The Senate's draft health care legislation includes a punitive excise tax on "Cadillac" health insurance benefits. The idea is to limit the tax deductibility of health care benefits by penalizing insurers (or self-insured employers) for providing benefits that cost too much ("too much" means total benefits of $23,000 for families or $8,500 for individuals in 2013, amounts that are set to increase more slowly than likely health care costs in subsequent years).
Many unions and business interests, and most House Democrats, think the excise tax is a terrible idea. Many eminent economists, the White House and much of the press seem to think it is a wonderful idea. If the tax (and bill) make it to conference, conferees will face a test. So here's the first question:
1. Which of the following statements is true?
(a) Governments should and can set limits on the health care benefits that they fund or subsidize.
(b) Particularly expensive plans provide particularly generous benefits.
(c) If insurance companies could not sell more expensive plans, they would do a better job of controlling health care costs.
(d) All of the above.
If you answered (d), you might be a Senate drafter or an eminent economist. You're also wrong. The right answer is (a).
Option (b) is false because, as a Dec. 3 report in Health Affairs based on a survey of more than 3,000 health plans in 2007 summarizes: "It's often assumed that high-cost health insurance plans - sometimes called 'Cadillac' plans - provide rich benefits to plan subscribers. Health reform provisions that treat these plans like luxuries may be misguided. Only 3.7 percent of variation in the cost of family coverage can be explained by benefit design (actuarial value)." As Allan Sloan explained in the Washington Post on Dec. 18, "as any insurance maven can tell you, costs depend more on the people being covered (old, sick, or both?) and location (high-cost New York or low-cost Montana?) than on the level of benefits."
Choice (c) is false because there is no evidence that insurance companies can control costs better just by trying harder. The excise tax would not give insurers more bargaining power in dealing with hospitals, doctors and drug companies. It would not create new innovations in delivery systems. It would not generate credible evidence to "manage" care. It would not do anything but force insurers to offer cheaper plans to whoever had unhealthy enough employees to qualify for the tax. Which leads to:
2. Which of the following statements about the excise tax is true?
(a) The tax would raise revenue for the federal government.
(b) It would cause employers to offer reduced health care benefits.
(c) Those reduced benefits would especially hurt people with chronic conditions, so one effect of reform would be to worsen insurance for some people who need it most.
(d) All of the above.
This time, (d) is correct. For reasons that we explain at much greater length in a forthcoming review of the excise tax and the literature on cost-sharing for the Institute for America's Future, insurers and employers are most likely to respond to the cap by reducing benefits; that will mostly take the form of greater cost-sharing, and this will be particularly harmful to people with more health care needs who happen to work with other people with greater needs. But any measure that limits the ability to pay for health care with pre-tax dollars will help the federal budget, regardless of whether it is fair to beneficiaries.
The conferees' problem, then, will be that the excise tax would help finance the rest of the health care reform, but do so in a particularly unfair way. It is also self-contradictory (since the idea of health care reform should be to help sick people get care) and likely unpopular (since it threatens, over time, to cut benefits for most Americans). But the problem is complicated by the fact that, nevertheless, setting some limit on what the federal government will subsidize through the tax code is reasonable in principle. The "gold-plated" plans, like for Goldman Sachs executives, are distinct exceptions, but that does not mean they deserve a subsidy.
The right compromise in principle would be to define "excessive" insurance in terms of the benefit package, not the cost. Then any tax would apply to luxury vehicles (Cadillacs) instead of vehicles carrying particularly sick people (ambulances). For example, the standard could be the actuarial value of the House "premium" plan, with the health savings account limit on out-of-pocket costs for all forms of care. But this is a political question, something like the following:
3. The House and Senate should
(a) Accept the Senate excise tax in spite of its many flaws.
(b) Dump the excise tax and find other financing for reform (which may be more popular with the public, but not in the Senate).
(c) Set a benefits standard, take whatever savings that gives and then make up the difference with other measures.
As a matter of policy, we think (c) is clearly the right answer. We think it's better politics, too. But we're not taking the test - or grading it.
Timothy S. Jost holds the Robert L. Willett Family Professorship of Law at the Washington and Lee University School of Law. He is an expert on health care law and is co-author of a casebook, "Health Law." Joseph White is chairman and Luxenberg Family Professor of Public Policy and a professor of epidemiology and biostatistics, and the director of the Center for Policy Studies at Case Western University.
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