The “Cadillac” tax can’t finance health care reform.

MIT Economist Jonathan Gruber recently wrote in the Washington Post in support of the Senate proposal to enact an excise tax on “Cadillac” health care plans, a “40 percent assessment on insurance plans with premiums of more than $8,500 for singles and $23,000 for families. In the House, the gap is closed with a surtax on those earning more than $500,000.” In some ways the “Cadillac” tax will be good for employees because they won’t “see” the tax themselves; it would be paid by their employers. In fact, employers will be encouraged to divert money from health care benefit spending to wages in order to avoid the tax, which should please wage-earners. But at the end of the day employees will receive less total compensation since the extra earnings will be taxed as income, and because they will have difficulty purchasing the same “Cadillac” level of health insurance, assuming they want it. Gruber argues that the tax works because it bends the curve, is eminently progressive, and because it corrects an existing tax bias.

The assessment proposed in the Senate is not a new tax; it is the elimination of an existing tax break that is provided to exactly these firms. Under current law, if workers are paid in wages, they are taxed on those wages. But if they receive the same amount of compensation in the form of health insurance, they are not taxed. As a result, the tax code has for years provided a large subsidy to the most expensive health plans — at a cost to the U.S. taxpayer of more than $250 billion a year. To put this in proportion, the cost of this tax subsidy to employer-sponsored insurance is more than twice what it will cost to provide universal health coverage to our citizens.

I completely agree that the Cadillac tax will, as Gruber predicts, “bend the curve” and change the incentive structure for employers. As he writes, “it would reduce the incentives for employers to provide excessively generous insurance, leading to more cost-conscious use of health care and, ultimately, lower spending.”

For that exact reason, taxing health benefits seems  counterproductive. I think what will likely happen is the market will reconfigure, as Gruber says, and companies will start offering fewer ‘Cadillac’ health plans. The reason they offered them in the first place was that it was the cheapest way of differentiating benefits with other firms since the plans aren’t taxed and taken, as I understand it, out of gross earnings instead of net profit. It  doesn’t seem like a good long-term way of funding public health programs or rebates because if behavior actually changes (as is the goal of any excise tax), then the funding source dries up.

It’s sort of odd that the CBO doesn’t seem to be taking this into account very much. The CBO estimates that revenue from the excise tax will go up every year that it’s collected, from $7 billion in 2013, $13 billion in 2014, all the way to $35 billion in 2019. The numbers should naturally go up as health care becomes more expensive, and with inflation, but there’s no evidence that there is accounting for a reverse effect when employers decide they no longer want to pay the excise tax (at least the CBO isn’t explicit about it, and I guess technically the rate of increase is slowing). Why aren’t the numbers going down every year as businesses stop providing, as Gruber predicts, excessively expensive health care plans? Why would any business keep the Cadillac plans once they are being taxed on it (and which are less visible as a benefit), and not just divert the difference to increased salaries?

Revenue from "Cadillac" tax (in billions)

I started writing this before the recent “accord” in which America’s future is sold out once again to labor unions. Labor unions, which negotiate for these excessively expensive health care plans, would be exempted from paying the new tax for 5 years. According to a union representative (not even the CBO), this would reduce the revenue of this tax by 40 percent, to $90 billion from $149 billion over ten years. I suspect the true revenue reduction would be a lot more, when estimated by an unbiased source. Let’s also keep in mind that while the unions are scheduled to start paying the tax in five years, reasonable people suspect that the Democrats will cave in again and give the unions another exemption when the time comes. As in their analysis for the rest of the health care bill, the CBO must assume Congress will actually keep its word and start charging unions in 5 years, so we can be sure that whatever the new cost estimate is, it will be far less than the true cost to America. If Gruber thinks that it’s unfair that businesses basically steal billions from the taxpayers every year through their lavish tax breaks, he (and the voting public) should be just as incensed now that the unions, like the Nebraskans, are getting special benefits at the cost of the average American taxpayer.

What’s deceptive is that the Cadillac tax in the Senate bill gets a lot of press, but it represents only about 15% of the estimated offsets from revenue expansions and spending cuts that will keep the spending bill in the black. If the tax is as good as affecting behavior as other excise taxes, and Congress caves in as easily to other special interests as it did to unions, I foresee little long-term “deficit reduction” or “deficit neutrality” from  health care reform. The real key to offsets is not reducing overspending by businesses, but by (get this) government-run healthcare plans.

Just as Congress has waived ostensibly “automatic” cuts in Medicare (provided by the Sustainable Growth Rate formula) each year since 2003, politicians in Congress will indubitably start waiving the Medicare spending cuts that make up about 50% of the offsets in the Senate bill as soon as the AMA and AARP start clamoring. They couldn’t stand up to labor. How will they stand up to the AARP? Here’s more fodder for the cynics out there. These cuts aren’t scheduled until 2011, after the midterm elections. Congress is deferring growing a spine until after they get reelected, but there will always be another election after that, and always another reason not to anger the large senior citizen constituent group.

And what about after 2019? Are there still going to be Cadillac plans to tax, or billions more that can be cut from Medicare to keep financing increasingly expensive subsidies? Where will the next ten years of funding come from?

Deficit neutrality is a pipe dream that’s used to sell gullible voters on the health care bill. Federal savings are fungible, and we could be saving money on Medicare cuts or excise taxes even without adding billions in subsidies for health insurance. It’s time for people to face the truth. Don’t get me wrong; I think there are very compelling arguments for expanding coverage, and importantly, creating more efficiency in our health care system. But if we want universal health care in this country, or anything close, Americans need to be told how much it costs, and we need to be willing to pay for it.

p.s.

One final word is that I’d encourage people to actually read the CBO reports on the House and Senate bills, rather than getting all of their information filtered by the press. Check out this insane proposed spending cut in the Senate bill, that I bet you never read in the NYTimes:

“Reducing Medicaid and Medicare payments to hospitals that serve a large number of low-income patients, known as disproportionate share (DSH) hospitals, by about $43 billion—composed of roughly $22 billion from Medicaid and $21 billion from Medicare DSH payments.”

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Bad Faith in Health Care Reform

As a liberal, watching the legislative process wreak havoc on the health care bill has made me incredibly despondent. I’d like to think that I’m intellectually honest enough that if I were a conservative, it would still at least bother me. What so demoralizes me is the absolutely abysmal quality of the policy discussion. While I think some of this might have resulted from a failure of good messaging and public advocacy on Obama’s part, the absolute lion’s share of the blame deserves to be placed on the bad faith of nearly every politician and spokesperson for the Republican party.

There was a huge opportunity for Republicans to play a constructive role in the healthcare debate by making foreceful and principled arguments. If the long-term deficit was truly important to them, they could have made the bill infinitely better by arguing for tighter cost-controls to achieve this goal. If having free market competition was the principle they wanted to enact, they could have fought to tax healthcare benefits. If malpractice lawyers were clogging up the system, they could have enacted fundamental tort reform.

Clearly, they did none of these things; instead we saw mutually inconsistent arguments made to confuse the public and win the news cycle each day. One day the issue was “death panels:” the government will reduce costs too much. Then, the long-term deficit: health care reform will cost too much money. One day, reform is going to take away seniors’ Medicare; the next,  government-run healthcare will be totally inefficient. Never mind the lack of any intellectual consistency with previous Republican policy positions (why was the deficit not an issue when it ballooned under Bush? why Bush’s prescription drug benefit but not Obama’s health care reform?); the arguments given against healthcare weren’t even consistent with each other.

These arguments were in bad faith intellectually, because they could not possibly have reflected the actual considered views of the people making them, and they were in bad faith legislatively because they denied the possibility of effective policy. Rather than participate in the legislative discussion with the Democrats, they tried to play spoiler in the hopes of wrecking any chance for an effective policy to emerge. It (tentatively) looks like they will have failed in that goal — the bill looks likely to pass — but the quality of the resulting legislation, on one of the most important issues imaginable to both parties, is significantly the worse for it.