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Grassley: No HSA Markup This Year

MARCH 8, 2006 -- Senate Finance Committee Chairman Charles E. Grassley said Wednesday he doesn't expect his panel this year to mark up White House proposals to expand tax breaks for health savings accounts (HSAs), citing the lack of a filibuster-proof majority to support them.

In an interview after a hearing on health care tax policy, Grassley said he thinks new HSA tax breaks would have to be part of the budget reconciliation process in order to get through the Senate.

"We're not going to have tax reconciliation in the budget," Grassley said. "If you don't have tax reconciliation in the budget, I don't know how you move things like this."

Legislation that is part of the budget reconciliation process requires only a simple majority to obtain congressional passage.

The broad focus of the hearing itself—"a checkup on the nation's health care tax policy," in Grassley's words—appeared to be a tipoff that Grassley is not yet ready to move on new tax subsidies for HSAs. He also said that "before we add more tax subsidies, we first should look to see if we can make the incentives we have today work better."

Grassley also noted the importance of working with Democrats on tax-based solutions to the problem of rising health costs and growing uninsured population. And the panel's top Democrat, Sen. Max Baucus of Montana, isn't keen on HSAs, Grassley noted. Baucus says the accounts could pull healthy people away from other types of insurance, making it unaffordable for those who are older and suffer from chronic diseases.

"I think HSAs are so new that it's reasonable that Sen. Baucus has the concerns he might have and he may be right," Grassely said after the hearing. "I hope he's not right because I think they're a good answer. But it's going to take a while to show who's right."

The Bigger Picture
Grassley said at the hearing that an examination of the nation's tax policy relating to health care is long overdue, however, and that the committee aims to tackle the issue broadly and to infuse it with fresh thinking.

To that end, the committee invited former Treasury Secretary Paul O'Neill to testify, and the policy maverick did not disappoint.

One of the focuses of the hearing was whether excluding employer-paid medical benefits from income and payroll taxes is a worthwhile tax incentive. That subsidy amounts to a $178 billion subsidy to employers to offer health care coverage, Grassley noted.

O'Neill declared that there should be no deductions or credits in the tax system. "Our tax system should be used to raise revenue—period."

Critics of the tax exclusion say it has led to excessive health benefits for many employees that separates them from any stake in the true costs of health care. O'Neill said the current system would be more efficient if each individual was required to purchase a health insurance policy against catastrophic health costs, with "a simplified, fundamentally reformed" tax system helping low-income Americans pay for that coverage.

O'Neill added that such full access to health care would be affordable if the health care system sought to deliver perfect, error-free care. Establishing a goal of perfection is highly motivating to employees, he said. Virtually error-free performance is attainable, he added, based on the safety record Alcoa compiled when O'Neill was CEO of that company and it set a goal of absolute safety attained through analyzing and correcting systems of work that produced accidents.

Alcoa, an aluminum manufacturing company, is now the safest workplace in the world, O'Neill asserted. U.S. health care could see savings of 30 percent to 50 percent with that approach, O'Neill maintained. He suggested the United States start by immediately funding "a study of five outstanding American hospitals that systematically details how all of their operations are performing when measured against perfection." Doing so would identify problems in work processes that produce errors that could then be corrected, he said, and serve as a model for other U.S. providers.

Goals other than delivering perfect care—such as reducing lengths of hospital stays, a "dominant" theme of health care delivery—"are not rooted in biology and healing, the very point of the health care system. Accordingly, focusing on them threatens to destroy value rather than create it, by creating incentives for behaviors unassociated or disassociated from healing," O'Neill said.

Urban Institute fellow Leonard Burman said that tackling rising costs by ending the employer tax exclusion altogether and giving individuals a direct stake in health care costs would still leave health insurance unaffordable for many. Burman has suggested limiting tax breaks for employer-sponsored insurance, a move intended to discourage excessive benefits by subjecting them to taxation.

Grassley said he does not think the employer exclusion is good health care policy and that individuals need to have a more direct stake in the cost of health care. But there's a "terrible political hurdle" to be cleared in overcoming it, he said. When former Senate Finance Chairman Robert Packwood, R-Ore., (1969-96) tried to cap the exclusion years ago, "I never saw such an avalanche of labor and corporations trying to stall that," Grassley said.

"There's a little more understanding [now] that there is a negative side to employer-sponsored third-party pay," but "it's still a very difficult issue," Grassley said. "One way though to kind of work around the political complication ... is to go the HSA route." But not this year, apparently.

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