Monday, December 16, 2019

The Cadillac Tax: An idea whose time never came

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To the surprise of no one, it looks like the ACA's long-postponed Cadillac ax, an excise tax on employer-sponsored health plans that exceed a certain cost threshold,  is slated for legislative execution, along with the medical device tax.

Against the vociferous opposition of unions and employers, Obama fought to preserve the Cadillac Tax, a linchpin of the ACA's efforts to control healthcare costs. CBO estimates that repeal will cost the treasury $200 billion over ten years.

On one level, it's sad that Congress can't make taxes with powerful opponents stick. Medical device tax repeal is a dead giveaway.  But the Cadillac Tax was based on two false premises.

The first was that giving insured Americans more "skin in the game" in the form of increased out-of-pocket (OOP) costs would lead to more efficient healthcare utilization. That premise has been discredited by studies showing that when OOP costs are high, people skip needed as well as unneeded care.  Meanwhile, as premiums have continued to rise and OOP costs have soared in recent years, there's massive evidence that large percentages of the U.S. population have serious difficulty affording needed healthcare. In fact, just today Kaiser president Drew Altman is reporting that per capita spending in private insurance has grown 52% over the past ten years -- compared to a 21.5% increase for Medicare and 12.5% for Medicaid.

The second false premise was that if employers were pressured to spend less on health insurance, they would find ways to deliver more value for less dollars -- that is, either pay for less unneeded care or simply pay providers less.  The complaint that U.S. employers give away the store to providers is long-standing, voiced most prominently by renowned health economist Uwe Reinhardt, who told assembled chief executives in the early 1990s, " “If you want to find the culprit behind the health care cost explosion in the U.S., go to the bathroom and look in the mirror.”

At intervals, large corporations announce coalitions and initiatives dedicated to reducing costs. Yet the efforts always seem to come to naught; providers manage to raise prices relentlessly against fragmented payers.  Providers, aided by relentless consolidation, divide and conquer. And employers negotiate from a remove, as even large self-funded plans generally rely on third party administrators -- i.e., insurance companies -- and pharmacy benefit managers to negotiate rates and administer benefits.

The share of premiums paid by employers has been essentially flat since 2010, according to annual Kaiser Family Foundation surveys (2019, 2010, 2000), though it's down somewhat from 2000. At present, employers cover 83% of single person premiums, compared to 81% in 2010 and 86% in 2000, according to Kaiser. For family coverage, the percentages are 71% in 2019, 71% in 2010, and 75% in 2000 (premium increases have been slower since 2010 than from 2000-2009). The percentage of patients' costs covered by employer-sponsored plans has also downticked only slightly. As I noted recently, in response to a Kaiser report on rising costs in ESI:
The employer share of costs in family coverage (premium plus out-of-pocket) has downticked only slightly:  it was 68% in 2008 and 66% in 2018.  But families and employers alike are tapped out: total costs increased 67% over those ten years.
Kaiser's health system tracker shows the increase for employers and employees alike since 2008:


As Drew Altman notes in the piece cited above: "Any effort to rein in health care costs will have to confront the growth in the cost of private insurance."  It could be fairly pointed out that the Cadillac Tax has not been tried as a means of controlling those costs. As those costs relentlessly rise, however, the tax would soon hit relatively moderate plans, exposing more people to unaffordable healthcare cost burdens.

As with most U.S. healthcare cost control initiatives, the Cadillac Tax is a workaround the sine qua non of cost control in countries with successful universal healthcare systems: rate-setting, whether directly by government or by all-payer negotiation overseen by government.  Short of single payer, I can see three means of cutting provider payment rates in commercial insurance:

1. Directly: cap commercial rates as a percentage of Medicare rates.

2. Indirectly: cap rates paid by commercial insurers to out-of-network providers (as Pete Buttigieg proposes).

3. Directly, method b: Introduce a strong public option open on an income-adjusted subsidized basis to all, and mandate that providers that accept the public plan accept the same payment rates from private plans (the Medicare for America bill does this).

4. Indirectly, via public option: Introduce a strong public option and open it on a subsidized basis to anyone whose employer doesn't offer genuinely affordable insurance - at a minimum actuarial value and maximum percentage of income. To survive, employer plans would have to pay rates competitive to the public plan.

Expecting a tax to drive employers to reduce rates paid to providers is an idea whose time is past.
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Update, 12/20/19: Back in June, Stan Dorn of Families USA argued that the Cadillac Tax is a zombie policy overtaken by events. Dorn points out that when Alain Einthoven suggested in an influential 1988 article that over-generous employer-sponsored plans left many Americans " in the open-ended cost-unconscious sector in which there is no incentive to contain costs," most employers did cover most-to-all of the cost:

But that has changed:
According to Commonwealth Fund surveys, average individual-market deductibles as a share of median US income jumped by 78 percent from 2008 to 2017, rising from 2.7 percent to 4.8 percent of median income. The share of ESI enrollees classified as “underinsured” because of high out-of-pocket costs and deductibles more than doubled from 2005 to 2018, climbing from 12 percent to 28 percent. Among ESI enrollees whose earnings were less than twice the poverty level, fully 57 percent were underinsured in 2018.

1 comment:

  1. I am all in favor of allowing workers to buy subsidized public insurance....but the numbers are tricky.

    Imagine a worker who makes $40,000 a year. He can participate in his company's plan if he pays $250 a month.
    But he is healthy and broke and that seems too high, so he stays uninsured.

    Over at the ACA, he would have to pay about 7 or 8% of his income for a silver plan. Guess what? That is still about $250 a month. Odds are that he won't join an ACA plan either.

    For that matter, Medicaid is free, but every single state finds "woodwork people" who do not join it until they are actually hospitalized (when social workers sign them up).

    Many workers in this wage bracket are pressured by housing costs,fuel costs, and insecure incomes. Some do go out and buy a new pickup truck vs. buying health insurance, but it is their freedom to do so.

    I am an advocate of pure social insurance, versus any scheme to incentivize good behavior.

    ReplyDelete