Rational Arguments

The tax by which reform is paid seems to be shaping up as the last big battle to be fought between the House and the Senate.  The House has advocated for an income surtax on singles making more than $500,000 and couples earning more than $1,000,000.  The Senate wants an excise tax on Cadillac plans.  I’ve described the differences before, as well as my concerns over the excise tax.

I’ve been thinking about the excise tax a lot over the last week, as evidenced by my posts on it.  I’ve also been reading a lot on it.  Austin Frakt posted a great response to my questions on his site.  Paul Krugman had a thoughtful piece in his NYT blog.  John Kerry even had a pro-tax post up on HuffPo. But something didn’t sit right about it.  I think Ezra Klein figured out what I didn’t like:

A lot of the arguments over the excise tax are getting caught in a bad, and even slightly misleading, sales job from its supporters. Sen. John Kerry’s blog post defending the policy, for instance, isn’t playing it straight. Saying it won’t tax employees is a distinction without a difference: It will tax insurers, which will add the tax into the cost of their plans, and employers will either choose different plans or pass the cost on to employees. Similarly, saying it will affect only “3% of premiums in 2013″ is designed to obscure the fact that it will hit a lot more policies in 2020. But this is one of those cases when bad arguments mask a good policy, rather than the other way around.

No one defends the tax exemption for employer-sponsored health insurance in principle. They only defend it in practice. The excise tax has its opponents, but none of them say we should make food, or broadband Internet, tax free as long as it is provided by employers. You don’t even hear them demanding that the bill make non-employer-provided health care tax free. No one, in other words, is interested in expanding this arrangement to other sectors, or even to the rest of the health-care sector. But given that the tax exclusion for employer-provided health care amounts to a subsidy worth about $250 billion a year, it’s got a lot of defenders.

I think my recent problems haven’t been with the policy, it’s been with the arguments.  I agree with Ezra that the Kerry piece is overly rosy.  It tries to “spin” the excise tax in a good way.  And I don’t like positive spin any more than negative spin.  We have to be willing to address the negatives (as Austin did in response to my humble request) as well as promote the positives.

And that – if anything – needs to be said over and over and over again about this whole reform.

My biggest issue with this bill (other than its laughable “universal coverage”) is that it does not do enough to contain costs.  But I, unlike many other people you hear from, am under no illusions about how hard that will be.  It’s going to tick off EVERYONE.  Because there’s no way to trim costs, in a real way, without it being felt by a ton of people.  It’s going to result in structural changes, it’s going to result in “rationing”, and it’s going to result in people making less money.

There’s no way to significantly reduce costs without everyone, even the middle class, feeling it.  Companies will feel it, hospitals will feel it, practitioners will feel it, and yes – people will feel it.  So to pretend that you can cut costs in a major way without it falling, at least in part, on a big part of the United States popilation isn’t just a little disingenuous, it’s also doing damage to the long term, and critical, ability of our government to sell real cost-control to Americans.

One of the points still left up for debate is which tax will help pay for  health care reform.  The House version wants to use an income surtax on the wealthy.  The Senate version uses an excise tax on “Cadillac plans”.  Some argue that although the excise tax will hit more people not technically rich (which it likely true), but that it will also have a policy good of helping to contain costs.  Many economists agree with them.

Economics is not my expertise.  When the models get complicated and the methods become less clear, I have to trust those doing the work.

A recent paper in Health Affairs, though, disagrees, with the claims that “Cadillac plans” are excessive.  Here’s the abstract:

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). Benefit design plus plan type (HMO, PPO, POS, or high-deductible plans) explains 6.1 percent of this variation. Industry type and medical costs in the region also play a role. Most variation in premiums, however, remains largely unexplained.

If only 3.7% of the variation is because of too much coverage, than it would seem that much of the higher premiums are due to other factors, like regional medical costs or the industry providing coverage. Sometimes, the higher premiums can’t be explained.

If this is the case, then I’m not sure how people still envision the excise tax working to reduce costs without actually covering less.  Those plans aren’t excessive in terms of benefits, evidently.

I need a health care economist to provide a reasoned take on this peer-reviewed study and explain why it’s wrong, or how the excise tax will function in light of its findings.

I’m looking at you, Austin.

UPDATE: Edited for clarity.

UPDATE #2: Austin answers.  You all really should be reading his blog regularly.