President Obama's Fiscal Year 2017 budget proposal responds to intense political pressure by proposing some changes to the calculation of the Affordable Care Act's "Cadillac Tax." This is a 40 percent excise tax on the cost of insurance coverage (including employer contributions to health savings accounts or flexible spending accounts) over a threshold, subject to a range of adjustments.
This would effectively cap the long-standing employer-sponsored health insurance tax exclusion, which encourages employers to fund health care coverage. Its implementation was postponed from 2018 to 2020 as part of budget legislation enacted at the end of 2015, due to bipartisan opposition.
It would be natural to question the value of a policy that unites Republicans and Democrats in opposition. Advocates for the tax argue that it is a fundamental piece of the 2010 reform because it will reduce inefficiencies and perverse incentives in the current system. Jason Furman, Chair of the President's Council of Economic Advisers, claims that "major benefits for our health care system, our economy, and the deficit" would be threatened by delaying or repealing the tax. As he reports, "101 leading economists and health policy experts" endorsed a letter making the same argument. Jared Bernstein of the Center on Budget and Policy Priorities argues that to oppose the tax would mean "support for the ACA is split at this critical stage of its evolution," dealing the whole program "a serious blow."
Some of the advocacy for the excise tax is misguided, but its marketing as a tax on "Cadillac"—so by implication luxury—coverage does state a principle that should be part of national health policy. Defining the level of benefits to be supported is appropriate; defining that in terms of a level of spending, as the law does, is not. The tax should be fixed so it applies to a clear definition of relatively luxurious benefits.
Defining Which Health Benefits To Support
All rich democracies except the United States guarantee a national standard of health insurance or health services to all citizens. These guarantees require that some citizens help pay for the health care of others. But no government extends this guarantee to everything that could be considered health care. Each government creates social solidarity, shared protection, for what it considers a minimum or essential set of benefits.
The U.S. approach to health care solidarity is unusual because, as part of it, the exclusion of health benefits from taxation encourages employers to pay for health benefits for their employees. Yet that does not change the principle. Just as Germany's sickness funds only cover some benefits, and the English National Health Service (NHS) only covers some services, the tax preference for employer-sponsored insurance should be based on some decision about what standard of benefits should be shared. If some employers provide truly lavish (that is, "Cadillac") coverage, such as health club memberships or concierge physician services, that excess should not be favored through the tax code. It should be viewed as discretionary personal consumption.
Limiting the tax preference so it does not include truly excessive benefits would increase federal revenue from the employers or employees who currently share such benefits. Relative to no limit, that would reduce deficits and increase equity. When citizens agree to a tax break, it should be for some agreed level of support. From this perspective discouraging "Cadillac" plans is perfectly reasonable; the challenge is defining what makes coverage a luxury rather than a standard of decency.
Capping Spending Aims For The Wrong Target
Unfortunately, the tax as enacted does not address the question. Instead, the law defines excess as a level of spending by employers on benefits. Yet spending is only weakly related to benefits, for well-known reasons.
The same benefits will cost dramatically more or less depending on the risk profile of the group of employees, basic price levels for inputs such as labor and rent in the region, possibly the organization of medical practice in the region, and certainly the market power of the medical industry in the region. So the excise tax, if imposed, is better characterized as a "living in the wrong place" tax or, even worse, an "ambulance tax" — taxing sicker groups.
Critics argue that, in order to avoid the tax, employers will reduce coverage. Employers and those who study them agree and add that employers are already reducing coverage in anticipation of the tax.
"Increasing employees' cost sharing," Robert Galvin writes, "has been the primary tool employers have used to address rising health care expenditures." He adds that high-deductible plans have shown that, at the least, they "save money in the short term." Hence there is little reason to expect employers to back off from this approach — unless there is severe backlash from employees.
Even so, employees could not expect employers to pay the tax. Benefits at a 40 percent premium cannot be a good deal for either. Then less healthy groups of employees, other things being equal, would hit the threshold first. So their coverage would be reduced more. A policy that reduces coverage for sicker groups contradicts basic principles of social sharing. In policy wonk language, it is a perverse reverse "risk adjustment" — instead of sicker groups getting additional support, they will get less.
Advocates and critics of the tax disagree about how many employers would hit the threshold in 2020 and beyond. Jason Furman and Matthew Fiedler, on behalf of the Obama administration, argue that estimates by the Kaiser Family Foundation and the Congressional Research Service are too high because they do not include the effects of adjustments to the thresholds that are discussed below. All sources, however, agree that, unless efficiency savings are achieved, more and more plans would be subject to the tax each subsequent year.
Since nobody predicts benefits will become more generous, this means all agree that, other things equal, the same benefits will be acceptable one year and "Cadillac" the next. More plans would become "Cadillacs" each year, even as the actual benefits did not change. This is a strange, dangerous, and unfair way to define "excessive" benefits.
Proposals To Adjust The Spending Cap
Supporters of the tax were forced to acknowledge some of these criticisms in 2010. Research in Health Affairs showed that only a small part of variation in premium costs could be connected to variation in the actuarial value of benefits or even plan design (e.g. a health maintenance organization or paid provider organization). The law includes an adjustment for the age and gender distribution of a group of employees, and allows higher limits for categories of higher risk occupations.
Yet those adjustments are flawed. Some cannot easily be applied: for example, firefighters and police are often insured within larger groups of city employees. Others such as "agriculture" or "construction" are too broad to be targeted accurately.
The administration's major proposed change would address the geographic variation by raising the threshold amount — if it is lower than the costs of the average "gold" (80 percent actuarial value) plan available through an exchange in a state. Yet that still leaves many puzzles, such as how to adjust to cost variations within a state, and whether "gold" plans, which do have significant cost-sharing, would be considered "Cadillacs" by most people.
When the ACA was passed, the "median 'actuarial value'… for an employer-based plan was 83 percent," compared to the "gold" standard of 80 percent. Now, the average gold plan appears to have very similar cost-sharing to the average employer plan, though employer plans on average have lower limits on total out-of-pocket spending. So the administration's fix appears to define "Cadillac" as "anything above average."
In practice, advocates for the tax rely more on another justification for using dollars, not benefits, as the standard. They presume employers could make care much more efficient, if they only tried harder.
In Furman and Fiedler's view, the tax subsidy for employer-sponsored insurance makes it "rational for employers to skew compensation packages away from wages and toward excessively costly and inefficient (my emphasis) health benefits." The excise tax, instead, would give the private sector "the right incentives to discover and deploy novel approaches to improving the health care system."
Far be it from me to deny that Americans spend too much for the medical care they receive. Compared to any other system, as has been shown by numerous analyses, ours has much higher prices and administrative overhead for the same services. In principle we should pay less. Unfortunately, outside of a brief period in the mid-1990s, employers have shown little ability, on their own, to drive down costs per service, as opposed to coverage. Medicare can semi-standardize prices; employers have not, and as a result prices vary dramatically and are driven by factors such as hospital market power.
The idea that a tax code change will change the balance of power between payers and providers has no support beyond wishful speculation. The idea it will cause discovery of "novel" (and effective) approaches is simply a wish: necessity does not guarantee invention. And those arguments are even less plausible when the same advocates insist the tax will affect very few employers. In any event, as discussed above, it is much easier for employers to cut benefits and they are doing so now.
Redefine The Cap To Target Excess Benefits
The Obama Administration's proposed changes do not solve the basic problem: as designed, the "Cadillac tax" aims at the wrong target. The administration's solution can only lead to an extremely complicated set of adjustments that inevitably will be inadequate. By far the most likely result is steady cuts in coverage. This might make sense if U.S. spending were so high compared to other countries because our cost-sharing is unusually low, but our cost-sharing is actually unusually high.
Policymakers should replace the excise tax and its dollar thresholds by deciding what set of benefits should be eligible for the tax preference. To say that, of course, does not eliminate difficulties. Two are most important.
First, all estimates of the budgetary effect of the tax assume it will allow less coverage each year. One point of a real standard is to stop that continual erosion. Changing the tax to focus on benefits rather than spending thresholds would likely reduce revenues associated with the tax. Budget hawks will object on those grounds alone. Obama Administration officials and allies have echoed this argument on the grounds that the revenues from the tax were part of their argument as to why the Affordable Care Act, in total, would not increase the federal budget deficit.
Yet we should not accept perverse policies just because they save the government money. There are many better ways to reduce spending in the health care system. Any measure that reduces spending but not benefits in the employer-sponsored system therefore would reduce the tax exclusion, and so reduce deficits by increasing federal revenues. We could start by reducing the cost of private insurance with all-payer price regulation.
The second difficulty is that legislators and executive branch politicians are no more willing to define a benefit standard than are academic economists. Congress would not define "essential benefits" for the ACA's new coverage, leaving this decision to the Secretary of Health and Human Services (HHS).
The Institute of Medicine, when asked for advice, made limiting costs, rather than some standard of adequacy, its priority. The Secretary then, contrary to expectations, gave states substantial discretion. Asking politicians or even academics to be frank about benefits will not make them happy. It would also set off contentious lobbying among provider and patient groups.
That conflict, however, is otherwise known as representative government. Voters should be given a chance to express their views of what constitutes decent health insurance. The result might be coverage above the misnamed "gold" standard, but it still would not be "Cadillac." Employers would be free to cover more, but as a separate, wrap-around benefit without tax exclusion. Truly "Cadillac" plans would be discouraged, equity increased, and medical inflation would not erode coverage.
from Health Affairs Blog http://ift.tt/1podLct
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