The Washington Post reports that union leaders are close to cutting a deal with Democrats on the so-called “Cadillac tax,” the 40% tax on expensive insurance plans that the Senate has proposed to help fund health care reform. According to the Post, unions would be exempted from the tax, for two years following the 2013 effective date, giving them time to negotiate new contracts with employers. For other reports on the negotiations, see Kaiser Health News.
What about employees who are not unionized? Late this afternoon, The Wall Street Journal reports that “Democrats agreed to add a provision making the tax less onerous on older workers and women, a union official said. Union sources cautioned that the agreement isn't finalized because it is still being presented to the various unions.” Meanwhile, CNN has said that labor leaders are pushing to expand the deal to exempt health plans for all Americans making under $200,000 a year: “AFL-CIO chief Richard Trumka has made looking out for all workers — not just union members — a big part of his platform.” Watch to see if this happens: if it does, it would be a major fix.
Otherwise, a great many employees will watch their employers dodge the tax by switching to less costly plans that carry higher co-pays and deductibles. This means that more Americans will put off getting needed care. Indeed, research done by none other than MIT economist Jonathan Gruber—a major supporter of the “Cadillac tax”– shows that when patients suffering from chronic diseases such as diabetes and heart disease face higher out-of-pocket costs, they cut back on physician visits and necessary drugs. The result: they become sicker, and down the road, costs rise as more patients wind up in the hospital. (Thanks to Merrill Goozner for pointing to Gruber’s 2007 paper on this subject. Also, see Jane Hamsher’s analysis of how Gruber’s analysis has been used to promote the tax on Fire Dog Lake.)
Yesterday, I e-mailed Gruber to ask about the discrepancy between his 2007 report and his recent statement that the tax is “not going to adversely affect [employees’] health.” He was kind enough to reply—though, to my mind, his response still doesn’t justify support for the tax.
Gruber offers three arguments:
First, he claims that while studies do show that chronically ill patients defer care when co-pays are higher, “NONE of these studies show any adverse impact on HEALTH for the typical person. The only evidence of an adverse impact on health is for low- income chronically ill patients” and under reform, low-income folks will be better off than they are today.
Secondly, he suggests that, for reasons we don’t understand, chronic disease management is effective only for some patients. And since “people are smarter than we think they are,” the ones who cut back on drugs and visits to the doctor are the ones who wouldn’t benefit from the care. (If his reply seems confusing, I’ve quoted his full response below where you can parse it yourself.)
Gruber concludes his argument by emphasizing that the tax is designed to raise some $150 billion to help fund reform: “I would not in any way claim that higher copayments will cause No reduction in truly effective care. But . . . . . do we really think that there will be a reduction in effective care that is worth $150 billion over the next decade?”
At that point, I’m afraid that his argument falls apart. The truth is that the tax will not raise anything remotely close to $150 billion.Moreover the tax will not “rein in” health care spending, as some proponents claim. In short, this tax is, in every way, a sham.
I analyzed the many myths about the Cadillac tax in an earlier post, but I’m coming back to the subject for two reasons. First, commentators continue to misrepresent the effect that the tax will have, and secondly, it seems that as negotiations come down to the wire, media myths are carrying the day. I would like HealthBeat readers to understand the facts. (Let me emphasize that I’m not alone. Over at Gooznews on Health, Merrill Goozner has been doing a bang-up job of analyzing the tax: here and here.
Meanwhile, over at the Washington Post, Allan Sloan, a financial reporter who has been covering the business world for decades, offers excellent insights. It’s worth listening to what Sloan says about “the Cadillac tax” because, unlike some who specialize in health care reform, he is a veteran business writer who truly understands the surcharge’s likely effect on employees’ wages and taxes.
Who Would Pay the Cadillac Tax?
While the 40 percent tax is billed as a “tax on insurance companies,” Sloan points out that if you look at how supporters reckon that it would raise $150 billion, you discover that 80 percent of that sum would come, not from “soulless insurers,” but from individuals paying higher income taxes, Medicare taxes and Social Security taxes. “Most of those tax dollars would come from people who earn between $100,000 and $200, 000,” Sloan reports. “You also see that the impact on people in the $1 million-plus range — most of whom probably really are rich — is relatively trivial.”
Where does Sloan get his numbers? From analysis published last month by the non-partisan staff of Congress's Joint Committee on Taxation. You’ll find the relevant tables on the final eight pages of the report. Sloan took the time to read and analyze those pages.
Why would the tax on expensive insurance policies lead to higher payroll and income taxes? Sloan explains: “Economists at the joint committee and most other places assume — I'll repeat that: assume — two things. First, that to avoid this tax, employers will pay less toward health insurance than they otherwise would.” In other words, they will buy cheaper policies. As I explained in my earlier post on the tax, in order to conform with reform regulations regarding benefits, employers won’t be able to switch to skimpier plans that offer fewer benefits. They’ll find less expensive policies only if they move to plans with higher co-pays and deductibles.
Secondly, Sloan observes, economists assume “that the money employers don't spend on health care will go to employees [in the form of ] higher salaries.” Thus, employees would wind up paying over $100 billion more in income and payroll taxes—money that would be used to fund reform.
“Call me skeptical,” Sloan adds, “or cynical — but I find it hard to believe that any employer would pay more to employees if it paid less for health care.” People called Sloan cynical in the 1990s, when he tried to warn about the excesses of the bull market. (Sloan is one of the heroes of Bull: A History of the Boom and Bust 1982- 2002. Repeatedly, he predicted that the stock market was headed for a nasty rendezvous with reality. He also warned that the much ballyhooed “merger of the century,” meant that AOL was taking Time-Warner to the cleaners.)
Sloan is a hard-headed reporter who bases his opinion on facts. He was right then, and he is right now.
A long-time observer of the economic scene, Sloan is familiar with the history of wages in the U.S. over the past 25 years. He knows that when corporations prosper, the money goes to investors and corporate executives first. If the company is well run, a windfall may be plowed back into the business. Found money rarely winds up in employees’ pockets. Anyone who thinks that if employers pay less for insurance they would hike wages is simply naïve.
While fatter benefits lead to lower salaries, these things rarely work the other way around. Even if the cost of total compensation slows. employers will hand out pay increases only if they are in a very tight labor market. MIT”s Gruber disagrees. He argues that, in the late 1990s, wages rose because “managed care” put a lid on the cost of health care benefits for a few years.
But as Larry Mishel explains in this insightful, fact-filled piece, those who saw wage gains were mainly “low-wage workers who didn’t have access health benefits. those who saw wage gains were mainly “low-wage workers who didn’t have access health benefits. Mishel goes on to explain why wages rose toward the end of the 1990s: “Productivity accelerated in the mid-1990s, and the low unemployment (and hikes in the minimum wage) facilitated faster wage growth. That this wage growth disappeared entirely in the 2002-07 recovery is
not due to faster health care cost increases but to weak employment growth and employers’ ability to achieve increased profitability rather than pass on productivity gains to workers. This reveals a fundamental flaw in our economy: productivity gains are not passed on to higher living standards for workers.”
Why Some Plans Cost More
Many of the Cadillac Tax’s supporters envy the well-paid baby–boomers in executive suites across the nation who, they fantasize, are getting expensive insurance plans laden with “extra” benefits.Here is the truth: a study of more than 3,000 insurance plans published in the December edition of Health Affairs reveals that when you compare insurance plans with very high premiums to less costly coverage, only 3.7% of the difference can be explained by richer benefits.
Why do premiums for some family plans run as high as $25,000? The study explains that typically, insurers charge more for some plans because they are selling to a small company with a large number of older workers. Insurers know that older workers will need more medical care, and they price the policy accordingly. Another major factor is location: premiums will be higher if a company is located in a city where delivery of health care is more expensive—not necessarily because doctors over-treat, but because real estate and labor costs so much more.
Here, San Francisco serves a good example. The medical culture in San Francisco tends to be evidence-based, which is to say that unless there is medical evidence to support a treatment, doctors tend to be more conservative about recommending it. If you look at Dartmouth’s analysis of how hospitals use resources, you’ll find that in San Francisco, patients see fewer specialists and undergo fewer tests and treatments than similar patients in Los Angeles. But while health care is not as pricey in San Francisco as it is in L.A., it’s far more expensive than it would be in Nebraska where the cost of everything—whether rent or a receptionist’s salary–is much lower.
Most employees won’t get a raise. Thus, they won’t pay more in income and payroll taxes– and the Cadillac tax will raise far less than it supporters suggest, leaving health care reform underfunded. (Ultimately, I hope that reformers will realize that in order to raise more money, they should tap Pharma’s 16% profit margin.). Meanwhile, employees will see their benefits cut, as employers switch to plans with lower premiums and higher co-pays and deductibles. (If they don’t switch, you can be sure that insurers will pass the 40% tax on pricey plans on to employers who buy those plans.)
Who will be hurt? Sloan is succinct: “people who are more expensive to insure because they're older, live in high-cost areas or both.”
Gruber on Whether High Deductibles Hurt Patients
Still, some argue, higher co-pays and deductibles might encourage some older patients to go to the doctor less often. We know that many patients are over-treated. If they have skin in the game, they’ll think twice.
Ezra Klein is among those who believes that the Cadillac tax would help rein in health care spending. He argues that expensive plans offer “lush” benefits, and often let employees go out of network, or make an appointment with a specialists without being referred by a primary care doctor: “Loose rules also encourage a lot of waste,” Klein declares.
Not so fast. First, the Health Affairs study shows that the difference in cost between HMO’s—which require that patients stay in network, and PPO’s—which let them go out of network —accounts for only 3% of the difference between cheaper and more expensive plans. Then there is that March 2007 paper that Gruber helped write for the National Bureau of Economic Research, which suggested that when faced with higher out-of-pocket-payments, chronically ill patients cut back on needed care.
When I e-mailed Gruber to ask about that paper, he responded by acknowledging that studies do show that folks reduce ‘effective’ care when copayments go up. “The RAND study found the same thing – they found that effective and ineffective care both fell.
“But,” he adds “NONE of these studies show any adverse impact on HEALTH for the typical person. The only evidence of an adverse impact on health is for low income patients who are chronically ill” – but under health care reform low income folks will be getting better insurance. Meanwhile, “For guys above 300% of poverty, chronically ill or not, there is just no evidence that higher copayment will reduce their health."
He continues: “Now you may ask: how is it possible that copayments could reduce 'effective' care but NOT reduce health? Two possible answers, and we don't know which is right. First, the docs are wrong about what is effective and what is not. In other words, most health care may just not be effective.” (Here I have to ask, if most health care just isn’t effective, why are we spending billions to try to provide universal coverage?).
“Second” says Gruber, “and in my view more likely, is that there is significant heterogeneity in what is effective across people, and they are smarter than we think they are in how they react? The ones for whom the drugs are most effective in actually producing health are the least likely to respond.”
In other words, he is suggesting that chronic disease management is effective for some patients, but not for others, and those who benefit will go ahead and get the treatment despite high co-pays. The “people are smarter than we think” argument is refuted by every study which shows that patients are just as likely to defer needed care. Also, it’s worth noting that Gruber is an economist. Economists are the only social scientists who assume that humans normally act in their own rational self-interest. Sociologists, political scientists, and, of course, psychologists, know better.
Moreover, I would note that, under the Senate plan, middle-income and upper-middle income families might well find co-pays and deductibles high enough that they would function as a barrier to care. Consider this: in the exchanges, a family of four earning $100,000 to $200,000 would not qualify for subsidies, and could face out-of-pocket payments of $10,500 annually—in addition to their insurance premiums. Goozner suggests that Gruber go back and read his own 2007 paper. He also notes that the Obama administration, which favors the Cadillac Tax, has paid Gruber nearly $300,000 to analyze its effect. This could color his thinking, if only at an unconscious level. The fact that initially, the payment was not disclosed, muddies the waters.
The Only Way to Rein in Spending: Cut Waste and Errors
Some of the Cadillac plan tax supporters argue that the tax represents the best way put a brake on health care spending. Some people may be hurt, but Ezra Klein argues: “There is no way to sharply cut costs. . . without there being losers. And those losers won't . . . be providers (indeed, if you cut provider costs too much, they stop accepting patients, and then the patients lose”).
Goozner suggests that “Here, Klein speaks for the army of economists and analysts who refuse to take on the special interests in health care who charge high prices, order unnecessary care and refuse to practice evidence-based medicine because failure to do so pads their bottom line. Reducing payments to providers will result in long lines and less access? I am used to hearing such arguments from
the lips of drug industry lobbyists and the physician guilds, whose average salary is now north of $300,000 a year."
I agree that too many commentators are reluctant to accept the fact that the only way to put a lid on runaway health care inflation is to address the underlying cost of care. The nation’s spiraling health care bill is driven by waste and errors. As I have written, the one way to address the problem is the realign financial incentives for providers, using financial carrots and sticks, rewarding those who achieve better outcomes by using checklists, while penalizing those who fail to begin to control hospital infections.
We also must cut reimbursements tests and treatments that we know provide little benefit to the patient. Medicare is already moving in this direction. Physicians like Atul Gawande, Howard Brody, and Don Berwick understand this. And they are far from alone.
Private sector insurers cannot solve the nation’s health care problems. Nor can patients—though they can help. But ultimately, those who have the power to re-shape care are those who to deliver care: health care professionals.
As professionals, they understand what it means to put patients’ interests ahead of their own interests.