Posts Tagged ‘John Kerry’

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


Are We Asking the Wrong Questions About Disease Management and Medicare?

April 8, 2008

A recent study suggests that Medicare’s Disease Management (DM) experiment has failed to cut medical costs. DM advocates argue that Medicare’s methodology was flawed. So what’s the answer? A New York Times article asks: Does Medicare DM cut costs, or should it be stopped?

That may be the wrong question.

As far the first part of the question is concerned, it wouldn’t be surprising if the answer turned out to be “no.” Revenues for disease management companies grew from $78 million in 1997 to $1.2 billion in 2005, according to the Disease Management Consortium, largely on the belief that DM programs cut medical costs and were therefore a good investment for private payers. Yet to date, no study has demonstrated conclusive medical cost savings from DM.

That doesn’t, however, mean that DM is a bad idea – especially for Medicare. 160,000 Medicare beneficiaries have been served by the Medical Health Support program, which provided chronic disease patients with periodic calls from nurses. The nurses give patients medical information, encourage them to seek treatment, remind them about their medical needs, and provide other forms of support.

The DM companies had financial incentives: Either achieve a 5% reduction in medical costs for their enrollees, net of service costs, or return their fees. When it became clear last year they weren’t going to make that goal, Medicare relaxed their requirements. Now, only a net savings is required in order for the vendors to keep their fees. It’s not clear if they’ll reach that goal, either. (The CMS pdf fact sheet politely describes the cost impact of these programs so far as “nominal.”)

It’s too early to draw definitive conclusions about this experiment, especially since the data are not yet publicly available. But here are some thoughts to consider:

  • Cost savings may not be the appropriate goal for DM with a population of this kind. Convenience (especially for those with limited mobility or money) and health improvement outcomes are also worthwhile objectives. The program should be evaluated for these indicators, and not for cost alone.
  • While the entire program may not be cost-effective, elements of it might be. Medicare should continue the experiment under modified conditions.
  • There may be opportunities to reduce program costs and improve efficiencies while delivering similar results.

Senators from the home states of the companies involved, including John Kerry and Lamar Alexander, think the experiment should be continued. The Times implies they’re just providing a constituent service to home state employers, but they may in fact be right. There is more to be learned about the role of DM in Medicare, and in the overall health system.

Overall, the DM industry is likely to experience a shakeout in the next year or two – for both private and public payers. Assumptions about its cost-effectiveness are likely to be overturned. The most likely end result? A re-engineered DM concept, which differs from today’s both in design and in outcome measurements. Medicare can play a vital role in DM research, discovering which elements work, which need to be added, and which can be discarded.