members and staff.
Comments for the Record
House Ways and Means Committee
Hearing on Economic Models Available to the Joint Committee on Taxation for Analyzing Tax Reform Proposals
Wednesday, September 21, 2011, 10:00 AM
1100 Longworth House Office Building
By Michael G. Bindner
Center for Fiscal Equity
Chairman Camp and Ranking Member Levin, thank you for the opportunity to submit comments on these issues. The Center for Fiscal Equity feels three types of models merit attention.
The first type of model needed is a robust model for the estimation of both revenue and the impact on the economy of consumption taxes, which include the FairTax, Value Added Taxes and a VAT-like Net Business Receipts Tax. The Center for Fiscal Equity bases its estimates for VAT and NBRT revenues on estimates developed by the Brooking-Urban Tax Policy Center, which estimate that a 5% broad based VAT would raise $259 Billion after reductions in other types of revenue are factored in.
We suggest that the JCT validate this model and its sensitivity range. For example, do these estimates imply that a 10% VAT would yield $518 Billion in net revenue? Would a 25% broad based NBRT yield $1.285 Trillion? A robust set of estimates by the JTC would keep everyone on the same page in proposing various revenue options.
The second type of model needed for tax reform and deficit reduction is an estimate of the economic effects of various spending and tax benefit programs. The following questions come to mind:
What is the impact of defense contracting versus Medicare provider payments versus the Child Tax Credit versus lower dividend tax rates?
Do lower tax rates on the wealthy cause growth or do they provide an incentive to firms to pursue productivity gains, including off-shoring jobs, union busting and holding wages in line?
What is the impact of these policies on the middle class?
What is the impact of these policies on inflation?
How do tax policies relate to the creation of asset bubbles, especially when capital gains taxes are cut, as they were in 1997, when the Technology Boom was fueled, only to be followed by the Tech Bubble popping and the 2001 recession?
On all of these models, is there a lag effect between outlays of various types and their full impact on the economy?
How does each type of spending effect consumption, savings and investment?
What are the secondary effects as households and firms then spend the money they receive, including the effect on federal and state revenues?
Is aerospace procurement more likely to stimulate spending the, for example, a tax cut to aerospace executives?
How does each affect investment in both plant and equipment and in the secondary markets?
The third type of model relates to how deficit financing effects economic growth rates in the aggregate. With a large debt, are deficits partly offset by outlays for net interest, with the size of the deficit being offset by such outlays when they are approximately equal? How do these effects relate to tax policy? When tax policy is more progressive, yielding more revenue from wealthier taxpayers, is budget balancing stimulative? When tax rates are cut and revenue falls, are deficits required to keep money in circulation?
The Center for Fiscal Equity has developed figures relating to the third model, which we call the financial margin, where the financial margin is the deficit/surplus added to outlays for net interest, all expressed as a percentage of Gross Domestic Product (GDP) and regressed onto growth in real GDP in the next year, removing inflation from the analysis. See the following table for the data set used in these analyses.
This repeats a study we performed but did not publish in 1987, which showed that Republican administrations generally must run bigger deficits to yield economic growth, but Democratic administrations generally did not. Indeed, these administrations had better economic performance by raising marginal tax rates on wealthier households.
For the Eisenhower years, roughly fiscal year 1954 – 1960, budget results predict growth in 1955-1961.The model explains 47% of the variation of the data and predicts a base growth rate of 4.1% with a 1.38% less growth for every 1% of GDP decrease in the financial margin – meaning that deficits were necessary to keep growing the economy. While tax rates were high, these rates were not designed to raise revenue, but to assure that middle class jobs were preserved.
The Kennedy and pre-war Johnson years show a much different picture. In a model which explains 98% of the variation, 3.13% of growth results from every 1% increase in the financial margin, with a base growth rate of 4.2%. In other words, paying back debt led to more growth.
The Viet Nam era results explain 53% of the variation, with a base growth rate of 3.6% and 1.16% of additional growth for every 1% of GDP reduction in the financial margin. Deficit spending is again required for increased growth.
The postwar model explains 66% of the variation, with a base growth rate of 0.2% and 2.3% of growth resulting from every 1% decrease in the financial margin, showing deficit spending was necessary to yield growth in the economy.
For the Reagan-Bush years as a whole, the model explains 37% of variation for the period 1981-1992, with a base growth rate of 1.4% and 1.3% of additional growth resulting from every percent GDP of deficit spending net of net interest. Isolating 1981-1986 yields a model which explains 96% of the variation. With a base growth rate of -2.0 %, 2.9% of growth is produced for every one percent of GDP decline in the financial margin – meaning budget balancing hurt the economy and deficits were necessary to grow it.
When George H.W. Bush and Bill Clinton raised taxes and controlled spending, more growth resulted, with 0.33% of growth resulting from each additional percentage of debt reduction, in a model that explains 72 percent of the variation, with a base growth rate of 3.4%.
The curve changes to negative once fiscal policy changed direction. In a model that explains 57% of the variation and a base growth rate of 2.4%, achieving a 1% growth rate requires an additional 0.27 percent of GDP loss in the financial margin – meaning the anemic growth of the last decade was fueled by deficits.
We believe that a Keynesian relationship explains these findings. When fiscal policy in the aggregate takes more money out of the bond markets after taxes have been cut, the running of deficits (net of interest payments) reduces savings and increases consumption by both the government and households.
When budget balancing using tax increases aimed at lower wage workers occurs, such as an increase in the payroll tax or “sin taxes” or through cuts to spending, such as Gramm-Rudman-Hollings, and deficits are smaller compared to net interest, the economy contracts as the savings sector on average increases at the expense of both government and household spending.
When budget balancing occurs because of higher marginal tax rates, however, money is removed from the savings sector in comparison to the consumption sector, making more credit available as well as higher government and household consumption.
This is essentially what happened when Presidents Bush and Clinton raised taxes in the 90s. Even though the budget neared and achieved balance, consumption continued in both the government and household sectors, although there were cuts, both absolute and programmatic, in the defense sector, while credit was widely available. When capital gains tax rates were cut in 1997, however, the savings sector received a greater share of output, resulting in an investment boom which we now know exceeded the availability of high value investment opportunities, driving up both asset prices and allowing junk investments to enter the market, which could not provide adequate returns in most cases, causing the 2001 recession.
The tax cuts of 2001 and 2003 reduced revenue and increased deficits to record levels in the post-war era, with further asset inflation leading to the current economic depression, especially in the housing market.
This brings us to the current economic situation. The Great Recession as obviously shifted the Financial Margin curve. While the current curve has few data points, these observations are consistent with both theory and economic data in the post-war era.
Assuming that projections in the President’s budget are accurate for 2011, it is possible to compute an estimate for FY2012 growth using FY2011 data and the current model. If the 2011 growth is estimated using the model rather than Administration projections, growth will be lower by half a percentage point. Using the model, 2012 growth based on current fiscal year spending is projected at 3.5%, provided that spending is not cut too much. In this model, lower spending results in a more anemic recover.
The Joint Committee on Taxation is urged to examine this model, as it has major implications for the road forward. Cutting the budget too aggressively could result in disaster, however allowing the Clinton tax rates to expire may allow the economy to return to the curves experienced in the early 1960s or the 1990s.
Our comments raise serious issues that must be dealt with in determining fiscal policy in the near term. Further adherence to current tax policy may lock us into a model where unsustainable debt is necessary to sustain the economy. Finding a way out of this debt by reverting to a more rational tax policy, based on these data, is essential.
Thank you again for the opportunity to present our comments. We are always available to members, staff and the general public to discuss these issues.
Comments for the Record
House Committee on Ways and Means
Subcommittee on Health
Hearing: Expiring Medicare Provider Payment Policies
September 21, 2011, 2:00 PM
by Michael G. Bindner
The Center for Fiscal Equity
Chairman Herger and Ranking Member Stark, thank you for the opportunity to submit my comments on this topic. This topic is key to the question of the affordability of health care entitlements. It is useful to compare the impact of how provider limits have been dealt with between the Medicare and Medicaid programs.
Medicare provider cuts under current law have been suspended for over a decade, the consequence of which is adequate care. By way of comparison, Medicaid provider cuts have been strictly enforced, which has caused most providers to no longer see Medicaid patients, driving them to hospital emergency rooms and free clinics with long waiting periods to get care.
The Affordable Care Act works toward increasing funds for Medicaid providers, which is necessary to get people out of emergency rooms. The same act, however, counted on assuming that Medicare provider cuts would be implemented – a heroic assumption – in order to pass according to budget rules. Now that the Act is passed, however, the fiction that current law will be maintained can be dispensed with.
Parity between Medicare and Medicaid is desirable, although without mandatory sick leave, it will not keep poor people from having to use emergency room care, although it will benefit nursing home patients who will be able to see a doctor without hospitalization.
Separating Medicaid into a program for retirees and a program for the non-retired working and non-working poor will allow the retiree program to be fully federalized and managed with Medicare, rather than the separate management that occurs now under CMMS, which is part of the problem. That simple step will add clarity to this issue.
There are many ways of achieving parity, however great care must be used so that these don’t constitute a race to the bottom. Cost shifting should not be used as a substitute for cost saving, especially if such shifting violates the tenants of social insurance.
The whole purpose of social insurance is to prevent the imposition of unearned costs and payment of unearned benefits by not only the beneficiaries, but also their families. Cuts which cause patients to pick up the slack favor richer patients, richer children and grand children, patients with larger families and families whose parents and grandparents are already deceased, given that the alternative is higher taxes on each working member. Such cuts would be an undue burden on poorer retirees without savings, poor families, small families with fewer children or with surviving parents, grandparents and (to add insult to injury) in-laws.
Recent history shows what happens when benefit levels are cut too drastically. Prior to the passage of Medicare Part D, provider cuts did take place in Medicare Advantage (as they have recently). Utilization went down until the act made providers whole and went a bit too far the other way by adding bonuses (which were reversed in the Affordable Care Act). There is a middle ground and the Subcommittee’s job is to find it.
Resorting to premium support, along with the repeal of the ACA, have been suggested to save costs. Without the ACA pre-existing condition reforms, mandates and insurance exchanges, however, premium support will not work because people will have no assurance of affordable coverage. This, of course, assumes that private insurance survives the imposition of pre-existing condition reforms. If it does not, the question of both premium support and the adequacy of provider payments is moot, since if private insurance fails the only alternatives are single-payer insurance and a pre-emptive repeal of mandates and protections in favor of a subsidized public option. The funding of either single-payer or a public option subsidy will dwarf the requirement to fund adequate provider payments in Medicare and Medicaid.
Resorting to single-payer catastrophic insurance with health savings accounts would not work as advertised, as health care is not a normal good. People will obtain health care upon doctor recommendations, regardless of their ability to pay. Providers will then shoulder the burden of waiting for health savings account balances to accumulate – further encouraging provider consolidation. Existing trends toward provider consolidation will exacerbate these problems, because patients will lack options once they are in a network, giving funders little option other than paying up as demanded.
Shifting to more public funding of health care in response to future events is neither good nor bad. Rather, the success of such funding depends upon its adequacy and its impact on the quality of care – with inadequate funding and quality being related.
Ultimately, fixing health care reform will require more funding, probably some kind of employer payroll or net business receipts tax – which would also fund the shortfall in Medicare and Medicaid (and take over most of their public revenue funding).
We will now move to an analysis of funding options and their impact on patient care and cost control.
The committee well understands the ins and outs of increasing the payroll tax, so we will confine our remarks to a fuller explanation of Net Business Receipts Taxes (NBRT). Its base is similar to a Value Added Tax (VAT), but not identical.
Unlike a VAT, an NBRT would not be visible on receipts and should not be zero rated at the border – nor should it be applied to imports. While both collect from consumers, the unit of analysis for the NBRT should be the business rather than the transaction. As such, its application should be universal – covering both public companies who currently file business income taxes and private companies who currently file their business expenses on individual returns.
The key difference between the two taxes is that the NBRT should be the vehicle for distributing tax benefits for families, particularly the Child Tax Credit, the Dependent Care Credit and the Health Insurance Exclusion, as well as any recently enacted credits or subsidies under the ACA. In the event the ACA is reformed, any additional subsidies or taxes should be taken against this tax (to pay for a public option or provide for catastrophic care and Health Savings Accounts and/or Flexible Spending Accounts).
The NBRT can provide an incentive for cost savings if we allow employers to offer services privately to both employees and retirees in exchange for a substantial tax benefit, either by providing insurance or hiring health care workers directly and building their own facilities. Employers who fund catastrophic care or operate nursing care facilities would get an even higher benefit, with the proviso that any care so provided be superior to the care available through Medicaid. Making employers responsible for most costs and for all cost savings allows them to use some market power to get lower rates, but no so much that the free market is destroyed.
This proposal is probably the most promising way to arrest health care costs from their current upward spiral – as employers who would be financially responsible for this care through taxes would have a real incentive to limit spending in a way that individual taxpayers simply do not have the means or incentive to exercise. While not all employers would participate, those who do would dramatically alter the market. In addition, a kind of beneficiary exchange could be established so that participating employers might trade credits for the funding of former employees who retired elsewhere, so that no one must pay unduly for the medical costs of workers who spent the majority of their careers in the service of other employers.
The NBRT would replace disability insurance, hospital insurance, the corporate income tax, business income taxation through the personal income tax and the mid range of personal income tax collection, effectively lowering personal income taxes by 25% in most brackets.
Note that collection of this tax would lead to a reduction of gross wages, but not necessarily net wages – although larger families would receive a large wage bump, while wealthier families and childless families would likely receive a somewhat lower net wage due to loss of some tax subsidies and because reductions in income to make up for an increased tax benefit for families will likely be skewed to higher incomes. For this reason, a higher minimum wage is necessary so that lower wage workers are compensated with more than just their child tax benefits.
The Center calculates an NBRT rate of 27% before offsets for the Child Tax Credit and Health Insurance Exclusion, or 33% after the exclusions are included. This is a “balanced budget” rate. It could be set lower if the spending categories funded receive a supplement from income taxes.
Thank you for the opportunity to address the committee. We are, of course, available for direct testimony or to answer questions by members and staff.