Healthcare endgame: how to pay for it

Now that Congress is entering the endgame on healthcare, there really is only one issue of consequence that has to be resolved — how you pay for this ambitious new program.

Don’t get me wrong. Emotions run high on the issues of abortion coverage and the public option. But there is a clear path to resolving those two issues: Move to the Senate position. Abortion opponents won’t like that result (they prefer the more stringent Stupak amendment contained in the House bill) and many liberal activists still want a public option as provided in the House bill. However, there is a clear path to crafting a majority in both chambers with these two issues out of the way, even on terms favorable to just the Senate.

However, coming up with the money to pay for providing subsidized coverage for millions of lower-income people who would receive their insurance through the bill’s system of insurance exchanges or through expanding the reach of Medicaid is another matter altogether.

The House closed this gap by providing for a 5 percent income tax surcharge on upper income taxpayers (individuals earning more than $500,000 a year and couples earning more than $1 million a year). The Senate rejected this approach and provided for a 40 percent excise tax on generous healthcare plans (those valued in excess of $8,000 for an individual and $23,000 for a family). These are the “Cadillac” plans.

Organized labor hates the Senate provision and candidate Obama campaigned against such a proposal by Republican nominee John McCain to impose an excise tax on generous healthcare plans. President Obama now seems open to such an approach but it will be a very hard sell to House Democrats.

Organized labor has drawn a line in the sand on this one issue because unions agreed to increases in the value of fringe benefits like health care rather than pressing harder for increases in wages during collective bargaining in recent years. Union opposition to the health policy excise tax resonates louder in the House than in the Senate because union manpower and financial support often can make a bigger difference in a campaign in an individual House district than in a statewide Senate campaign. Also, rank-and-file union members feel betrayed by any backsliding by Obama on this issue since this was how union leadership convinced some reluctant blue-collar workers to support an African American candidate in key battleground states in the Midwest.

Forget about all the noise about other issues in healthcare. This is where the rubber meets the road. It will take all the collective skills of President Obama, House Speaker Nancy Pelosi and Senate Majority Leader Harry Reid to sort this out. Pelosi, in particular, has so far provided great flexibility in sorting through some issues unpopular with parts of her Caucus in order to put together the 218 votes necessary for House passage of health care.

Top union leaders are in the midst of negotiating this issue with the White House this week.

Here’s the formula: Increase the threshold for taxation of “Cadillac” healthcare plans high enough so that most blue-collar workers are not affected, and index this each year to inflation so that blue collar workers won’t be subject of “bracket creep.”  Some observers have suggested that an initial family threshold of $28,000 would exempt the health plans of most union members.

In order to make up for the revenue lost by this higher threshold, the Senate would have to agree to some version of the House’s millionaire’s tax (perhaps a 2.5 percent surcharge). Also, the Senate’s increase in the Medicare payroll tax on certain taxpayers would have to be preserved.

Democrats cannot fail this close to the finish line. There must be a true compromise on the revenue issue. Failure to pass healthcare would be a death blow to Democrats’ chances to keep down Senate and House losses in the 2010 elections. Everyone knows this. It’s time to make a deal.

Frost, who served as a Democratic member of Congress from 1978-2004, is a partner in the law firm of Polsinelli, Shughart.