Will This Study Finally End Democrats’ Magical Thinking About the ‘Cadillac Tax’?

February 19, 2010

It’s been a fascinating anthropological exercise to watch the health excise tax concept (the so-called “Cadillac tax”) keep its popularity among Democratic and liberals, even as one study after another discredits the assumptions behind it. It’s the Democratic equivalent of trickle-down economics – an idea that doesn’t seem to die no matter how much it’s contradicted by the facts.

The Senate health reform bill places a 40% tax on all employer health benefit costs above a certain threshold. This tax came with a set of assumptions which have been disproven one by one. We were told that the tax would target health plans with especially ‘rich’ or ‘generous’ benefits, for example, but a comprehensive analysis showed that wasn’t the case. We were told that employers would cut benefits as a result of the tax and give the money saved back to employees as wages, but surveys showed that they plan to do no such thing (more here).

Then we learned that the tax would disproportionately affect plans with lots of older people, or more women, or people who live in higher-cost parts of the country. Who could support an unfair-sounding idea like that? Barack Obama, for one. After months of silence as the Senate eviscerated one of his campaign promises after another, he finally spoke up … in favor of the tax which he had lambasted during the election.

A lot of bloggers and commentators continue to agree with him, too,as do his top economic advisors. Why? In part, it’s because they oppose the idea of using employers to provide health care coverage. I do, too — but I don’t think you fix that problem by reducing people’s current coverage, especially in such a discriminatory way. After all, there’s no other option available for these employees. It’s like trying to solve the problems of public housing by throwing people out into the street.

Proponents also imagine that the employees affected will somehow become “smarter health shoppers,” despite the fact that doctors – who are not taxed by the bill – make the decisions that drive health care costs. So there’s also a heavy dose of Cato Institute-style free-market ideology in the idea (although its proponents would be shocked at the comparison.)

Finally the unions stepped in and negotiated a compromise deal with the White House. By this time the tax’s proponents were insisting this was a merely tax on “union benefits,” and that the unions were a “special interest” acting selfishly. Now a new study from UC Berkeleypunctures this final Cadillac-tax myth. Research conducted by Ken Jacobs and his colleagues at the Center for Labor Research and Education suggests that the vast majority of employees affected by the tax (at least 80%) would not be in a union.

It looks like the unions did everyone a favor by mitigating the effects of this tax. They’ve managed to reduce (though not necessarily eliminate) some of its more discriminatory effects. Yes, in some ways their negotiations would benefit union members slightly more, but only temporarily. And most of the people who benefit by the concessions they’ve won arenot in unions.

The unions managed to raise the tax’s thresholds, and they got agreement in principle to adjusting the threshold for age, gender, and residence in 17 high-cost states. Yet major problems remain: The increase in threshold levels is less than one year’s medical inflation. There’s no adjustment for active workers over 55, who are an especially costly group. The potential adjustments for state and gender haven’t been spelled out yet, but political experience raises doubts about whether those adjustments will fully account for cost differences.

The tax’s proponents have embraced the CBO’s conclusion that it will raise $149 billion in revenue over ten years, mostly by taxing those extra wages workers will supposedly get (but employers say they don’t plan to give). Fact is, you can’t collect taxes on wages that aren’t paid – and if benefits are cut back, which is likely, you can’t collect taxes on people’s lack of health care coverage, either.

Jacobs et al. have other reasons to doubt the CBO’s figure, too. They believe that the total number of employees affected by the plan is less than that the CBO projected. That, plus a lower estimated per-employee revenue figure, gives them a top number of $90 billion even without the union-won agreements.

So here’s the likeliest scenario under the “Cadillac tax”: A number of employees, mostly non-union, will find that their health benefits are either being taxed or (as is more likely) cut back. Their out-of-pocket costs (copayments and deductibles) will be raised, leading them to see the doctor less often. And their overall health costs may stay the same or even go up!

Oh … and one more thing about the tax: The public hates it. Yet despite all that, if a health reform bill passes this year Democrats are expected to keep the Cadillac tax in it.

Why isn’t this idea dead? Why doesn’t somebody put it out of our misery? There are four reasons: The first nobody thinks the Senate can be talked out of it. The second is that it’s one of the few remaining measures in the bill that even looks like cost containment, even though it isn’t, and Dems want to be able to say they’re cutting costs. The third is that the House’s alternative is to tax high earners, and for whatever reason some Democrats are reluctant to do that.

The last reason is the most potent of all: Zombie ideas like the Cadillac tax and trickle-down economics are hard to kill. If they’re “intuitive” – that is, if they sound good to you the first time you hear them – then you fall in love with them. And if the idea you love one day leaves millions of employees without the coverage they need? Well, then I guess it’s like the old saying goes: Love means never having to say you’re sorry.


A Tax Even Its Defenders Can’t Love

January 12, 2010

People are saying that the so-called Cadillac tax “might fall flat” and “has real problems.”  And those are its defenders.  I can’t remember any new policy in recent history whose own advocates had so many complaints with its design.

Not that we’re  “Ezra Klein Watch” around here, but Ezra’s become the locus and the spokesman for the pro-tax contingent. He’s mounted a yeoman’s defense, using a broad (if what occasionally seems to be shifting) array of arguments.  Not that all of his points are without merit, by any means.  He and other tax proponents have raised compelling arguments that merit serious discussion.  Unfortunately, they don’t have much to do with this tax.

The debate shifted after studies (by Gabel et al. and the Milliman actuarial firm) showed that “richness of benefits” is not what would place most health plans into the tax.   It mainly targets benefits for older, sicker people, those than live in the wrong part of the country, or those in the wrong industry.  Then we learned that yes, employers will cut benefits if the tax is passed, but no, workers won’t get the money their employers save as wages.  Two consulting firms (Towers-Perrin and Mercer) confirmed overwhelmingly that companies intended to keep the money instead.

Sure, reducing overall health costs would free up more money for wages in the future.  But nobody’s explained how this tax would reduce overall costs. All we know is that these workers, whose coverage would be cut now, would  get nothing in return.  Meanwhile there would be a lot of unfair suffering – suffering to which the tax’s defenders seem uncharacteristically indifferent.  “No one should be under the illusion that this tax will not cause some pain,” writes Ezra.  “Everything has losers.”

So if your coverage gets cut because your co-workers are too old or too sick, take comfort:  Everything has losers.

Ezra acknowledged the problems during an online exchange we had recently.  “My argument is not that the excise tax is without problems, or sure to work,” he said then, “(a)nd I don’t deny that (it) might fall flat.”  But he’s still pushing for it.

“The excise tax is a tax that’s meant to change behavior,” he writes, “much like a cigarette tax.” But a cigarette tax taxes cigarettes. This tax doesn’t target inappropriate or excessive use of health services.  It taxes everything. It’s like cutting working families’ grocery budget with the rationale that “some of them might buy cigarettes with that money.”   It’s a blunt instrument where we need a  scalpel.

A “cigarette tax” approach to benefits would require a national discussion of “basic” vs. “optional” coverage  – ie, is vision coverage obsolete? – or some other creative ideas.  Maybe we should tax services that fall outside of accepted medical practice standards, or tax providers if they deviate too often from best practices.  (I’m not endorsing these ideas, merely listing some alternatives.)

Ezra also voices an argument I’ve heard privately from some health economists: “(A)ll employer-based insurance, right now, is exempt from taxes — a regressive and cost-increasing decision that this barely begins to redress.This is a tax that should already exist, and it should exist on every dollar of health benefits, not just every dollar above $23,000.”

It’s a legitimate point.  Our employer-based system is an historical anomaly, one that treats some forms of employee compensation differently from others.  That’s inherently unfair.  But the wage levels we have today are the product of this system.   They’ve grown up together with these  benefits, like tangled vines.  If we were to make a national decision to tax health coverage – an idea that was  mocked when Republicans suggested it – we would need to have a well-thought-out transition plan.  Otherwise we’d have an enormous de facto wage cut for our already-beleaguered middle class.

If we’re not willing or able to do that for the country as a whole, why select a portion of the insured workforce – on a discriminatory basis, no less – and do it to them?

Paul Krugman reluctantly endorsed the tax while simultaneously criticizing it:  “A flat dollar limit to tax deductibility has real problems. At the very least, the limit should reflect the same factors insurers will be allowed to take into account in setting premiums: age and region.”  There’s a genuine imbalance here:  The Senate bill allows insurers to charge up to three times as much for older people’s coverage, but raises the tax’s trigger point by only 13% for workers over 55. (And, to clarify, that’s for retired workers.  An active workforce with a a higher percentage of older employees will still be unfairly hit.)

Prof. Krugman insisted that “the final bill should address the criticisms.”  Amen.  That goes beyond Prof. Krugman’s proposed modifications to the tax design. WHile they would relieve the most egregious discriminatory effects of the bill, they still wouldn’t address the fundamental problem:  This tax doesn’t target excessive care.

That gets us to the last line of defense:  that this tax, however flawed, is a first step toward genuine cost containment.  But nobody’s explained how it would contain costs, and insurers have always responded to increased expense by shifting costs back to patients – not by getting smarter.  Why does anyone think a badly designed tax that causes indiscriminate pain will evolve into something better?  The most likely outcome is a backlash that makes genuine cost containment impossible for a generation.

There are good proposals, there are bad proposals, and there is the proposal on the table today.  The tax’s defenders have come up with some interesting ideas – or at least the germ of some interesting ideas.  But those ideas aren’t the table: this tax is.  Let’s not settle for a  flawed idea.  Let’s implement something that works.

Weird Science: Why Politicians and Pundits Cling to the “Cadillac Tax” Idea

January 8, 2010

The theory behind the “Cadillac tax” on health plans is little more than wishful thinking based on dubious research. Advocates believe that forcing employers to cut benefits will lead to cheaper, better care. That’s like preventing rain by outlawing umbrellas. Yet the President has reversed his campaign opposition to the tax and now supports it. John Kerry, who I respect, is defending it too.(1) Why?

Because they’re poorly served by their advisors, and by pundits who cling to the idea in the face of new evidence. Although the Washington Post got it right, too many analysts and journalists are beholden to ideas that Art Levine rightly dubbed “voodoo economics for the punditocracy.”

Why do President Obama and his advisors keep touting the tax? And why do journalists like David Leonhardt of the New York Times keep asserting that “health economists” think it’s a good idea? Uwe Reinhardt – the most respected health economist in the country – said the idea that “with high cost-sharing, patients will do the only legitimate … cost-benefit calculus … surely is nonsense.”

The best-known advocate for the tax is MIT economist Jonathan Gruber, who was hyping it as recently as a week ago, without mentioning new and contradictory data.

The Post described Gruber in 2007 as “possibly the party’s most influential health-care expert and a voice of realism in its internal debates.” How can a “voice of realism” claim that this is “a tax that’s not a tax,” one that affects “generous” plans? That statement was published only nineteen days after a paper in the influential journal Health Affairs (summarized here) disproved it. Using actual benefits data, the authors showed the tax would not target “generous” plans. Instead it would unfairly affect plans whose enrollees were older, worked in the wrong industry, or lived in an area where treatment costs are high. A leading actuary came to a similar conclusion.

Gruber also claimed that the money employers save (by slashing benefits to avoid the tax) would be returned to workers as wages or other compensation. But two leading health benefits firms (2) had already published surveys in which the vast majority of employers polled insisted they would do no such thing.

These are intelligent, ethical, dedicated people. So what’s going on? I suspect the problem is an inability to reject an attractive idea, even when confronted with contradictory facts. There is a simple truth in the world of ideas: Theories can be beautiful. Reality can be ugly.

This “beautiful” idea was born in research. The RAND Corporation published the results of its long-term Health Insurance Experiment (HIE) in the 1980s. Researchers claimed that forcing people to pay more for their medical treatment leads to reduced use of medical services, which saved money without making anyone sicker.

The HIE suggested that people who had to pay more for their care avoided treatments their doctors considered medically necessary about as much as those considered unnecessary. Yet, surprisingly, it concluded that they were no less healthy. The HIE became the theoretical foundation for 25 years of benefits-cutting, providing moral cover for a generation of analysts as they shifted medical costs back to patients. (I was one of them.) Now it underlies the thinking behind the “Cadillac tax.”

Here’s Problem #1: The HIE’s been challenged by a number of economists. As University of Minnesota economics professor John Nyman told me, “I don’t believe you can have a reduction of 25% in hospital admissions and not have it show up in any health measures.” While we don’t have space here to tackle the debate, it’s fair to say that the study’s conclusions are controversial at best. Gruber, a RAND defender, described the study as the “gold standard.” Others disagree.

Problem #2: Even if you accept RAND’s findings, you have to believe they still apply after widespread changes in society, the economy, and employer/employee relations. And then you have to believe Gruber’s assertion, based on long-term wage and benefit trends, that employers will give most of that money back to workers as compensation.

Even though surveys say they won’t …

So let’s review this fragile latticework of assumptions: First, that the RAND study is sound. Second, that the tax will only target ‘generous’ plans, despite a very thorough study disproving that. Third, that employers will give much of this money back to workers, although they say they won’t.

On that thin reed of assumptions the White House, many Senators, some economists, and the tax’s editorial supporters (Leonhardt, Ezra Klein, etc.) are prepared to support a policy that by 2016 will reduce coverage for one American in five with employer insurance. That’s more than eleven million people – and the figure would rise sharply each year.

What went wrong? I can’t know for sure, but here’s a thought: Experts can have an “aha” moment, a flash of insight, even when the pattern they perceive isn’t really there. They can build models and theories – even reputations – around that pattern. When evidence proves the pattern is false, they literally can’t see it.

Fortunately, it’s not too late. We can see it. There’s still time for the President, Senator Kerry, and other leaders to change course. Prof. Gruber and other tax advocates can still review these new findings. They and their advisors can discard an attractive but disproved theory and do the right thing for the American people.


(1) Although it was gratifying that Sen. Kerry acknowledged that the tax’s thresholds are too low.
(2)Towers Perrin Employer Survey, “Health Care Reform 2009: Leading Employers Weigh In,” (pdf), September 17, 2009; Mercer, “Majority of Employers Would Reduce Health Benefits to Avoid Proposed Excise Tax,” December 3, 2009

Maggie Mahar Fact-Checks the “Cadillac” Tax

January 6, 2010

Respected health writer Maggie Mahar (“Money-Driven Medicine”) got curious and decided to fact-check the excise tax. – the tax on misleadingly-named “Cadillac plans” (which are really plans that simply cost more, usually for reasons that have little or nothing to do with the benefits offered.)  Wisely, she follows the money – which in the world of health care follows the chronically ill. Her findings?

… 75 percent of our health care dollars are spent on patients suffering from serious chronic diseases such as cancer, heart disease, stroke, and chronic obstructive pulmonary disease.

As Merrill Goozner points out: “The idea that taxing those plans will somehow encourage people to reduce their utilization is wishful thinking that ignores who actually makes health care decisions — doctors, hospitals, drug companies, and other providers. It also ignores why most people use health care — it’s because they are sick.

If co-pays for visits to a specialist are high, some chronically ill patients may put off seeking help, but eventually most middle-class Americans will see an oncologist or a cardiologist, even if they have to borrow the money to cover the deductible. “

She provides an excellent overview of the topic and strong rebuttals to the tax’s defenders. Well worth a read.

(Disclaimer:  I am working with the Campaign For America’s Future to prevent the tax from becoming law, both because I believe it to be unfair and because I consider to be poorly designed policy.)

Florida HMOs: Already Meeting The Senate Bill’s New Standards?

January 4, 2010

I found the attached chart, sent via Managed Care OnLine’s “Daily Factoid,” interesting.  Why?  Because these top Florida HMOs are already well ahead of compliance standards with the Senate’s proposed limit of 15% administrative costs for health plans (or close to to achieving them, depending on how the accounting standards are finally written).

Take a look:

Florida HMOs Medical Loss Ratio and Administrative Costs as a Percent of Premium Revenue,
1st Quarter 2004 – 1st Quarter 2009
Medical Loss Ratio Administrative Costs as a % of Premium Revenue
1st Qtr 2004 82.0% 10.9%
1st Qtr 2005 81.1% 11.3%
1st Qtr 2006 82.6% 11.7%
1st Qtr 2007 82.2% 9.9%
1st Qtr 2008 83.5% 10.2%
1st Qtr 2009 84.5% 10.0%

Source: Florida Hospital Association (FHA) Eye on the Market: HMO Indicators Report, 1Q04-1Q09

New Massachusetts Polling Data: What’s the Lesson?

December 22, 2009

Paul Krugman doesn’t like the Rasmussen poll on the popularity of health reform in Massachusetts.  I’ve cited that poll in the past, so I have an obligation to present contradictory information.  Besides, when Krugman talks, I listen.  Since many people consider the reform we’re likely to get similar to that which was enacted in that state, it’s an important issue.

Krugman cites the Boston Globe/Harvard School of Public Health poll and finds this to be its essential conclusion:  ” 79 percent want (reform) to continue.”  That’s much stronger than the tepid support in the Rasmussen bill, and it’s important.

I had a somewhat different interpretation, however, when I read the write-up in the Globe that Prof. Krugman cites.  “79 percent of those surveyed wanted the law to continue,” the article says, “though a majority said there should be some changes, with cost reductions cited as the single most important change that needs to be made.”

Then there’s this:  “In another question, residents were nearly evenly split over whether Massachusetts could afford to continue with the law as it stands: 43 percent said the state could not, and 40 percent said it could.

Lastly, the money quote (literally):  “A national survey by Kaiser released this month found that Massachusetts has the most expensive family health insurance premiums in the country, averaging $13,788 in 2008.”

Some of us knew that already, but it’s important to repeat it in this context.

Granted, the Senate bill has more cost containment in it that the original Massachusetts bill, especially in the latest draft (and thanks in part to progressive opposition to the bill, in my opinion.)  But I still think it’s weak on cost controls, and that many people are wildly overestimating the effect of those that it does contain.  But it’s worth noting that many of the bill’s proponents have been touting the idea that mandates themselves will help keep premiums under control.  I think that argument has been seriously undercut by results in Massachusetts.

The Senate Deal: The Price of Everything

December 20, 2009

The CBO finally scored the redrafted Senate health care bill, saying it will cost $871 billion over the next ten years. Not that anybody waited for the numbers before cutting a deal. This was never really about the numbers. It was about coming in below an arbitrary figure and passing the bill by an arbitrary date.

The CBO Director’s Blog writes that  “(t)he changes with the largest budgetary effects include expanding eligibility for a small business tax credit; increasing penalties on certain uninsured people; replacing the ‘public plan’ … with ‘multi-state’ plans  … deleting provisions that would increase payment rates for physicians under Medicare; and increasing the payroll tax on higher-income individuals and families.”

In other words, the bill now has more breaks for business but harsher punishment for uninsured individuals, it eliminates the already-weakened public option, it pays doctors less – and it costs the Federal government $23 billion more.

Hey, what’s not to love?

The idea of raising payroll taxes on higher earners is a good one.  But if you take that new revenue, add the unfair tax on higher-cost benefit plans (studies demonstrate its unfairness), throw in the pay cut for doctors, and toss the higher individual penalties on top of that, it still doesn’t offset the fiscal recklessness behind killing the public option.

Why would the public plan have saved the government money?  Because, as the CBO puts it, “it was expected to exert some downward pressure on the premiums of the lower-cost plans to which those subsidies would be tied. ”  In other words, it would have made other insurance cheaper by creating real competition.  If it’s costing the government this much money to lose the public option, can you imagine what it’s costing the rest of us as individuals?

Remember: the CBO score doesn’t include the personal value of  these policies for each of us. The Senate’s new bill won’t just increase the Federal budget. We’ll also pay higher premiums because we lost the public option, and face more out-of-pocket payments from the excise tax.    Wasn’t it Oscar Wilde who said a cynic is someone who “knows the price of everything and the value of nothing”? It’s pragmatic to take the best deal you can get, but it’s cynical to avoid the battle and then claim it’s the best deal you can get.  The main thing dividing progressives right now is that some see pragmatism and others see cynicism.

Another question:  If Joe Lieberman can single-handedly be credited with most of these changes, is it fair to call him the Twenty Billion Dollar Man?  Maybe.  But remember, it’s easy to hate Joe Lieberman – and it’s a distraction.  The Administration and the Senate leadership made a series of choices that give him this power.

Some say that the public option was always doomed – that the Administration cut a deal in which they’d make a half-heated attempt to fight for it and would then let  it die, placating the always-compliant liberal wing with another mantric repetition of the phrase “we didn’t get everything we wanted, but …” In that scenario Joe’s the Bad Cop to the President’s (and Harry Reid’s) Good Cop.  If Joe Lieberman didn’t exist it would be necessary to invent him.  “Hey, I wanted to help you out – here’s a cup of coffee – but my partner here …”

Think that’s unfair ?  I certainly hope so, but that gets us back to the string-of-blunders interpretation. Reality’s probably somewhere in the middle:  mismanagement and a back-room deal or two. (We know there was a deal with Big Pharma.)

There’s an easy way for the President and Sen. Reid to disprove the Good Cop/Bad Cop Scenario, of course:  They can fight like hell to win concessions in the House/Senate conference, to bring the  final bill more in line with the House version.  That would mean, at the very least, a public option and no excise tax.

Think they will?  Me neither – but I think they should be pressed to do so.  I expect that the House will be put under enormous pressure to cave and accept the bill as it is.  I think the President and other party leaders assume the left can always be counted on to cave in for the good of the country.  I also think that anyone who points out the flaws in this bill will be subjected to another round of scoldings from party leaders and their supporters, charged with not understanding how the world works. Wouldn’t it be better to debate the tactics on their merits instead?

Because that last charge is the biggest miscalculation of them all.  Many of the people being lectured  over this bill are the same people who have been right about matters of both policy and politics for most of the last decade.  (And about the politics – the Democrats are going to get killed if they pass this bill.)  So it was particularly satisfying to see Markos Moulitsas respond forcefully to Chris Matthews for his wave-of-the-hand dismissal to those who saw the last decade’s events more clearly than he did.

That doesn’t necessarily make them right today, of course, but I think they are.  And speaking personally, I’m not talking about “killing the bill” – I’m talking about getting a better bill.  I believe it will take a credible threat  – a “fear factor” – to get that done.

We’re Not Switzerland

December 20, 2009

The pro-Senate health bill contingent keeps trotting out the example of Switzerland to buttress their arguments.  Here’s a quick recap of why the comparison doesn’t work:

First or all, Switzerland is a wealthier country: OECD figures show that the median household income there in 2007 was $60,288, versus $50,233 in this country. Despite their greater prosperity, roughly one-third of its citizens receive financial assistance from the government to pay their premiums.   If you increased the average American’s salary by 20% and then offered them health insurance for no more than 8% of their total income, who wouldn’t take that deal?

Defenders of the Senate’s excise tax use past wage and benefit trends to argue that the tax will cause benefits to be cut – but that employers will give that money to employees in the form of wages.  Unfortunately there are new studies like Towers-Perrin’s (pdf)  which show compellingly that isn’t true.   (Only 9% of employers surveyed said they would share any of the savings with employees, much less give them the whole amount.)

All insurance companies in Switzerland are non-profit, too. What’s more, the Swiss system includes price controls that would never pass ideological muster in the US.

Benefits are also much stronger there.  At a current exchange rate of nearly 1:1 between the Swiss franc and the US dollar (0.96:1.0), the Swiss typically have a government-mandated deductible of roughly $300 dollars for a basic plan (deductibles can be several times that under the Senate bill).  After the deductible is met, Swiss insurance pays 90% of all medical costs (much more generous than what we typically have), up to an out-of-pocket limit of – get this – roughly $700 per year per person.

So the maximum out-of-pocket cost for care in Switzerland is $1,000 per year adult (unless they choose more minimal coverage).  In a typical Swiss plan, two adults and two children would pay a maximum of $2,700 in out of pocket costs in their worst year, regardless of income.  In this country even a family of four struggling to get by on $54,000 could pay up to $5,000 under the Senate bill (and that’s after paying $4,000 in premiums).

And here’s another point:  Given the wage difference between the US and Switzerland, our family would be earning nearly $65,000, not $54,000.  That renders the US/Swiss comparison even less valid.

Ironically, any American plan with benefits like those would be a likely target for the Senate’s excise tax.  A percentage of its benefits would be taxed at 40% – meaning that plan benefits would probably be slashed.  at which point it wouldn’t be a  Swiss-style plan anymore …

But wait, there’s more.  Those nonprofit Swiss insurers are forbidden to charge any more for a 90-year-old than they do for a young and healthy adult, while wide variances (3 times or more) are permitted in the Senate bill.  Not only are the Swiss protected from having their premiums go up as they get older – a protection not afforded by the Senate bill – but the excise tax will exacerbate our  American “age penalty” by disproportionately affecting health plan whose members are older than average.

Needless to say, the Swiss pay much less in healthcare costs than we do, and their costs are rising much more slowly.

This bill doesn’t do things the Swiss way. You can’t impose a Swiss-style mandate on a system that is more expensive, provides less benefits, and is profit-based, unless you provide meaningful cost controls and more equitable coverage. If you also decide to tax any benefit plan that begins to approach Swiss-style coverage, you’ve rendered the comparison completely meaningless – if it wasn’t already.

Is Truth the Next Casualty in the White House’s Push For the Senate Bill?

December 18, 2009

Many of us admire the wealth of talent on display in the White House, so it’s disappointing when there’s a breakdown in the accuracy or completeness of information being put forward by members of this Administration.

Take Jason Furman, the Deputy Director of the Administration’s National Economic Council. We understand that emotions are running high about the Senate health bill, but Mr. Furman’s recent brief in support of that bill isn’t just rhetorically overheated (although it’s certainly that.) What’s less excusable is the way he overlooks some significant new findings that undercut his argument. He’s entitled to his opinions, and even to his emotions. But it’s his responsibility as an economic advisor to know and report the facts, too, and in this case he’s failing to carry out that part of his job.

Here’s what Mr. Furman said – and didn’t say – in a recent blog post on the White House web site.

He opens with sarcasm – an unfortunate tactical decision when addressing one’s potential allies. “(O)pponents of reform are testing the age old adage that if you only say something enough times you can somehow make it true,” writes Mr. Furman. “Yesterday, we heard a new version of the old, tired refrain that the health reform bills in Congress would raise taxes on the middle class.” Here are the rest of his statements, and the facts that undercut them (as available in data from the Joint Committee on Taxation and several other sources):

Statement: “First, the health insurance reform bill being considered in the Senate does not raise taxes on families making less than $250,000 – in fact it is a substantial net tax cut for American families.”

Fact: In 2019, six years after this bill takes effect, the excise tax will affect one in five taxpayers making $50-$75,000 per year. The average tax impact on people in this income bracket will rise to $1,100 in 2019. Overall, more than 24 million taxpayers (or “tax units”) will be affected by 2019.(1)

The CBO found that the tax would impact 19% of all employees with health insurance by 2016.

Statement: “(T)he excise tax levied on insurance companies for high-premium plans, the so-called ‘Cadillac tax,’ will affect only a small portion of the very highest cost health plans – a total of 3% of premiums in 2013. The vast majority of health plans fall below the thresholds set in the Senate plan and would be completely unaffected by the provision. “

Fact: the Communication Workers of America, using figures provided by the Joint Committee on Taxation, found that 27 percent of single plans and 22 percent of family plans will be affected by the tax in 2019. (Report available in pdf form here.) And a recent Mercer survey (discussed here) found that 19% of all benefit plans – that’s one plan in five – could be affected by the tax in its first year.

Mr. Furman is either unaware of these figures, or – as is more likely – he’s playing a misleading game with numbers. He says that 3% of premiums will be affected, but what he doesn’t say is that this is because only the premium above a certain level is taxed. Here’s the financial reality for working Americans, once the games are set aside: At least one in five employees will be hit with a new tax, and studies show that on average this will add $958 to their benefit costs in 2013 (also from the CWA report). Both the average cost and the number of people affected will keep going up each year.

(And, as an aside, let’s stop using the phrase “Cadillac tax.” Like the phrase “death tax,” it’s a misleading and emotionally charged phrase designed to manipulate people’s perceptions of the issue.)

Statement: “In addition, the Senate plan provides special protections to plans held by workers in high-risk professions – like police and firefighters – as well as by those over 55.”

Fact: Two new papers in the respected journal Health Affairs (summarized here) have concluded that the Senate bill does not do enough to offset these factors, and that people are most likely to be subjected to this tax because of the industry that employs them or the age mix of employees in their plan. According to one of the papers cited(2), only 3.7 percent of the variation of premiums for family plans is determined by a plan’s benefit design.

What does that mean? Health plans don’t usually cost more because they offer extravagant benefits. They cost more because they include people whose medical expense are higher – older workers, chronic disease sufferers, and women. Other important cost drivers include the size of the employer and the part of the country where the employees are located.

Statement: “(F)or the small sub-set of plans that are affected, the primary impact of this provision will be to increase workers’ wages. Getting a pay raise is not what most people would call a tax increase.”

Fact: In a survey of employers conducted by the Towers-Perrin firm (pdf), only 9 percent said they would increase salary or direct compensation if health care reform reduced their benefit costs; 78 percent said they would keep the savings in the business as profit.

Mr. Furman quotes a list of economists who believe that wages will go up if benefits are cut. That’s a theoretical assertion based on multi-year comparisons of wage and benefit trends. But theories are theories and reality is reality. It’s hard to give a theory – especially one that’s based on data from a different economic climate – more credit than real-time, real-life survey results like these.

What’s more, even a small increase in wages – which are taxable – would never offset a similar loss in benefits, which aren’t taxed. Once you add in the much higher deductibles and cost sharing that will result from this tax, people will wind up deep in the hole.

Statement: “Finally, supporters of the status quo are supporters of continuing the hidden tax of $1,000 that the millions of Americans who get insurance through their job or buy it on their own are already paying each year to cover the costs of caring for those without insurance.”

Fact: None of the groups or experts opposing this tax are supporting the “status quo.” This is the kind of rhetorical gamesmanship that has become all too common in Washington lately. Opponents of this tax simply suggest that it be removed, as is proposed in the Sanders-Franken-Brown Amendment, and replaced with the more rational and progressive taxation policy in the House’s bill.
Peter Orszag committed a similar, if less egregious sleight-of-hand on Monday when he cited the excise tax as one of four “fiscally responsible” measures likely to contain costs – ignoring the new Health Affairs report which challenges that assumption. As we’ve already mentioned, that study shows that generous benefits- the very cost tax supporters claim it will contain – only account for 3.7% of the variations in premium for a family plan.(3) That means this tax will hit a lot of plans that aren’t generous at all.

Is it really possible that neither Mr. Furman nor Mr. Orszag have heard of these studies – and neither has anyone who works for them?

Policy experts like Furman and Orszag are free to represent their Administration or push a political line. But, like generals testifying before Congress, I believe they also have a responsibility to lay the facts out fully before the American people. They work for us. If they want to tell us why they don’t accept these new findings, fine: they can make their counter-arguments. But pretending that these studies don’t exist should not be an option. Either these White House officials are ignoring critical information, or they and their teams are unaware of some important new studies affecting their areas of policy expertise. I don’t know which explanation is worse.

Either way, we expect more from this Administration.

(1)Joint Committee on Taxation data, as summarized by the Communications Workers of America (pdf)
(2)Jon Gabel, Jeremy Pickreign, Roland McDevitt, Thomas Briggs, “Taxing Cadillac Plans May Produce Chevy Results,” Health Affairs (Dec. 3, 2009)

(Disclaimer:  I’m actively involved in a campaign to eliminate the proposed excise tax, and any writing I do on that topic should be read with that understanding.)

You Call That Health Reform?

December 13, 2009

These days when people ask about health reform, I’m reminded of Gandhi’s visit to England in 1931. Somebody asked him what he thought of “Western civilization” and his answer was, “I think it would be a good idea.”

That’s how I feel about health reform: It would be a good idea.

The truth is that what we’ve been calling health reform doesn’t really “reform” the system at all. It mostly shifts responsibility from one part of the economy to the other. While the Senate’s misguided excise tax places undue and unfair pressure on working people’s health plans, both bills squeeze the middle-class enormously. How? By mandating the purchase of costly and inefficient private insurance, in order to create conditions where the lower-income uninsured can receive coverage. Maybe we should call it “health inefficiency redistribution” instead, since the few cost-containment provisions are in all likelihood being oversold.

That said, the current House and Senate bills would both accomplish some very important things. But these bills do little to lower costs, and it didn’t have to be this way. This seems like a good time to get out of the weeds and look at the situation from a slightly broader perspective.

Here are some thoughts that might help sketch the outline of real reform:

People don’t understand how the money really flows in InsuranceLand.

Ezra Klein will point out that insurance company profit margins are low. They are, but as I pointed out here, the really big insurers have better-than-average margins – and most people are covered by really big insurers.

Even more importantly, margins are artificially low for health insurers. Think of it this way: Let’s say you hire me to pay your bills for $5 each. The first bill is for $1,000, so I charge you $1,005. My profit margin is very low (0.5%), but I just made five bucks and all it took was a second to write the check (and 42 cents for the stamp). Sweet. If I do that 10,000 times I day I’m rolling in cash … and I when I bitch about my profit margins, it’ll sound reasonable to lots of Democrats and liberals.

With the cost inflation we’re seeing, health insurers aren’t “managing” anything. Like my example above, they’re just writing checks. They should be treated that way – as overpaid performers of a clerical function – until they demonstrate that they can do their jobs better. We could make some accounting changes, too.

The idea that insurers have to pay 90% of whatever they charge for medical expenses sounds good, but …

if that happens, what’s the one sure way to make sure they have more profit in the years to come? Charge more! If you only get to keep ten cents on the dollar, the only sure way to get more money is to collect more dollars. Don’t think they’d do that? I hope you’re right. But at a minimum, it certainly doesn’t give them much incentive to lower costs, does it?

There are more creative ways to accomplish the same goal – and give them the right incentives.

We already have single-payer in most of the country – but it’s private single-payer.

One study has shown that 94% of health insurance market areas in this country have a near-monopoly situation, while another showed that in 16% of markets they studied one carrier had 90% or more of the market. We have near-single-payer or absolute singer-payer in wide swaths of the country – but it’s single-payer in the hands of a profit-making elite answerable to no one.

Real health reform would do something about that.

Meanwhile, here in the real world …

So, what about the health reform we do have? I had already said that the watered-down public option probably wasn’t worth keeping, and that advocates should hang tough in favor of something more robust. Medicare expansion seemed like a good alternative to that weak public option in certain ways, although that’s a tough choice to be forced to make. There are also many unanswered questions – and it could become a dumping ground for bad risk. The number of people eligible for the plan is likely to be extremely small. And I never underestimate the political process and its ability to mess up even a marginally good thing. (See reports that Kent Conrad was trying to ensure that the expanded Medicare program can’t use Medicare rates – an idea that would rob it of any real value.)

So the Medicare expansion, even if it’s not diluted any further, is a backdown from a compromise proposal that was a itself compromise from the Democrats’ 2008 campaign pledges – pledges which were themselves less than what most experts felt needed to be done. A compromise of a compromise of a compromise of a compromise: I’ll let others decide if that’s the best we can expect from (and for) our nation.

Any good news? Sure. Both the Senate and House bills provide insurance to the lower-income uninsured (although the subsidies are too weak), create portability for people with pre-existing conditions, and limit out-of-pocket costs. (Note that I said limit and not reduce. From what I’ve seen, neither bill would lower those costs much, but they’d cap them.) But would the bill be “a pretty remarkable accomplishment,” as Mike Lux put it? Only if you grade on an extremely steep curve – one in which an “A” is not the health reform we should have, or even the one that was promised by Democrats in the 2008 election, but is the result of a process that seemed to lack the best our leaders can offer in the way of imagination and decisive leadership.

Maybe, once the bill is passed, we could use the enormous reservoir of talent our leaders possess to begin work on real reform. The work won’t end then – it’ll just be beginning.