“Cadillac Health Care Plans.” Even the phrase suggests gilt-edged insurance for Greedy Geezers at Goldman Sachs . No wonder the Senate wants to slap a tax on insurers and self-insured employers who offer over-the-top policies beginning in 2013.
After all, plans that fetch more than $23,000 for families (or $8,500 for individuals) must encourage over treatment, right?
If you’re not sure, that’s hardly surprisingly. In recent days, New York Times columnist Bob Herbert, the Washington Post’s Ezra Klein, MIT economist Jonathan Gruber, and Merrill Goozner, editor of Gooz News on Health, have offered sharply conflicting reports on the tax and its likely effects.
I decided to compare the arguments, and check the facts.
The first thing you need to know is that a pricey plan is not necessarily chock full of benefits. When setting premiums, insurers are not thinking about how much value you will get from the policy; they are contemplating how much it will cost them to reimburse you. Here, two factors weigh heavily on their minds: your age, and the cost of health care where you live.
Insurers would much rather sell a policy to a young person living in Iowa than to a woman of a certain age who has put down roots in Manhattan. To put it quite candidly, they don’t want me as a customer. So, if they can, they will charge me more. (Under the Senate plan, insurers can triple premiums for older customers and adjust premiums to reflect regional differences in the cost of care.)
Those who support the tax assume that high-priced plans cover full body scans. They seem to assume that in the private health insurance market, you get what you pay for. Higher premiums must mean more generous benefits, and more frills.
The most recent December edition of Health Affairs online reports on a study of more than 3,000 insurance plans: "It's often assumed that high-cost health insurance plans – sometimes called 'Cadillac' plans – provide rich benefits to plan subscribers.” But “Health reform provisions that treat these plans like luxuries may be misguided. Only 3.7 percent of the variation in the cost of family coverage can be explained by benefit design (actuarial value). “
Factor in plan type (whether it is a PPO, an HMO that expects patients to stay in network, or a high-deductible plan), and you have now accounted for just 6 percent of the variation in prices.(Thanks to health care experts, Timothy S. Jost and Joseph White, for calling attention to this study in their article in RollCall.
The researchers report that premiums also vary by industry and “may capture some unmeasured characteristics of the workforce such as health status.” Insurers price policies based on past experience in a given industry.
The study confirms that location matters. And age lifts premiums. . As MIT economist Jonathan Gruber observes: smaller “firms with older employees may have higher insurance costs not because their plans are more generous but because the employees themselves are more expensive to insure.”
Would You Be Affected By the Tax?
You may be thinking, “I don’t know how much my employer pays for my family’s insurance, but I’m certain it’s not $23,000.”
Yet, as Bob Herbert notes: “because of the steadily rising costs of health care in the U.S., more and more plans would reach the taxation threshold” in the near future.
“Within three years of its implementation, according to the Congressional Budget Office, the tax would apply to nearly 20 percent of all workers with employer-provided health coverage in the country, affecting some 31 million people. Within six years, according to Congress’s Joint Committee on Taxation, the tax would reach a fifth of all households earning between $50,000 and $75,000 annually. Those families can hardly be considered very wealthy.”
Everyone realizes that insurers will pass the 40% excise tax along in the form of even higher premiums. At that point, MIT’s Gruber explains, most experts assume that employers will say “no thank you”, and begin looking for a cheaper plan. To avoid the tax, self-insured corporations also will begin shopping for a better bargain.
But under health care reform, all plans must provide a fairly rich package of “essential benefits.” How are they going to find less expensive insurance?
Their only recourse: switch to policies with high deductibles and co-pays. The benefits these plans offer will meet the reformers’ requirements– even though many employees may not be able to afford to reap the benefits by actually using the insurance.
But Don’t Higher Co-pays and Deductibles Control Waste?
“Proponents see this as a terrific way to hold down health care costs,” Herbert writes. “If policyholders have to pay more out of their own pockets, they will be more careful — that is to say, more reluctant — to access health services. On the other hand, people with very serious illnesses will be saddled with much higher out-of-pocket costs. And a reluctance to seek treatment for something that might seem relatively minor at first could well have terrible (and terribly expensive) consequences in the long run.”
Gruber, who supports the tax, sees this as progress. He believes that the surcharge “would reduce the incentives for employers to provide excessively generous insurance, leading to more cost-conscious use of health care and, ultimately, lower spending.”
Unfortunately, Gruber overlooks a few facts. First, 75 percent of our health care dollars are spent on patients suffering from serious chronic diseases such as cancer, heart disease, stroke, and chronic obstructive pulmonary disease.
As Merrill Goozner points out: “The idea that taxing those plans will somehow encourage people to reduce their utilization is wishful thinking that ignores who actually makes health care decisions — doctors, hospitals, drug companies, and other providers. It also ignores why most people use health care — it's because they are sick.”
If co-pays for visits to a specialist are high, some chronically ill patients may put off seeking help, but eventually most middle-class Americans will see an oncologist or a cardiologist, even if they have to borrow the money to cover the deductible.
Will they then be over-treated?
Perhaps. But chronically ill patients don’t make the decisions on big ticket items such as surgery, hospitalization, a battery of expensive tests, or a drug that costs $50,000 a year. Doctors and hospitals tell them what they must have to survive. Co-pays and deductibles will not make these patients more “cost-conscious.” Cost-sharing will only give a distraught stroke victim another reason to worry.
Patients do make small decisions. Should I visit the doctor? Should I have my blood pressure checked? Should I try a smoking cessation clinic? And here, research shows, that if they face a co-pay, there is a 50/50 chance that they will make the wrong decision, foregoing needed care.
But, and here’s the good news—under the Senate bill, co-pays for necessary preventive care are not allowed. If the US Preventive Services Task Force (USPSTF) gives the test or treatment an “A” (strongly recommended) or a “B” (recommended), the legislation stipulates that “a health insurance issuer offering group or individual health insurance coverage shall not impose any cost sharing requirements.” (Hat tip to Health Beat reader Fred Moolten for pointing to the exact wording in the bill.
So even if employers ratchet down to scaled-back policies, the cost-sharing will not apply to screening for colon cancer.
Still, somewhere in between the little decisions that patients make about preventive care, and the larger decisions that health care providers control, co-pays will reduce utilization. And about half the time, patients will skip needed care. .
But Shouldn’t Employees Pay a Tax On Benefits ?
In theory all employees should pay income taxes on benefits as well as salaries. The current system is simply unfair.
Today, wealthier employees are more likely to enjoy comprehensive coverage, with their employer paying 75% to 100% of the premiums. Low-income workers more often work for an employer who offers either no insurance, or skimpy coverage, paying a smaller share of the premium.
The fact that high-income employees are getting such a fat tax break violates the whole notion of “progressive” taxes.
But the Senate plan doesn’t tax those at the top of the income ladder.. Instead, the employees who would find themselves paying more out of pocket would be those who happen to work in the wrong industry, live in a community where the cost of delivering care is especially high, or work for a small firm where many of their colleagues are older. Rich or poor, these are the people who would find themselves paying more out of pocket. There is nothing “progressive” about this.
Perhaps the solution would be to tax health care benefits for all employees?
Those who argue for a surcharge on benefits sometimes suggest that if employees had to declare benefits as income, many employers might well get out of the insurance business. After all health benefits would be less valuable to employees, and so less useful in helping employers recruit and keep their best talent.
Those who support the tax then go on to fantasize that employers would pass on the savings to employees in the form of higher wages.
Gruber argues that if the 40% tax causes employers to “reduce their insurance generosity,” this could have a similar effect: They will “make it up in higher pay for their workers,” he writes. “We saw this in the late 1990s,” he argues, “when the rise of managed care temporarily lowered insurance costs, and wages rose in real terms for the first time in many years.”
He must be kidding. Take a look at unemployment. Consider the state of the economy. Review average wages over the past twenty years. Do you really see employers hiking salaries? Granted, hourly wages finally began to rise in the late 1990s, but this was only after years of seeming prosperity coupled with wage stagnation. Unless the job market is very tight, employers share profits with investors long before they begin handing out raises.
But you don’t have to believe me. Listen to the employers themselves. According to Herbert, “A survey of business executives by Mercer, a human resources consulting firm, found that only 16 percent of respondents said they would convert the savings from a reduction in health benefits into higher wages for employees. Yet proponents of the tax are holding steadfast to the belief that nearly all would do so.”
High Premiums Only Reflect the Underlying Problem
Ezra Klein supports the Cadillac tax because he sees it as a first step toward reining in health care inflation.
He acknowledges that under the Senate plan there will be “losers” : the unlucky employees, many of them middle-class, who find that their employers have switched to a plan that costs them more.
But Klein argues: “In return, we'll make a start on bringing down system-wide health care costs, and we'll have a strong stick forcing insurers to create more affordable policies.”
Here Klein ignores the fact that insurers cannot make insurance more affordable unless they make U.S. health care less expensive—by covering less and slashing reimbursements to hospitals, drug-makers and doctors.
The conventional wisdom has it that insurers are making fat profits. But this just is not true. Today, the industry is looking at a measly 3% profit margin. Health insurers’ margins have lagged other industries for years. Indeed, when U.S industries are ranked for profitably, health insurers place 87th. And this is true of the insurance industry’s leaders.
Very recently, insurers’ share prices have risen because investors are hoping that , with more customers, these companies will flourish. Wall Street might be right, but I doubt it. (As you may have noticed in recent years, you cannot count on “the market” to be either rational or efficient. Put it another way: the market is only as rational as we are.)
As the uninsured and underinsured gain coverage, insurers will find that they have more customers, but those new customers will require more care. Unless drug prices and specialists’ fees drop, these new policyholders will cost insurers dearly.
Keep in mind, that over the past ten years, private insurers have watched their reimbursements to doctors, hospitals and patients levitate by an average of 8% a year, year in, year out. There is no sign that health care inflation is slowing down.
Meanwhile, there is not a lot of fat in the insurance industry—it has been struggling to keep margins at 3%. Could these companies spend less on advertising, marketing, lobbying and CEO salaries (though those salaries are a drop in the bucket when compared to total revenues and expenses)?
Yes—if they were operating in a different economy. But in our capitalist society, we expect them to market and advertise; this is what will make the exchanges “competitive.”
In the end, true cost-control means addressing the underlying problems: we pay too much for virtually every pill and procedure; we over-pay for aggressive care and under-pay for preventive care. We reward hospitals for inefficiency and waste. And too often, providers over-treat patients, exposing them to unnecessary risks.
The problem is not that premiums are sky-high because insurance plans are too generous. Premiums only reflect the problem at the center of a healthcare system spiraling out of control: over-use of over-priced medical technologies, leading to run-away healthcare inflation.
And ultimately, if the nation is going rein in spending, we cannot expect insurers to do the heavy-lifting. In many cases they simply don’t have the power when negotiating with Big Pharma, or the brand-name hospitals and doctors that patients want in their networks.
Moreover, we don’t want insurers making the judgments about which procedures and products should be covered, or how valuable they are. They have neither the expertise nor the standing, morally or politically, to shape healthcare policy
Such decisions should be made by an Independent Medicare Advisory Commission (IMAC) that uses medical evidence to encourage effective care. (I have written about IMAC here http://www.healthbeatblog.com/2009/12/glass-half-empty-glass-half-fullthe-senate-has-a-bill—-part-2-of-3.html ) If Medicare follows IMAC’s recommendations, Medicare has the clout to change the way it pays for care, saving money and lifting quality by rewarding value rather than volume. Other insurers might then follow Medicare’s example.
The House Solution
In Conference, legislators will have a chance to reconsider the Cadillac tax. But even if they are persuaded by arguments that it will impose an unhealthy burden on many middle-class workers, those who support the Cadillac tax say it would raise $150 billion over ten years. If we ditched it, how could we raise the funds needed to finance reform?
The House proposed an alternative: the final version of the House bill calls for a tax surcharge of 5.4 percent on income over $500,000 in the case of individuals and $1 million for families. Over 10 years, the surcharge would bring in $540 billion.
Some would argue that there is no reason that our wealthiest citizens should pick up the tab.
The truth is that in recent years, the very rich have benefited from windfall tax cuts that added to a burgeoning deficit. It makes sense to ask them to help ensure that reform is deficit neutral.
Moreover, this group has enjoyed unparalleled prosperity, and not just in the 1990s. From 2002 to 2006, households at the very top of the economic ladder (in the top 1.2%) watched their incomes rise by roughly 42 percent. (For more numbers that reveal how income has been redistributed upward in recent decades, see my debate with Phil Kerpen, Director of Policy, Americans for Prosperity. on PBS NOW.
Finally the folks who would see their tax bills rise are now paying effective tax rates that are, by recent historical standards, surprisingly low. (Thanks to Conor Clarke writing on Andrew Sullivan’s “The Daily Dish” (Atlantic Online)for this chart. Asking those perched on the very top step of a one-hundred –step income ladder to help finance health care for all is far from unreasonable. With last week’s vote, we as a nation, made a statement: Americans have now agreed that we want to live in a society where everyone has access to essential care. This is why conservatives are so upset by the current legislation. We have set a goal, and at this point, they fear, there is no turning back. But to achieve that end, all of us– rich and poor, young and old, doctor and patient–must pull together.