Archive for January, 2010

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