Despite our nation's enormous financial and economic difficulties, you have promised to press ahead on health-care reform. That's the right decision. Although expanding coverage is expensive, the prospect of millions more U.S. workers losing their benefits in this recession makes the case for reform even more urgent. Your challenge is to find ways to pay for universal coverage without either dampening the chances for an economic recovery or loading even more debt on the next generation.

Over time, health-care reform can and should pay for itself. After all, our system is larded with waste -- by some estimates accounting for as much as 30 percent of total government spending. Rooting out waste and redundancy, however, will not happen overnight, and it will require upfront investment to boost the quality and efficiency of medical care.

One particularly promising cost-containment strategy is to promote the spread of high-quality, integrated health-care systems, like the Mayo Clinic.1 Mayo costs the government 17 percent less than the national average for treating the sickest Medicare patients, while providing excellent care.

Uniformly raising the quality of health-care in America would thus yield enormous savings, which could finance reform and perhaps even help to defray soaring Medicare costs as the baby boomers retire.

Progressives in Congress seem inclined to enact health-care reform soon and worry about budget deficits later, after the economy recovers. They point out that Congress passed a $700 billion bailout for Wall Street without agonizing over the deficit. At a cost of approximately $100 billion a year, healthcare reform seems like a relative bargain, and would produce a healthier, more productive workforce to boot.

Of course, long-term fiscal discipline also is critical to the nation's economic health. In time, too much debt will undermine the value of the dollar, drive up interest rates, and put America deeper in hock to foreign lenders. We cannot just add another trillion dollars for health reform to the nation's balance sheet and hope things will turn out all right.

But if health-care reform could pay for itself over several years, it would do no lasting harm to the U.S. economy. In that case, it would be a public investment as well as an immediate boost to public consumption, as the uninsured buy medical services they might otherwise have forgone.

A Federal Health Budget

Therefore, I recommend that you call upon Congress to create a Federal Health Budget as an action-forcing mechanism to balance public-health spending and savings. If projected savings do not materialize, Congress would have to take action to ensure the Health Budget stays in balance.

Congress has accepted such self-discipline in the past. In the 1990s, it set caps on the budget that, if breached, triggered automatic across-the-board spending cuts. In this case, it would not be fair to make other public programs pay for excessive health-care spending. Instead, the consequences for overspending should be confined to the health sector, in the form of either automatic spending cuts or specific allocations of taxpayer dollars.

A Federal Health Budget, of course, would directly control only government spending on health care, not private spending. But since government picks up more than one-half of the nation's health-care tab, its efforts to control spending by reducing waste and inefficiency will have a strong impact on private markets.

In short, a Federal Health Budget can ensure that health-care reform pays for itself. Here are the key steps for creating such a mechanism:

1. Set a baseline for all federal health-care spending. This would include Medicare, Medicaid, and the federal government's tax subsidy to employers who provide job-based health insurance. Under existing budget rules, the tax subsidy is not identified as an annual budget item even thought it costs the federal government more than $200 billion in untapped revenue each year. By accounting for all major spending -- including both direct entitlement spending and tax subsidies -- this step would establish a working baseline for the Federal Health Budget.

2. Set targets for projected spending based on the best examples of efficient health-care delivery. For example, health-care spending in Salt Lake City and Rochester, Minn. -- two cities with large integrated-health operations (Intermountain Healthcare has its headquarters in Salt Lake City, while Rochester is the home of the Mayo Clinic) -- is dramatically less than the national average, with no adverse effect on the health of either community.

If universal coverage is to be fiscally sustainable, such high-quality care should be the rule, not the exception. The White House and Congress should base national targets for federal health-care spending on a simple national goal: Every community should have health care that is as good and economical as that provided by the Mayo Clinic.¹

3. To implement the Federal Health-care Budget, you should propose a new, independent Health Fed, modeled after the Federal Reserve and its regional banks. The Health Fed would break the country into regions and work with local officials, employers, hospitals, and insurers to achieve regional health-spending targets. This new entity would share the savings in the Federal Health Budget with states in the same way that Medicare has recently struck gain-sharing agreements with doctors and hospitals.

4. To ensure that a Federal Health Budget is truly cutting waste rather than essential medical services, there must also be annual assessments of patients' health outcomes. The U.S. Agency for Healthcare Research and Quality already issues an annual National Healthcare Quality Report, but this should be expanded to include a more comprehensive assessment of health coverage and services. Such data would allow the administration and Congress to set targets for patient outcomes at the same time it sets spending targets.

5. Keep the Federal Health Budget in balance. If the projected savings from reform are insufficient to pay for expanding coverage, changes in spending and revenues should be automatically triggered. One option would be to cut Medicare provider payments. Another would be to tighten limits on the $200 billion tax exclusion for job-based coverage.

Congress would retain the discretion to preempt any automatic actions with reforms of its own. For example, it could ask the Health Fed to assemble a package of budget changes for an up-or-down vote, in the same way that trade agreements are ratified and military bases are closed. And of course, Congress could shun tough action altogether, creating a health-care deficit. But at least it would have to do so in plain sight, with the political consequences that would entail.

Funding Necessary Reform

If Congress acts responsibly, a Federal Health Budget would create a virtuous cycle of quality improvement and reduced costs. As individual providers and insurers found better and cheaper ways to provide care and coverage, the targets for federal spending and patient outcomes would be reset, and this would create pressure to spread the efficiency gains throughout the healthcare system. By slowing the rate of increase in health-care costs generally, we could ease the enormous strain that the boomers' health-care costs will soon start exerting on the federal budget.

Although establishing a Federal Health Budget could help ensure that health-care reform pays for itself in the long run, it is still important to reduce poorly designed public health-care subsidies in the short run. By restructuring those subsidies, we can raise the initial funding for the Federal Health Budget and begin a new cycle of health-care savings that will greatly benefit our economy and our public health.

For example, Senate Finance Committee Chairman Max Baucus (D-Mont.) rightly points out that the current tax expenditure for job-based coverage is a logical source of financing for expanding coverage. For employees, health-care benefits, unlike wages, are tax-free. This tax break benefits highly paid executives most of all, since they are in the highest tax brackets.

In fact, the health-care exclusion is the only major tax break that is unlimited for each taxpayer. As a result, it tends to inflate spending on medical services. That is one reason why medical inflation runs two or three times higher than general inflation.

Eliminating the tax break for job-based health benefits altogether, as Sen. John McCain (R-Ariz.) proposed during his presidential campaign, would be highly disruptive for tens of millions of Americans who get their coverage at work. But capping the amount of health spending that is exempt from taxes would limit the subsidy for high-income workers and give every worker the same benefit. In this way, the federal government could save many billions of dollars that could be used to defray the upfront costs of expanding coverage to the uninsured.

The tough question is this: Where should the cap be set? If it is too low, it might induce employers to cut back coverage for essential health-care services rather that trimming waste. Moreover, workers and labor unions have fought hard for comprehensive benefits and have given up wages to keep those benefits.

Until workers can see how reform can reduce their health costs without sacrificing quality, it will be hard to achieve political consensus on tight caps. Instead, Congress should consider setting a loose cap initially, and then tightening it later in order to help keep the Federal Health Budget in balance.

Expanding coverage while at the same time acting to restrain costs is the truly progressive way toward affordable health care for all Americans. Many cost-saving initiatives, such as improving primary care for chronically ill patients, will reduce the need for expensive health-care services like hospitalizations.

Naturally, the loss of such income will be an unsettling prospect for medical specialists and hospitals. But as uninsured Americans get coverage, they will purchase more of the specialized services they could not previously afford. The promise of new income from formerly uninsured patients will soften most of the short-term impact on doctors and hospitals.

Over the longer term, as cost-saving measures kick in, providers will see an increased demand for their services from a rapidly aging population. When that happens, though, the nation will need another round of productivity increases from its health-care workforce in order to avoid dramatic benefit cuts or tax increases.

In short, Mr. President, your twin challenge is to cover the uninsured in the short term and set the stage for financing the baby-boom generation's retirement in the longer run. This is why health-care reform and budget reform must go hand in hand. The link between health-care reform and fiscal responsibility is the key to holding together a broad, bipartisan coalition in Congress. It is the political prerequisite for comprehensive health-care reform.

After all, fiscal conservatives will not embrace new spending on health care without some means of assuring long-term fiscal discipline. Liberal members will rightly balk at anything less than covering all Americans. Doctors and hospitals will look askance at reforms that threaten their incomes. Healthcare reform that pays for itself is the way to finally break the logjam on universal coverage.

Endnote 1. David Kendall, "Improving Health Care -- By 'Spreading the Mayo' (the Mayo Clinic Model, That Is) ," Progressive Policy Institute, Memos to the Next President, 2008, available at www.ppionline.org.

David B. Kendall is the director of PPI's Health Priorities Project. His work has explored issues ranging from health-information technology to medical-malpractice reform. Prior to joining PPI in 1994, Kendall worked on Capitol Hill for Reps. Michael A. Andrews (D-Texas) and James R. Jones (D-Okla.). In 1993, he served on the President's Task Force on National Health Care Reform.