I’ve spent a good part of this week arguing in favor of Congress’ decision to prevent companies from deducting their retiree prescription drug subsidy and I think Uwe Reindhardt makes the case in the clearest possible terms. In all the noise about health care reform bankrupting businesses, we’ve somehow missed the point that closing the double dipping provision does not result in a loss of real wealth.

Large corporations are complaining that the provision will cost them billions of dollars, but they’re not losing real wealth. For the last seven years taxpayers have been bribing these companies to continue providing prescription drug coverage to their retirees by paying for 28% of their expenses. AT&T and Boeing cashed the checks and deducted the value of the credit from their taxes. Under the new health reform law, companies are still being bribed, but they’re no longer able to deduct that money from their taxes and so they must revise their future earning projections. That noise you hear isn’t a loss of current revenue, its a revision in how much companies think they will receive in subsidies in the future.

Or, as Uwe explains:

Enter now the Medicare Modernization Act of 2003, which since 2006 has provided Medicare beneficiaries with substantial federal subsidies for prescription drugs. To encourage corporations to continue the provision of prescription drugs to retirees under their retiree health plans, rather than dumping the outlay into the lap of the new Part D Medicare program, the law granted corporations a federal subsidy equal to 28 percent of their outlays on prescription drugs for retirees.

The sum of the projected subsidies in the year the law was passed then became a reduction in the firm’s liability for retiree health care, with a corresponding increase in the firm’s net worth. Once again, this book entry was not an increase in real wealth because the subsidies were mirrored in higher current or future taxes falling on other taxpaying entities.…It is this accounting entry — the required deduction from book net worth — that The Wall Street Journal and like-minded critics of the current health reform bill appear to regard as a “wholesale destruction of wealth.”

I cannot imagine that many economists would take that view, however — unless the argument is that any time the government redistributes money from general taxpayers to businesses, the latter will automatically turn these funds into wealth-producing new capital investments, rather than use these tax savings to repurchase their own stock in the market or spend them on corporate mergers or simply on higher paychecks.

This situation is analogous to a homeowner being allowed to deduct a government mortgage subsidy from his taxes. “What amount should that homeowner then be allowed to deduct from taxable income for 2009 – the gross interest payment of $14,338, [his payments + government credit] or the net interest payment $10,037 [his payment - government credit]?,” Uwe asks. “If the former, the homeowner in effect could tax-deduct an expenditure that was actually made for him by the government. Would that be reasonable? Many people would say no.”

Indeed, it’s hard to believe that anyone could defend this behavior if it was coming from someone other than a fairly influential and politically generous entity. You either really have to believe in corporate welfare or look for any reason to pronounce health care reform a failure to take up this cause.

While I’ve been arguing that health reform may be invalidated by the states, over at Ezra Klein’s blog Suzy Khimm make the important point that success of reform will also depend on state action. Khimm points to Massachusetts’ and Maine’s recent efforts to protect consumers from premium rate hikes and argues that all states will be responsible for overseeing the new exchanges once reform is fully implemented. “Though there will be federal rules and regulations for the exchanges, each state is tasked with creating and administering them. So state officials — both elected and appointed — will be bearing a lot of responsibility for enacting reform and regulating the insurance market“:

Some states have already beefed up their oversight of the health-care system and insurance market, and the regulatory battles they’re facing portend the kind of challenges that officials will be facing on the state level.

In Massachusetts yesterday, the state’s Division of Insurance rejected “235 of 274 increases proposed by Massachusetts health insurers for small businesses and individuals … mark[ing] the first time state government in Massachusetts has used its authority to deny health premium increases,” the Boston Globe reports.

The ruling makes good on a promise made by Gov. Deval Patrick to turn down excessive price increases.

And in Maine, there’s an ongoing legal battle over a state insurance regulator’s decision to reject an insurance company’s request for a premium hike last year. Anthem Blue Cross and Blue Shield, which is part of WellPoint, argues that they needed the premium increase to turn a profit during the recession. Contesting the state ruling in court, Anthem maintains that the insurance regulator’s decision had “zeroed out its profit to keep customer rates down” in the individual market, according to the Wall Street Journal.

Khimm notes that “by leaving so much up to the states, the health law could end up creating a system in which there are significant disparities in health coverage and insurance regulation, at least partly depending on political will…reform-resistant state governments will have much opportunity for foot-dragging and spotty regulatory enforcement because of their new responsibilities under the health law.” I agree, and would only add that the states doing most of the dragging probably have the highest rate of uninsured. Their populations are suffering from the most pronounced health care crisis and have worse health conditions.

In this sense, the state-based exchange structure is most unjust: it disadvantages the the populations that need reform the most and I suspect that if the disparities become too pronounced, Congress may have to step in and inject some federal oversight.