Health Plan Subsidies Carry Multibillion-Dollar Price : Legislation: Rival Mitchell, Dole bills agree U.S. must help lower-income working Americans buy insurance.

Behind the heated rhetoric and conflicting claims, the two leading health care bills now under debate in the Senate, one offered by Majority Leader George J. Mitchell (D-Me.) and the other by Minority Leader Bob Dole (R-Kan.), share a major point of agreement--multibillion-dollar government payments to help lower-income working Americans buy health insurance.

Surprising as it may seem in the current political climate, the two plans represent bipartisan support for a significant new extension of federal responsibility for health care. Since the mid-1960s, Washington has accepted the burden of insuring retirees and the very poor. The Dole and Mitchell bills embrace an additional principle--that the government has an obligation to help at least some working Americans with the cost of buying insurance.

The two bills differ on the amount of the subsidy they would grant to working Americans, as distinct from those living in poverty. Indeed, the difference is quite large: Mitchell’s subsidy plan would cost more than $100 billion per year, according to the Congressional Budget Office. Dole’s would cost about $30 billion annually, according to a study by the Lewin-VHI health consulting firm.

In addition, while Mitchell would provide money only to lower-income working families--a predominantly Democratic group--a large chunk of Dole’s proposed subsidies would flow in the form of tax benefits, primarily to upper-income, more Republican Americans.

But either the Dole or the Mitchell proposals, or a similar subsidy plan in the House Democratic bill proposed by Majority Leader Richard A. Gephardt (D-Mo.) could, if enacted into law, quickly become one of the federal government’s largest entitlement spending plans--a program that would send checks to tens of millions of American families.

For example, while Dole would spend much less than Mitchell, the GOP leader’s $30 billion in subsidies is significantly larger than the approximately $20 billion a year that the federal government now spends on Aid to Families With Dependent Children, the nation’s chief welfare program.

The price tag on any health insurance subsidy inevitably will be large. Government analysts estimate that comprehensive insurance for a family of four costs in the neighborhood of $6,000 per year. That bill is largely invisible to workers whose employers pay most of their premiums, but it comes to about 13% of the total income of the average family of four, and 40% of the income of families at the federal poverty line.

What brings Dole and Mitchell, publicly so antagonistic, so close together on the overarching principle of subsidies is a basic fact. To reach the goal of reducing the number of Americans who lack insurance, the government has only two possible options: It can force people to act or it can entice them to act.

Originally the Clinton Administration hoped to avoid adding heavily to federal spending, so it proposed force, in the form of an employer mandate--a legal requirement that all companies provide insurance to all workers. But with Republicans opposed to such a mandate and many Democrats shying away from it, members of Congress on both sides of the political aisle have turned to enticements as the path of lesser political resistance.

That decision translates into multibillion-dollar federal subsidies.

The Dole and Mitchell subsidy plans are similar enough that some senators, perhaps more optimistic than realistic, see the nugget of a potential agreement. Others warn that more conservative Republicans might desert Dole if they ever thought his bill stood a real chance of becoming law.

“Gramm probably has 20 votes against anything,” said one senior White House official, referring to Sen. Phil Gramm (R-Tex.), a leading conservative and potential Dole rival for his party’s presidential nomination in 1996. Gramm has put considerable pressure on Dole not to move too close to the Democrats on health.

But the real challenge facing both the Dole and Mitchell formulas is not so much partisan maneuvering as the very real problems in designing and administering the subsidies.

There is, first, the issue of how to pay for them. Mitchell, Dole and Gephardt would finance their plans in part with money currently being spent on Medicaid, the government program that covers the poor. That is theoretically feasible because under their plans many of the poor would buy private insurance, using subsidies, rather than get Medicaid help.

Further, all the plans would offset some of the cost of subsidies by reducing Medicare payments to doctors and hospitals. Mitchell and Gephardt would also raise some taxes, including a 45-cents-per-pack increase in the cigarette tax.

The Congressional Budget Office, in an analysis released Tuesday, estimated that Mitchell’s bill, overall, would reduce the federal deficit slightly over the next 10 years. The budget office has not completed an analysis of either Dole’s bill or Gephardt’s. Both the Dole and Mitchell bills include “circuit breaker” provisions that automatically would reduce most subsidies if Medicaid and Medicare savings fell short, although the workability of those provisions remains in doubt.

A second problem with subsidies is that “nothing else stands still,” as Alice Rivlin, the budget expert who is now director of the White House Office of Management and Budget, put it. Once the government adopts a subsidy plan, if the law does not require companies to pay for insurance, at least some will begin to drop coverage for workers, thereby making them eligible for subsidies, Rivlin noted.

In fact, if the subsidies are generous enough, some workers might be better off if their employers did drop coverage. Should that happen, “the cost can start escalating,” Rivlin said. On the other hand, if the subsidies are kept small, they will not succeed in making insurance affordable.

Because of that dynamic, all cost estimates for subsidy programs involve a fair amount of guesswork.

Finally, there is the danger of creating “perverse incentives” that discourage people from working at all. Conservatives often argue that marginal income tax rates of 35% or more discourage upper-income Americans from making productive investments by reducing their potential gains. Liberal policy analysts point out that, in effect, low-income workers face much higher marginal tax rates.

For instance, a family of four at the poverty line--about $15,000 per year--now loses roughly 56 cents of every additional dollar it earns because of reductions in the earned-income tax credit for working families, along with higher state income taxes and reductions in food stamps.

A family of four earning $18,500 faces a marginal tax rate of 72%. Add on health insurance subsidies that rapidly phase out as income goes above the poverty line and low-income working families could face the dilemma of losing almost every additional penny they earn if their incomes go up.

“You can end up with some very high marginal rates,” said David A. Super of the Center on Budget and Policy Priorities, a liberal organization that has analyzed the impact of health reform plans on the working poor.

A final problem involves administration. Some agency will have to determine who is eligible for the subsidies, disburse the checks, examine income data to check for fraud, and so on. Both Dole and Mitchell would leave that job to the states--a task that many state governments are almost certainly not up to at this point.

In drafting a subsidy plan, members of Congress also face several major policy questions.

The first is whether Congress should target spending only on the very poor or expand subsidies to help working families with income above the poverty line.

Democrats object that Dole’s bill, by concentrating almost exclusively on the poor and near-poor, would leave low-income working families in the lurch. A family of four with income of $25,000, for example, would receive no subsidy under Dole’s bill. So buying a comprehensive insurance package would cost that family almost one quarter of its annual income.

“Many working people will need a subsidy to afford health care coverage,” Mitchell said as he opened the Senate debate. “High costs are driving ordinary Americans to choices that no civilized society should tolerate.”

Dole argues that the issue is affordability. “It’s a question of whether or not you have the money,” Dole said in introducing his bill Tuesday. “Somebody has to pay for this sooner or later.”

The Republican leader, however, is somewhat more generous with another, more prosperous--and more Republican--group. Under Dole’s bill, taxpayers would be able to deduct from their taxable incomes the full cost of the premiums they pay if they buy their own insurance, either because they are self-employed or because their employers do not provide coverage. The deduction would be phased in over several years.

Tax deductions, by nature, provide more benefit to upper-income recipients because they pay higher tax rates.

Mitchell’s plan does not include that tax deduction but it does provide considerably more generous subsidies for lower-income working families, part of the traditional Democratic base. Indeed, Mitchell’s plan includes three separate and overlapping subsidy plans--a potential problem that the Congressional Budget Office has warned may be unworkable.

The basic subsidy in Mitchell’s plan would provide help to families earning up to about $36,000--2.4 times the poverty line. A second subsidy would provide money to families with children through age 18 and to pregnant women. It would go to those with family incomes up to three times the poverty level.

A third subsidy would go to help families when a worker becomes unemployed. Under that plan, the subsidy essentially would focus on the person’s monthly income, allowing people to get help while unemployed even if earlier in the year, while working, they already had earned too much money to be eligible for the regular subsidies.

Despite those problems and uncertainties, some form of major subsidy scheme appears all but inevitable as a part of any health reform plan that emerges from Congress. The reason: Most of the uninsured lack insurance not because they do not want it or because they have some problem that prevents them from getting it, but because they cannot afford it.