I have employer-based health insurance. Like most Americans, you probably do, too. One question I’ve been asking myself — given the anger that exploded over the last week between progressives who favored and those who opposed the Senate health-care reform bill — is what the excise tax in this version will do to those of us who have employer-provided plans.
The Senate excise tax will tax employee health care benefits 40% for plans valued over $8,500 for individuals and $23,000 for families. The tax is indexed to inflation (+ 1%). Right now, this tax will affect 3% of premiums. Multiple people call this a tax on “Cadillac” health care plans. Over time, more and more plans will be affected by this tax, given the current rate of medical inflation, which far exceeds the general rate of inflation. If you aren’t affected by the 40% excise tax today, you will be tomorrow.
A substantial group of progressives who support the tax claim that it’s one of the Senate bill’s primary means of controlling medical inflation. Ezra Klein lists it among his “five cost control mechanisms in the Senate health-care bill,” arguing that the excise tax “is, essentially, a tax on the unchecked growth in premiums.” Klein and many health care economists say that the excise tax will control costs by making plans below the threshold much more appealing, and will increase worker salaries because health care plans more expensive than the cap will be taxed at a higher rate than income. That is, it’ll be cheaper for employees to give you a dollar in salary than a dollar of health insurance.
Unions have objected to the excise tax because it will affect their health care plans, which are often negotiated for knowing that a dollar of health care coverage is worth more than a dollar of income. At Fire Dog Lake, Jon Walker has objected that the tax will “reduce the quality of millions of Americans’ health insurance coverage, will technically ‘bend the cost curve’ by just barely 0.3% in 2019. All that for a measly 0.3% reduction in national health expenditures,” i.e., that companies will tend toward cheaper plans but that an increasing number of workers will find that those savings will come out of the benefits their plans provide. At the Web site of Physicians for a National Health Program, Leonard Rosenberg is quoted as saying that the tax will give employers “a strong incentive to cut back on their benefits. Instead of reducing underinsurance, this part of the Plan will increase it.” My — and your — health insurance will get worse over time. We pay relatively lower premiums, health inflation remains unabated, and we get less coverage.
The crux of the argument seems to be based on different ideas about the causes of differences between health care costs. What’s responsible for this difference? Overly generous (“Cadillac”) benefits? Lazy insurance companies? Inefficient medical providers? The clearest case I’ve found against the excise tax is available on Slate. Timothy Noah goes over the facts — including a peer-reviewed study in Health Affairs — and concludes that “benefit design” had little to do with the variation between different plans: “excess” or wasteful health care doesn’t have much to do with why expensive plans are expensive relative to less expensive plans. Health care inflation, meanwhile, will continue, sucking in more and more employer-based plans into the grip of the excise tax. In fact, “[i]t’s therefore easy to imagine the Cadillac tax squeezing patients between ever-lowering benefits and still-rising prices for medical care”; a growing number of people may “see the value of their health insurance decline relative to doctor and hospital fees.” It’s worth reading the whole thing.
Addressing some of the same facts, Klein comes to an opposite conclusion (referencing what I think is the same Health Affairs study): “if the insurance market is really so mysterious and inefficient that we can’t confidently say why one plan is pricier than the next, that’s good evidence that there’s a place for strong cost controls penalizing fast growth in premiums. It is, at least, worth a try.” And: “I don’t deny that the excise tax might fall flat. But right now, we need to err on the side of trying cost controls, not ruling them out. I have no doubt that if the excise tax proves overly aggressive, it will quickly be declawed.” But this seems to go back to the point of my previous post. The “wonky” case for the excise-tax is based on the decidedly non-wonky admission that it may very well not work to do what it’s supposed to do, since we don’t have a very good idea what causes variation between plans, but the ultimate reassurance that if it doesn’t work, well, some political incentive magic will undo what’s bad about the policy.
Is this a risk we want to take? It looks like one we’ll be asked to take. Did I mention the title of the Health Affairs study? It’s “Taxing Cadillac Health Plans May Produce Chevy Results.”
If this tax turns out to be a bad idea, Congress will simply lower it. Congress may seem paralyzed when it comes to doing hard stuff, but lowering taxes can easily draw broad bipartisan support. I think the risk is minimal.
Comment by Ian — December 26, 2009 @ 11:04 am
The more I research the excise tax, the more convinced I am that it’s a bad idea as currently implemented. The problem is that indexing the plan to general inflation–rather than medical inflation–will not solve the problem, viz. medical inflation.
Individuals are willing to pay huge amounts of money out of pocket for medical treatment, and the massive bureaucracies surrounding insurers and providers will not disappear. Providers want to squeeze every cent they can out of private insurers, and private insurers would rather pay a bureaucrat to contest a bill than simply pay the bill.
All the general-inflation-indexed excise tax will do is gut employer-provided plans (which tend for complex reasons to overwhelmingly affect unionized workers). Once a company has decided to provide high-deductible, high-copay insurance, why would removing the excise tax cause that company to reverse course and provide what it removed? The negotiated health plans will be gone, and unions are weaker today than they’ve ever been. It seems plausible to me that there would be no recovery of the lost high-quality health insurance plans.
Moreover, the excise tax is POPULAR with deficit-hawk centrists and conservatives. They *like* the excise tax, and not because it is supposed to control medical inflation, but because it makes the bill more “budget neutral.” Why wouldn’t they filibuster any attempt to remove it, or make removing it conditional on gutting other positive aspects of HCR.
I think Jon Walker at FDL is correct: During the conference committee, the White House should push to eliminate the excise tax — using the House’s deficit-reduction scheme instead — or index the tax to medical inflation, so it really only punishes those plans that are “excessive” relative to the industry mean.
The problem to be solved is medical inflation. This version of the excise tax doesn’t solve the problem except — as far as I can tell — by arguably irreversibly reducing the quality of existing health care over the long term.
Comment by Lee — December 26, 2009 @ 4:02 pm
I find it very unlikely that Republicans will be able to muster a fillibuster to block a tax cut. Even if conservatives like this particular tax, a tax cut is a tax cut is a tax cut.
The important thing to understand is that this excise tax only applies to health insurance plans that are way too expensive. You call them “high-quality” plans, but it’s not clear that these plans actually provide better care. They are “high-cost” plans, and the people who receive them are the health care rich. These plans should be taxed to raise money to provide health care to people who can’t afford it.
If, as a result of this excise tax, the employers who offer these super-expensive plans decide to offer their workers cheaper plans instead, that’s a big step in the right direction isn’t it? Or are you arguing that union workers cannot afford or accept the very health-care plans the rest of us consider adequate?
Comment by Ian — December 27, 2009 @ 7:07 pm