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.

Excise & Healthcare Reform, Part II, or: “What Overall Effect Would the Cadillac Plan Tax Have?”

Part I of this series provided an overview of the excise on high-cost health insurance plans contained in the Senate’s healthcare reform bill, the Patient Protection and Affordable Care Act (PPACA).  This part summarizes the projected general effects of the excise provision.  The final part of this series will address the problematic and controversial consequences of the excise and possible alternatives.

Three governmental agencies have been primarily responsible for calculating the effects of healthcare reform legislation for Congress:  the Congressional Budget Office (CBO), the Joint Committee on Taxation (JCT), and the Center for Medicare and Medicaid Services (CMS).  Both the CBO and JCT operate under the auspices of Congress, while CMS operates within the Department of Health and Human Services (HHS).

Additionally, numerous private entities separately analyze legislative language to ascertain its effects.  As expected, private entities often issue findings that differ, in varying degrees, from those provided by governmental entities.  This post focuses on the government findings regarding the excise provision, upon which the Senate relied (presumably) in passing the PPACA.  This post is summarized from information contained in the following documents:

JCT letter to Representative Joe Courtney, Dec. 08, 2009

JCT letter to Representative Joe Courtney, Oct. 16, 2009

CBO letter to Senator Bayh, Nov. 30, 2009

CBO letter to Senator Reid, Dec. 19, 2009

CMS memorandum “Estimated Financial Effects of the ‘Patient Protection and Affordable Care Act,’ as passed by the Senate on December 24, 2009,” Jan. 08, 2010

Present tax law allows for the exclusion of employer-provided health benefits from individual income tax and contributions made by employers from FICA (Federal Insurance Contributions Act) tax. The excise would generate approximately $148.9 billion dollars in revenue from 2010-2019.  The excise tax itself would not be deductible from Federal income tax.

For each year after 2013, the actual excise tax collected would account for a smaller percentage of the total revenue collected as a result of the excise provision.  This would be the result of an increase in wages following shifts away from the high-cost insurance plans.  The JCT provided the following explanation:

[T]he Joint Committee on Taxation estimates that the excise tax would be mainly passed along [to consumers] through increases in premiums and that many consumers respond by reducing their demand for insurance above the excise cap.  As described above, because health insurance premiums are a component of compensation, which is not likely to fluctuate due to the excise tax, as consumers spend less on tax-excluded benefits, their taxable cash wages will increase.  Therefore, as the value of health insurance plans decline, the income tax base will increase in the long run.

The total number of health plans affected by the excise would increase from 2010-2019 due to the compounding difference between the inflation rate applied to the premium threshold and medical cost inflation.  The percent of active plans affected by the excise tax would increase during the 2013-2019 period from 14% to 27% and 9% to 22% for single plans and family plans, respectively.  The average premium for those affected plans would actually be lowered.  How?  CBO provides:

For policies whose premiums remained above the threshold, the tax would probably be passed through as a roughly corresponding increase in premiums.  However, most employers would probably respond to the tax by offering policies with premiums at or below the threshold; CBO and JCT expect that the majority of the affected workers would enroll in one of those plans with lower premiums.  Plans could achieve lower premiums through some combination of greater cost sharing (which would lower premiums directly and also lower them indirectly be leading to less use of medical services), more stringent benefit management, or coverage of fewer services.

The excise certainly generates a significant amount of revenue to fund other aspects of healthcare reform.  However, the excise is also expected to decrease the overall national health expenditures (NHE).  According to CMS, the excise “…would have an initial, significant impact on the overall level of expenditures.”  Furthermore, “In 2019, these impacts would reduce the total NHE by an estimated 0.3 percent.”   The current NHE projection for the year 2019 is $4.7 trillion.  That puts the savings at $14.1 billion.

The excise generates revenue, reduces affected premiums, and “bends the cost curve.” So, what is the problem?

Excise & Health Reform, Part I, or: “What is an Excise & How Would this Tax on Cadillac Plans Work?”

[Ed. Note: We are very pleased to introduce James Christiano to the blog. He is a law student here at Seton Hall Law and, after receiving his B.A. in psychology in 2002, worked from 2003 to 2008 as a District Adjudications Officer for the United States Citizenship and Immigration Services (USCIS), an agency within the Department of Homeland Security.  During his time with USCIS, James was primarily responsible for adjudicating applications for immigration benefits, including naturalization, lawful permanent resident status, and work authorization. As you might imagine, James has an eye for regulatory analysis, and will be offering a series of posts (to start) on provisions in the health reform bill regarding  "excise" along with analysis as to their potential impact.]

One of the many controversial aspects of healthcare reform is the Senate’s proposed excise on high-cost health insurance plans.  Such high-cost plans have often been referred to, arguably inappropriately, as “Cadillac plans.”  This post provides an introduction to the proposed excise on high-cost plans as provided in the Senate Bill.  Subsequent posts will address the ramifications and controversies of the excise.  (Note: The Senate Bill contains other excise provisions, including a 5% excise on elective cosmetic surgery procedures, which this post does not discuss.)

What is an excise?

Black’s Law Dictionary defines excise as “[a] tax imposed on the manufacture, sale, or use of goods (such as a cigarette tax), or on an occupation or activity (such as a license tax or an attorney occupation fee).”  Excises are commonly, and redundantly, referred to as “excise taxes.”

A quick skim of Subtitles D and E of Title 26 of the United State Code provides one an idea of the types of goods and activities that Congress has deemed deserving of an excise.  A few examples are luxury passenger automobiles, certain vaccines, communications services, authorized and unauthorized wagers (i.e., gambling), petroleum, firearms, cigarettes, and “excess expenditures to influence legislation.”

Excise currently imposed on group health plans

Federal law already subjects group health plans to an excise under certain circumstances.  For instance, 26 USC § 5000 imposes an excise on certain group and large group health plans deemed “nonconforming” — i.e., those that do not comply with the requirements of particular subsections of 42 USC § 1395y(b)(1) and (2).  Additionally, 26 USC § 4980B and D impose an excise (as a form of penalty) on group health plans that fail to meet HIPAA and COBRA requirements.

Excise on high-cost plans in the Senate Bill

The Senate Bill includes a provision imposing a 40% excise tax on high-cost, employer-sponsored health insurance plans.  High-cost plans would include those costing $8,500 for individuals and $23,000 for those other than self-only, beginning in the year 2013.  Starting in 2014, the threshold for high-cost plans would be increased annually by the change in the Consumer Price Index (CPI) plus 1%.  These thresholds are further increased for individuals employed (or previously employed) in certain high-risk professions or the repair or installation of electrical or communications lines.  Also, residents of states that rank in the top 17 among the highest-costing average employer-sponsored health insurance plans would be subject to more lenient thresholds for the years 2013, 2014, and 2015 (120%, 110%, and 105% of the threshold, respectively).

For each given high-cost plan, the coverage provider would be responsible for paying a 40% tax on the amount equal to the cost of the coverage exceeding the threshold.  For example, a coverage provider would be subject to an excise of $400 for a plan costing $24,000 in 2013 ($24,000 - $23,000 = $1,000; $1,000 x 40% = $400).  A coverage provider may be the insurance issuer, the benefits plan administrator, or the employer, depending on the coverage arrangement.

Reform Rodeo

1. On Obama’s Speech Next Week:
Kaiser Health News rounds up a variety of expectations regarding next week’s address to Congress by the President on health reform.

2. On Paying for Health Reform:
The New England Journal of Medicine has a fantastic post on paying for health care reform–discussing the economic and political obstacles to funding reform.

3. On EHRs and Medical Students:
The Health Care Blog has begun an interesting series of posts discussing how medical school curricula should be influenced by our drive for a fully EHR-based health care system.

4. On the costs of hospice care:
With the debate still raging about the government’s role in end-of-life issues, the Healthcare Economist has a pertinent post about Medicare’s experience with the increasing utilization of hospice care, and the effect of that utilization on cost.

5. On Taxing Health Benefits:
A much shorter NEJM post further expounds on the regressivity of taxing employer-paid health benefits.

6. In case you missed it:
Professor Frank Pasquale and Health Reform Watch Managing Editor, Michael Ricciardelli featured in Maggie Mahar’s “The CBO’s Dubious Health Care Cost Estimates,” on Taking Note.

Wild Card:
The New York Times discusses the controversial–and industry enraging–advertisements being run by New York City’s public health officials in their effort to fight obesity.

So How Much Does that Can of Soda Really Cost?

Externalities. The concept is, rather simply put, that “an externality or spillover of an economic transaction is an impact on a party that is not directly involved in the transaction. In such a case, prices do not reflect the full costs or benefits in production or consumption of a product or service.”

Which is to say, there’s a cost beyond the price–and that cost may be borne by someone other than the buyer or seller.

Smoking and drinking alcohol are often given as prime examples, as the affect of such can have social costs outside their price. Beyond the health costs, numerous studies have shown, for instance, a high incidence of arrest and incarceration to be alcohol related. It costs approximately $39,000 per year to imprison someone in New Jersey. The cost of incarceration, if the incarceration is caused by, or sufficiently related to, alcohol consumption, is an externality, or more precisely, an external cost. A cost which is simply not reflected in the price of a bottle of booze. With external costs taxes are often imposed upon products which produce such to both help defray what are commonly known as the social costs, and to inhibit use.

In New Jersey, the total tax on each pack of cigarettes amounts to $3.58 ($2.575 state/ $1.0066 federal). A portion of the federal tax goes to fund SCIP.

And the question is: What about soda and other such sugary soft drinks? A growing number conclude that soft drinks bear such a cost.

The Wall St. Journal reports that:

New research shows medical spending averages $1,400 more a year for an obese person than for someone who’s normal weight.

Overall obesity-related health spending reaches $147 billion, double what it was nearly a decade ago, says the study published Monday by the journal Health Affairs.

The higher expense reflects the costs of treating diabetes, heart disease and other ailments far more common for the overweight, concluded the study by government scientists and the nonprofit research group RTI International.

RTI health economist Eric Finkelstein offers a blunt message for lawmakers trying to revamp the health-care system: “Unless you address obesity, you’re never going to address rising health-care costs.”

Obesity-related conditions now account for 9.1% of all medical spending, up from 6.5% in 1998, the study concluded.

I am not suggesting that soda and sugary soft drinks bear sole responsibility for obesity or the doubling of obesity-related health spending over the last decade.

But as CBS News reports,

“Americans consume roughly 250 more calories every day than they did in the 1970s — and half those calories come from sugary drinks.”

“We’re not saying that calories from sugared beverages are different than any other calories,” said Dr. Kelly Brownell of Yale University. “There’s just too many of them.”

Brownell says a 10 cent tax per can could yield $140 billion in revenue over ten years.
But the beverage industry is pushing back.
“This is no time for Congress to be adding taxes on the simple pleasures we all enjoy like juice drinks and soda,” trumpeted one industry-backed TV ad.

(While researching this article, this ad from “Americans Against Food Taxes” popped up.)

According to the California Center for Public Health Advocacy:

Soft drink consumption has more than doubled since 1971. The average teenage boy drinks two 12 oz sodas per day or more than 700 cans per year. The average teenage girl drinks 1.4 twelve oz sodas per day or more than 500 cans per year. (CSPI, Liquid Candy, 2005 — based on 1999-2002 National Health and Nutrition Examination Survey)

Further:

Despite the first-ever per-capita declines in soft drink sales, companies still sold more than 14 billion gallons of calorie-laden soft drinks in 2008. That is equivalent to about 506 12-oz. servings per year, or 1.4 12-oz. servings per day, for every man, woman, and child.  Those drinks include regular (non-diet) carbonated sodas, energy drinks, sports drinks, fruit drinks, ready-to-drink teas, and vitamin waters.

CBS reports that the plan to tax 10 cents per can, amounting to approximately $140 billion over 10 years, to help pay for healthcare costs has failed to gain “traction” in Congress. The plan, understandably, has met staunch opposition from soft drink manufacturers and their lobby.

The argument against such taxes is that they are regressive and fall more sharply upon the poor than they do the affluent. I understand the argument–and at times I have understood it intimately. But I’m not at all sure it holds up here, as some simple math will show.

First off, because of the variety of sizes in which soft drinks come, a per ounce tax makes more sense to work with. 10 cents per 12 oz. can = .8333 cents per ounce. If the average consumption is 1.4 cans per day, or 16.8 oz, we’re talking about an average tax of roughly 14 cents per day. You simply cannot buy anything with 14 cents– but in the aggregate it can get you a little closer to funding universal healthcare. And perhaps, if the spectre of that 14 cents did cause some to consume slightly less soda, perhaps we as a country would not be the worse for it.

The House’s Proposed Surcharge on the Rich: Not Progressive Enough

The usual suspects are alarmed by the House Tri-Committee Health Reform Bill’s proposed surcharge on high income earners. As the NYT explains with some examples, “Starting in 2011, a family making $500,000 would have to pay $1,500 in additional income tax to help subsidize coverage for the uninsured. A family making $1 million would have to pay $9,000.” The surcharge rises with income, and over time, to hit 5.4% (by 2013) for households earning over $1 million annually. Households making between $280,000 and $500,000 per year would only face a 2% surcharge by 2013.

Beneath all the sturm und drang about soaking the rich, the press should focus on three underlying realities. First, income and wealth vastly increased at the top of the distribution over the past thirty years–in part because of corporate cost savings that included denial of health coverage to millions of workers. Second, inequality itself exacerbates the health care crisis, by fueling the allocation of medical care according to profit potential, not need. Third, inequality causes health problems, because societies grow “more dysfunctional, violent, sick and sad if the gap between social classes grows too wide.” The surcharge on the rich is not some random resentment inflicted by Frenchified Madame DeFarges on America’s John Galts. The surcharge will itself help address some of the problems health reform is designed to solve. I’ll unpack these thoughts in a series of posts this week.

Nevertheless, the surcharge is not progressive enough, and this should be the main message of liberals commenting on the House bill. As David Leonhardt has observed in another context,

Today . . . the very well off and the superwealthy are lumped together [in the tax code]. The top bracket last year started at $357,700. Any income above that — whether it was the 400,000th dollar earned by a surgeon or the 40 millionth earned by a Wall Street titan — was taxed the same, at 35 percent. This change [from the past] is especially striking, because there is so much more income at the top of the distribution now than there was in the past.

The House’s top bracket for the surcharge is one million dollars, a slight improvement. But it is very hard for me to see why those who make that amount should be treated identically to those in the “Fortunate 400″–the 400 highest earning households which made, on average, more than $263 million apiece in 2006. As a Wall Street Journal article reports, “the group’s average income tax rate — calculated as income taxes paid as a percentage of adjusted gross income — fell to 17.2%. in 2006 from 18.2% the prior year. That’s down from a high of 29.9% in 1995.” The health care surcharge makes up less than half of that decline in taxes from 1995 to 2006.

In short, the next time a pundit screams “class warfare” at a surcharge like the one proposed by the House, I’d recommend calmly agreeing, and pointing out that those at the very top of the income scale do indeed appear to be shirking their fair share of the fiscal burden. I’d also ask the pundit to take a look at these figures from Charles Morris’s The Trillion Dollar Meltdown:

Between 1980 and 2005, the top tenth of the population’s share of all taxable income went from 34 percent to 46 percent, an increase of about a third. The changing distribution within the top 10 percent, however, is what’s truly remarkable. The unlucky folks in the 90th to the 95th percentiles actually lost a little ground, while those in the 95th to 99th gained a little.

Overall, however, income shares in the 90th to 99th percentile population were basically flat (24 percent in 1980 and 26 percent in 2005). Almost all the top one-tenth’s share gains, in other words, went to the top 1 percent, or the top “centile,” who doubled their share of national cash income from 9 percent to 19 percent.

Even within the top centile, however, the distribution of gains was radically skewed. Nearly 60 percent of it went to the top tenth of 1 percent of the population, and more than a fourth of it to the top one-hundredth of 1 percent of the population. Overall, the top tenth of 1 percent more than tripled their share of cash income to about 9 percent, while the top one-hundredth of 1 percent, or fewer than 15,000 taxpayers, quadrupled their share to 3.6 percent of all taxable income. Among those 15,000, the average tax return reported $26 million of income in 2005, while the take for the entire group was $384 billion.

A truly progressive health surcharge would take that fractal inequality into account. But we may as well support the small step towards fairness that the House Bill represents.

Health & Taxes

Only a few short months ago, Barack Obama was elected President of the United States of America. Supporters rejoiced, “Yes we did!” Shortly after that historic event, then President-elect Obama announced his nomination of former senator Tom Daschle to be his secretary of health and human services. Advocates of universal health care reform were ecstatic.

With the release of Critical: What We Can Do About the Health-Care Crisis and his nomination for U.S. Secretary of Health and Human Services, it seemed that Tom Daschle was the solution to all of our nation’s health care woes: a fragmented and inefficient patchwork of public and private payors, rising costs, too many government ties to the private sector, and a lack of uniformity on the proper spelling of “health care.”

Yet it appears that that dream is over: Daschle announced today that he is withdrawing his nomination for Secretary of Health and Human Services. CNN.com reports that, in announcing his withdrawal, Daschle said:

[I]f 30 years of exposure to the challenges inherent in our system has taught me anything, it has taught me that this work will require a leader who can operate with the full faith of Congress and the American people, and without distraction.

The president said Tuesday he accepts Daschle’s decision “with sadness and regret,” according to CNN.com.

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