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Why the Excise Tax Must Be Part of the Agreement on Health Reform

January 12th, 2010 . by economistmom

…Because it’s the closest thing we’ve got to reversing the tax-free treatment of employer-provided health benefits (granted through the income tax exclusion);

…which is the most immediate and surest route we have right now to “organically” dampen the growth in health costs (”bend the health cost curve”).

But don’t take my word for it; read what Paul Krugman has to say about it:

The argument for limiting the tax exclusion is that the tax break on health insurance encourages over-spending, so limiting it could help in the process of “bending the curve”. More generally, since we think the United States spends too much on health for not-so-good results, it makes sense where possible to pay for expanding coverage from the health sector itself. Both arguments are reasonable…

Even with the excise tax, premiums are likely to rise over time — just more slowly than they would have otherwise. So what we’re really asking is whether slowing the growth of premiums would reduce the squeeze rising health costs would otherwise have placed on wages. Surely the answer is yes…

A last general point: we really don’t know what it will take to rein in health costs, but that’s a reason to try every plausible idea that experts have proposed. Limiting tax deductibility is definitely one of those ideas.

Bottom line: the details of the excise tax should be fixed, but it’s on balance a good idea.

And Ezra Klein offers similar support (and like Krugman responds to particular criticisms against the excise tax), but adds some frank talk about what bending the health cost curve entails:

no one should be under the illusion that this tax will not cause some pain, or upset some voters, or assail the plans of some middle-class workers. It will. But it’s worth saying this very clearly: You cannot design a cost control that won’t. The health-care cost problem is not a problem of the rich and famous. It is not a problem that can be painlessly solved by limiting insurance company profits (much, much too small) or reducing payments to providers (which would mean long waits and less access). Everything has tradeoffs. Everything has losers.

Compared to what we’re going to have to do in the long run, the excise tax is small change. It won’t hurt many people. It won’t hurt folks badly. It has the chance to do some real good. And if it fails, it’s easy to repeal an unpopular tax. But if the hope is that someone will discover a cost control that no one dislikes and that produces no losers, it’s going to be a long while in coming. In the meantime, we need to start trying cost controls. Passing up this opportunity will only make the eventual reckoning worse.

That’s why the excise tax on high-end health insurance plans, which is in the Senate version of the health reform bill but not the House version, must not be compromised away.  The House has nothing equivalently effective at cost control in their version to trade.  Their alternative for a revenue offset, a millionaire surtax with a deepening (unindexed) reach over time (even in the optimistic case where that deepening reach is followed through on), would not even keep up with rising health costs, let alone control them.

11 Responses to “Why the Excise Tax Must Be Part of the Agreement on Health Reform”

  1. comment number 1 by: AMTbuff

    Diane, appealing to an observer as partisan as Krugman is an odd way to support your opinion as a member of a non-partisan group like Concord. I agree with your argument, which was sufficient on its own.

  2. comment number 2 by: SteveinCH

    I return to my basic argument on bending the curve. It is the role of the government to bend the curve on government spending on health care, not all spending on health care. Imagine for a moment, a world with no insurance. If individual citizens chose to spend money on health care such that it was 15 or 20 or 25 percent of GDP, what role does the government have in saying they cannot do so?

    Now expand this thought to a world with private insurance, how is the answer different? Arguably, we could go through a whole list of things on which Americans spend more than other nations per cap or as a percent of GDP (SUVs anyone) and there is no argument about needing to bend the curve on those expenditures.

    All of which brings me back to the Cadillac tax. As a funding mechanism, I favor it. I think it’s the best of a bad set of options for funding. As a way to bend the relevant cost curve, it’s basically useless. It will have absolutely no impact on Federal (or state) spending on health care.

    Bending the Federal spending curve can only be accomplished by changes in benefit guidelines over time (aka rationing) since there is, by definition, no market incentive in Federal spending to begin with, making a tax an impossible solution.

    It’s a bit of a puzzler to me that the obsession with the government bending the cost curve has so much to do with the private market and so little to do with the public market. Maybe I’m missing something here but I just don’t see what the excise tax has to do with responsible government spending.

    Parenthetically, I do agree that citing Klein and Krugman doesn’t feel nonpartisan but I took it as a sort of “even the crazies on the left believe so it must be so.”

  3. comment number 3 by: SteveinCH

    One more thing on this. My personal point of view is that HCR is more likely than not to bend the cost curve upward.

    By putting the Federal government in the business of defining minimums for coverage and other issues, it is extremely likely that standards of coverage (minimums) will rise and that attempts to cost manage will fall to political pressure.

    The more government involvement there is, the more likely it is that popular pressure will result in cost decisions that are bad since we do want to eat our cake and have it too.

  4. comment number 4 by: ArkansasAngie

    Gee … Robert Reich doesn’t agree in his piece — The Last Big Question: Will Health Care Reform Be Paid For By The Rich or the Middle Class? http://www.politicalposts.com/SPFV/tabid/116/PostId/7302/Default.aspx

    Speaking as an employer … small business job creator … I don’t understand why employers provide health insurance at all.

    Health insurance is a personal thing. It lives and breathes when ever and where ever the person is … 24/7. In other words … I don’t believe in worker’s comp either.

    There is such as thing a moral hazard for systems, too. Bailing wire, chewing gum, duck tape and WD 40 just aren’t the necessary solution.

    We need to start from scratch.

  5. comment number 5 by: economistmom

    AMTbuff: Yes, Krugman is very partisan, but he’s also a Nobel laureate, and what he says in this column is more in keeping with the smart economist in him. You can tell that’s true by looking at how the liberal blogs are reacting to it. (They don’t like it.)

  6. comment number 6 by: Brooks

    AMT,

    It’s generally ok to offer as support a partisan expert whose bias/insincerity would lead him to the contrary of the position and arguments he is presenting. In fact, that is often a very useful and sensible means of convincing at least some of that person’s fellow partisans of the argument. As Steve implies above (if I may modify it a bit), it’s like saying “Even this expert on your ideological side concedes this point.” That’s why, when I wanted to disabuse folks on the right of their oft-repeated myth that the Bush tax cuts had increased revenues and the tax cuts generally/always do so, I collected quotes/excerpts mainly from conservative economists and other relevant experts — http://swordscrossed.org/node/1671

    The “Cadillac tax” is perhaps a mixed bag vis a vis the ideological spectrum, but it’s certainly more to the right than the House’s tax on the affluent. So if even Krugman is advocating it, albeit with some adjustments, it’s more persuasive than if a conservative or centrist or even non-partisan/non-ideological organization advocates it, because people on each ideological side are generally suspicious of the objectivity and sincerity of anyone not on their “side” of the fight, even if they accept the person’s expertise, and credibility is a function of all three.

    As a separate point, let’s keep in mind that any reduction in the tax deductibility of employer-provided health insurance is not really a tax increase, but rather a reduction in a subsidy — i.e., a cut in spending. Or if you prefer, think of it as a revenue-neutral combination of a tax increase on some and a tax cut for others: a tax increase on those receiving that insurance and a tax cut for everyone else. Diane has written some outstanding posts on such “tax expenditures” and we’ve discussed the topic here before. If we start with the assumption that everyone will pay X% of their income in taxes (forgive my oversimplification) and then let Joe take some of his compensation in the form of health insurance and thus make it tax free income, the effect is the same as if Joe paid X% and the government sent him a refund (or gave him a voucher in advance), and sooner or later I have to pay more to make up the lower revenue from Joe — I’m subsidizing Joe.

  7. comment number 7 by: SteveinCH

    I largely agree with your framing and your response Brooks, but I still maintain that the bending of the cost curve that is required is a bending of the government’s cost of insurance. As you have pointed out in other posts, HCR is actually an upward shifting of the government curve independent of slope and I contend that the Cadillac tax will do very little to shift the slope of government costs even if it’s impact on overall costs may be (slightly) downward.

  8. comment number 8 by: Brooks

    Steve,

    The “Cadillac tax” is no panacea (forgive the healthcare metaphor), but it will help at least directionally, it will raise revenue needed to reduce deficits, and it will reduce the portion of Joe’s compensation that I, in effect, have to pay. Joe doesn’t work for me, so I’d rather not pay part of his compensation.

    But certainly I wouldn’t want to overstate the impact the “Cadillac tax” will have on federal spending on healthcare or even overall (public and private) healthcare spending. Ultimately we’ll end up with some combination of solutions that save us money but reduce the quality of our healthcare and thus health outcomes, via some combination of:

    - Government rationing (more denials rather than authorizations for treatment). Insurance companies will probably achieve a similar effect but through the market, albeit not smoothly, with customers, in effect, deciding how much they are willing to pay for what coverage (in terms of both stated coverage and reputation for authorizations vs. denials for treatment).

    - Shifting away from fee-for-service payments to providers to more fixed payments (capitation; bundling; whatever) that will get providers to, in effect, do the rationing.

    - Lower rates paid to providers (which will reduce supply and perhaps quality) and to drug companies and medical equipment producers (which will reduce innovation).

    - Shift of a greater portion of costs to patients (making them more price sensitive as well as lowering the expense of coverage).

    - Increasing the age of eligibility for Medicare, means testing eligibility, and increasing premiums for a given package of coverage.

    - Reduction of Medicare fraud (although hard to quantify, I’ve read that estimates are generally around $60 billion per year, e.g., http://fieldnotes.msnbc.msn.com/archive/2010/01/11/2170075.aspx ).

    - etc. I’m sure I’m leaving some stuff out. The above is just off the top of my head.

  9. comment number 9 by: SteveinCH

    Brooks,

    Makes sense to me. Were I the king of the world, health insurance wouldn’t be deductible at all as I agree that the tax code shouldn’t favor one form of compensation over another.

    I also agree that real cost management will require direct or indirect rationing as I would interpret most of your list in that way. Ultimately, the cost per treatment in HC will continue to inflate faster than inflation and thus, the only way to reduce costs is to reduce treatments.

    As to fraud and abuse, I’m entirely unclear why we should expect this to be reduced now when it hasn’t been reduced in the past. In general fraud and abuse can be reduced but it requires an upfront investment to do it and (probably) higher administrative costs to sustain it.

    The fact that fraud exists doesn’t mean it can be cost effectively prevented, nor do I see the incentive in place for government to do so.

  10. comment number 10 by: Brooks

    Steve,

    Re: reducing Medicare fraud, I share your skepticism, but for what it’s worth, the article to which I linked discusses a supposedly greater focus on it as well as at least some added resources by the Obama Administration (executed by HHS). Unfortunately, it’s somewhat inherently hard to measure the level of fraud, so measuring progress is difficult, although there are some indirect, quite imperfect metrics such as amount of fraud uncovered, prosecutions, etc.

  11. comment number 11 by: Brooks

    Meant to say “HHS and the Justice Department”