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How Is Obama Going to Pay for Health Reform?

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Covering the uninsured may turn out to be the easy part. Paying for it will be the real challenge.

The numbers don't lie. The health reform plan President Obama laid out on the campaign stump would cost as much as $1.6 trillion over 10 years, according to my colleagues at the non-partisan Tax Policy Center. While no one knows what sort of reform Congress will cook up over the next months, it is a good bet the price will be somewhere in the neighborhood of $1.5 trillion. And even these days, that is still a lot of money.

Yesterday, trade groups representing doctors, insurance companies, drug and device manufacturers, and health care workers all said they'd do their part to reduce the growth of medical spending over the next decade by $2 trillion. The White House thinks half of that would benefit government. So even if this shaky coalition makes a good faith effort to control costs, and even if they produced their promised savings, Obama would still need to come up with another half-a-trillion dollars from somewhere.

Of course, in the real world, these cost savings will turn out to be chimerical at best. So where will the money come from to expand government coverage? Higher taxes, of course. But whose?

In his budget, Obama proposed a $600 billion reserve fund to help pay for expanded public coverage. But the fund's centerpiece -- the cap on deductions for charitable gifts, mortgage interest and the like -- is a non-starter on Capitol Hill. Just days after the White House first floated the idea, administration aides were backing away. The cap, which would generate about $266 billion over 10 years, was still in the formal budget Obama released yesterday, but it is on life support.

That leaves a handful of other ideas that are at least as controversial. Senate Finance Committee Max Baucus (D-MT) seems willing to curb the tax exclusion for employer-sponsored health insurance. Nearly every economist agrees that it makes no sense for some workers to get tax-free employer-sponsored insurance, while those whose employers don't provide coverage must buy their own without a tax break.

But House Democrats and many unions oppose any change in the tax exclusion, and many business executives are terrified of the idea. The Administration flips and flops -- sometimes at the same time. For instance, on May 6, Health and Human Services Secretary Kathleen Sebelius told the House Ways Means Committee that the White House is "willing to look at all serious discussions of the issue" even though she added that it has "the huge potential of destabilizing the private insurance market." Got it.

On its own, Congress won't address the cost issue. It will either not pay at all for huge chunks of reform, or will end up making only incremental changes to the health system. If the President wants more than that, he'll have to take the lead when it comes to paying the bill.