Healthcare Reform and Excise, Part III, or: “Are You Sure That’s a Cadillac?”

Part II of this series described the general effects of the excise provision of the Senate’s Health Care Reform bill, the Patient Protection and Affordable Care Act (PPACA), as projected by CBO, JCT, and CMS.  The post concluded:  “The excise generates revenue, reduces affected premiums, and ‘bends the cost curve.’  So, what is the problem?”  Here, I will attempt to describe the problems with the excise provision as written in the Senate’s PPACA.

The most obvious flaw in the excise is its “kill-em all” approach to determining which plans would be subject to the 40% tax.  According to JCT, the excise would affect 27% of “single” employer-sponsored plans and 22% of “family” employer-sponsored plans by the year 2019.  It is hard for one to imagine that a quarter of all active employee health insurance plans are “Cadillac plans.”  Either the Senate was disingenuous in purporting to target “excess benefits,” or the excise provision was drafted in a grossly careless manner.  (Note:  The short excise provision in the PPACA uses the term “excess benefit” ten times.)

Simply looking at the text of the PPACA shows that the Senate failed to consider (or simply ignored the fact) that affected plans would be disproportionately composed of the following:

• Plans with large number of women and/or older workers
• Plans providing coverage in high-cost areas (as opposed to simply high-cost states)
• Plans negotiated through collective bargaining
• Plans covering those in high-risk professions that are not specifically exempted by the PPACA

The excise also works to disproportionately burden middle-class workers.  According the JCT, over 80% of the revenue generated by the excise from 2013-2019 would be in the form of additional taxable income from those enrolled in affected plans.  Such additional taxable income would come from the conversion of non-taxable healthcare benefits into cash compensation.  Simply put, health benefits would be reduced, wages would be increased proportionately (although some increased wages may be eaten-up by increased cost-sharing), and taxes would be levied on the increased wages.  By 2019, affected persons earning $20K - $100K would, on average, be paying an additional 1% - 2% in federal taxes.  However, affected persons earning $1,000,000+ would, on average, be paying only additional .1% in federal taxes.  Of course, this is assuming that in our current economy, employers will actually pass-on savings from reduced healthcare benefits to wage-earners.

These flaws garnered significant amounts of criticism, particularly from organized labor, whose members would be disproportionately affected by the excise.  During reconciliation of the House and Senate bills, labor unions achieved a tentative compromise with legislators regarding the excise, which would:

• Exempt collective bargaining contracts, state and local workers and VEBAs through January 01, 2018.
• Raise the threshold to $8,900 for single plans and $24,000 for family plans. (Taft-Hartley plans will be considered at the family rate.)
• Add adjustments for gender and age, raising the threshold for plans that have significant numbers of women and/or older workers.
• Raise the threshold for plans with workers in high-risk professions, affecting more than 9 million workers.
• Raise the threshold for plans with retirees age 55 and up.
• Exempt dental and vision costs beginning in 2015.
• Raise the threshold on plans further if health care costs grow faster than expected from 2010-2013.

Putting aside the massive political implications, the compromise merely puts lipstick on the pig.  What about other affected “non-Cadillac” plans not exempted under the compromise?  What about the lost excise and income tax revenue?  How much would the compromise “un-bend” the cost-curve?

Furthermore, if affected plans choose to increase-cost sharing to avoid exceeding the premium threshold, the excise could actually decrease health and increase health expenditures:

If the excise tax pressures people to purchase health plans with increased cost-sharing (e.g., higher copayments), consumers may very well respond to this effective price increase by haphazardly cutting back on medical spending.  However, many of the interventions that are avoided may turn out to be health-improving and/or cost-effective. This problem is especially true for vulnerable populations. Research has demonstrated that low-income and chronically ill populations are generally harmed by higher cost-sharing and may actually incur higher overall costs in response to the introduction of this cost-sharing, as they cut back too much on the cost-effective managing of chronic conditions.

Research has found that the optimal cost-sharing rate for many chronic conditions and large classes of prescription drugs is very low or even zero. This same research shows that increased cost sharing in certain areas (e.g., prescription drugs or primary care) can lead to higher overall costs due to increased utilization in other areas (e.g., hospitalization).

Bad ideas are Congress’ second-most abundant resource.  Really bad ideas are its’ first.  The excise on high-cost employer-sponsored insurance plans constitutes the latter.  I hope that continuing to discuss the excise provision may deter Congress from considering any similar provision in future legislation.

Medical Expense for a Family of Four Rises

Yesterday we took a look at Health Insurance CEO pay, and noted that Mr. Ronald Williams of Aetna made $467,309.85 per week in 2008, while Ms. Braly of Wellpoint was left to make ends meet on $189,311.76 per week, and Mr. Hemsley of United Health was forced to manage on  $62,327.73 per week (though one might hope that Mr. Hemsley had the presence of mind to put a little something away the year prior when he had made $253,164.02 per week).

Today we take a brief look at how the other half lives. HealthCare Finance News reports that according to the Milliman Medical Index (MMI) the average medical bill for a typical family of four covered by an employer-sponsored preferred provider organization (PPO) program rose 7.4 percent from 2008 to 2009. In actual dollars:

The total 2009 medical bill for a typical American family of four is $16,771, compared with the 2008 figure of $15,609. The $1,162 increase is the highest measured by the MMI since the 2006 increase of $1,168, when cost trends were at 9.6 percent.

The MMI found that employers are expected to pay $9,9947, or 5.4 percent more than in 2008, while employees are expected to contribute $4,004 toward their health costs, an increase of 14.7 percent, and pay $2,820 in out-of-pocket expenses, an increase of 5.4 percent.

According to Health and Human Services: “The estimated median income for a four-person family living in the United States is $70,354 for FFY 2009″ (slightly more than Mr. Hemsley’s weekly paycheck). According to the MMI, of that $70,000, nearly $7,000 in employee wage goes to healthcare expense. That’s 10 per cent or $583.33 per month. That’s more than enough to make the payment on a brand new Cadillac.

In addition, one should also note that the employers’ contribution is nearly $10,000 per year, or $833.33 per month. Together, the actual total is $16,771 or $1397.59 per month. Which is to say that the average expense for medical for a family of four is $1400.00 per month. According to the Census Bureau, the average price of a house in the U.S. in March of 2009 was $201,400.00.

According to CNNMoney.com the current average for a 30 year fixed rate mortgage is 5.24% but rates are “all over the map.” We’ll use 7%. The monthly mortgage payment on $201,400 for a 30 year fixed rate at 7% is $1339.92. The average monthly medical expense amounts to $1397.59.

That’s a house. The average monthly medical expense for a family of four amounts to a house, maybe not one that Mr. Williams, Ms. Braly or Mr. Hemsley would live in, but a house nonetheless. Oh, and there’s still $57.67 left over– enough to catch the earlybird special at the Family Buffet.

Taxing Health Benefits, Obama Administration Said To Be “Open”

In a recent post on this blog, Professor Tim Greaney noted that Senator Max Baucus had recently said that

the tax exclusion for employer health insurance payments was on the table, [with Senator Baucus] noting two characteristics that make it an appealing target:  regressivity and potential source of considerable “revenue.”  On these and other issues, Baucus stressed the critical role OMB scoring will play in shaping the ultimate design of the legislation.

Not to say that OMB “scoring” will be influenced by the predilections of its director, but nevertheless, those predilections may be worth noting. The New York Times reports

At a recent Congressional hearing, Senator Ron Wyden, an Oregon Democrat whose own health plan would make benefits taxable, asked Peter R. Orszag, the president’s budget director, about the issue. Mr. Orszag replied that it “most firmly should remain on the table.”

Mr. Orszag, an economist who has served as director of the Congressional Budget Office, has written favorably of taxing some employer-provided health benefits and using the revenue savings for other health-related incentives. So has another Obama adviser, Jason Furman, the deputy director of the White House National Economic Council.

The Times also noted that

When Senator Max Baucus, Democrat of Montana, advocated taxing benefits at a recent hearing of the Finance Committee, which he leads, Treasury Secretary Timothy F. Geithner assured him that the administration was open to all ideas from Congress. Mr. Geithner did, however, allude to the position that Mr. Obama had taken as a candidate.

The Times reports that sentiment elsewhere, however, was not quite as sanguine about the proposal: “Many Democrats, especially House liberals, are opposed. ‘It’s a dumb idea,’ said Representative Pete Stark of California, chairman of the Ways and Means Subcommittee on Health. “We have to maintain as much as we can of the employer payments.”

The Times article is well worth taking a moment or two to read; it relays a number of different viewpoints regarding the matter, and also features a political aspect certainly worth noting: during the presidential election campaign, Obama was quite critical of  a John McCain proposal to tax health benefits. Obama denounced the McCain plan as “the largest middle-class tax increase in history.” The Times reports that

At the time, even some Obama supporters said privately that he might come to regret his position if he won the election; in effect, they said, he was potentially giving up an important option to help finance his ambitious health care agenda to reduce medical costs and to expand coverage to the 46 million uninsured Americans. Now that Mr. Obama has begun the health debate, several advisers say that while he will not propose changing the tax-free status of employee health benefits, neither will he oppose it if Congress does so.

Senator Baucus on Delivery System Reform

Tim Greaney,

Director, Center for Health Law Studies

Chester A. Myers Professor of Law

Saint Louis University School of Law

Senator Baucus’ March 3 press conference sponsored by the Kaiser Family Foundation Health Care Reform Newsmaker Series: Sen. Max Baucus (D-MT) offered a few insights into the early state of the debate on health reform legislation.

Two points stood out.  First, he observed that “delivery reform” was for him a central element in designing reform legislation. Pressed to define what he meant, Baucus mentioned value based purchasing and the medical home concept.  Second, he stated that the tax exclusion for employer health insurance payments was on the table, noting two characteristics that make it an appealing target:  regressivity and potential source of considerable “revenue.”  On these and other issues, Baucus stressed the critical role OMB scoring will play in shaping the ultimate design of the legislation.

The known unknown here, however, is how some of the relatively novel delivery reforms like medical homes will be defined and implemented — and hence ultimately scored by OMB for their impact on system costs. One problem is that the “medical home” may encompass a wide range of delivery/financing arrangements. In general the medical home has been broadly defined as a physician-directed practice that provides care that is “accessible, continuous, comprehensive and coordinated and delivered in the context of family and community.” But as Bob Berenson and colleagues pointed out in Health Affairs last September,[1] few primary care medical practices are close to having the size, management capabilities and infrastructure (electronic and otherwise) to function as medical homes.  Transitioning to such practices (even on a virtual office basis) will surely take time, money, and a sea change in culture and practice style.  Estimating the pace and effectiveness of such change may prove as daunting as projecting next months Dow Jones average.

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[1] Robert Berenson et al., A House is Not a Home: Keeping Patients at the Center of Practice Design, 27 Health Affairs 1219 (Sept/Oct 2008)

Health Benefit Costs Over Time

The U.S Bureau of Labor Statistics (BLS) offers a report: “Program Perspectives, On Health Benefits, recent data on employers’ costs and employees’ access.” The report (which also appears in the “Resources” section of this weblog) is user friendly and well worth the moment or two it would take to peruse it. It offers some interesting information on both relative cost and access. Of particular note, however, is “Chart 1,” which is a graphic representation of the “Employment Cost Index, private industry, 12 month percent change, health benefits and total benefits, 1982-2008.” Although BLS offers a caveat on the numbers, it cuts both ways.

BLS characterizes the data thus: “Over the last 25 years, health benefit costs for employers has moved in fits and starts.” The chart shows rapid accelerations in cost accompanied by periods of deceleration. In March1983 the cost of health benefits spiked 23.5% over the year prior; a similar (but not as large) rise may be seen from mid-1987 to mid-1988, and a protracted ascent may be seen from 1996 to 2002. BLS juxtaposes the health benefit costs with the costs of “total benefits;” in comparison, the movement of “health benefit costs” is precipitous.

BLS does not offer an explanation. It would be interesting to see charts which juxtaposed the cost of health benefits during this time period with the Inflation Rate, Interest Rates, Avg. ROI in the Stock and Bond Markets–and of course, the reported profit of the major commercial Health Insurance providers.