Medical Device Daily Washington Editor

WASHINGTON – The Senate Finance Committee met again Tuesday to review the last rung – and possibly the third rail – of healthcare reform, namely how to pay for it. While many ideas were floated during the session, committee chairman Max Baucus (D-Montana) made one point resoundingly clear: the tax-exempt status of health insurance premiums might be subject to tweaking, but the concept itself is sacrosanct as far as he is concerned.

During last year's presidential campaign, Sen. John McCain (R-Arizona) proposed to end the exclusion as a source of revenues for expanding coverage, but then-Sen. Barack Obama derided the idea. The Obama administration has handed off to Congress the task of providing the framework of reform, but President Obama may be forced into an about-face on the issue should Congress go down this road.

Given the raucousness of the previous hearing on healthcare reform (Medical Device Daily, May 6, 2009), Baucus tried to ward off a repeat performance by protesters, stating that "the reason we're getting together is because we respect each others' views." He also said, "I sincerely hope that everyone in the audience will respect" the importance of the proceedings enough not to disrupt the hearing.

It was for naught. One protester stood up and shouted that the tax-exempt status of healthcare premiums "is regressive" to vigorous applause from sympathizers in the audience. Another protester yelled out, "no more Blue Cross' double crosses," complaining "we're tired of insurer's greed."

After things calmed down, Baucus acknowledged that "the current tax exclusion is imperfect," but made the case that "the first place we should look for savings is within healthcare itself."

Later in the hearing, after one of the witnesses argued for a wholesale repeal of the tax exemption for premiums, Baucus observed, "I honestly don't believe we're going to repeal the exclusion. That's just not going to happen."

Sen. Chuck Grassley (R-Iowa), the committee's ranking GOP member, said, "I'll bet if you polled every member of Congress as to what the most difficult part of reform is, they'd probably say what we're doing today," which is cost.

Grassley expressed some skepticism over the announcement at the White House Monday afternoon of an industry proposal to shave $2 trillion from healthcare costs between now and 2019 (Medical Device Daily, May 13, 2009), stating that the gathering at the White House might "lead some to believe that we don't need this round table." However, he asserted "I'm sure we'll be waiting for some time before this fairy dust becomes gold."

Grassley asked members of the witness panel about their views of the tax-exempt status of non-profit hospitals. "It appears that tax exempt hospitals are more likely to provide services" to indigent populations, he said, but added, "presumably as a result of universal insurance there will be a decline in" care for the uninsured and hence no need for the exemption.

Edward Kleinbard of the Joint Committee on Taxation, a House-Senate panel charged with reviewing tax policy for the two bodies, said he has seen data generated by the Congressional Budget Office and by the Internal Revenue Service on the topic that he said "are consistent with the point that you've made," noting that about $6 billion could be reclaimed by the federal government each year.

Jonathan Gruber, PhD, of the Massachusetts Institute of Technology (Cambridge), cautioned that "about a third of uncompensated care goes to the insured" who end up not paying. "There will still be a need for uncompensated care" even when insurance approaches universality, he said.

Gerald Shea of AFL-CIO (Washington) observed that the meta-union's members "are concerned about the destabilizing effect of this kind of tax change" while hospitals simultaneously deal with the cost controls that Congress will seek as part of healthcare reform, suggesting that Congress "not be trying to do these two things together" due to the possibility that "it would really destabilize the system."

On the subject of the tax-exempt status for healthcare insurance premiums, Kleinbard said "we believe that the exclusion, which is really an employer exclusion, is fundamentally important," adding that despite Baucus' statement that it is regressive that the exemption is much more important to those in lower-income rungs than those who are relatively well-to-do.

"In order for any tax exclusion to be equitable," Kleinbard opined, it would "have to take into account some of these regional differences" in healthcare spending, a phenomenon documented in the now-well-known Dartmouth Atlas.

Sen. Orrin Hatch (R-Utah) asked Kleinbard whether adjusting the tax exemption would run afoul of existing law, asking further whether "such a geographic variation mean some are subsidizing healthcare for others."

Kleinbard acknowledged that any such mechanism "would be extraordinarily complex," remarking further, "this walks you right back into the section 89 experience," which he said triggered a backlash.

The reference is to section 89 of the Internal Revenue Code, which went into force in January 1989. Section 89 requires that employers offer the same health benefits to all employees regardless of salary level, and companies that offer benefits to employees in different regions could violate section 89 requirements if they tweaked the exemption by region and the tweak happened to result in more benefits for employees who earn more than others.

All the same, the idea had a lot of support. Gruber said the exemption is "a problem in our tax code and a natural place to look" for monies to reform healthcare. He cited a "win-win nature of the tax exclusion," suggesting that policymakers could either cap the total tax value of the exemption, set an income ceiling at which the exemption is no longer available, or a combination of the two. In any event, he argued, the exemption is "the No. 1 place to look."