Browsing the blog archivesfor the day Tuesday, December 29th, 2009.

The Excise Tax on “Cadillac” Policies: Two Views

Health Care

However much I respect wonkiness, I lack the math skills to be a wonk myself. Especially when numbers (including money) are involved, I must trust the wonks to know what they’re talking about. I can’t present arguments of my own beyond “what Bob the Wonk said.” So, when I run into opposing arguments from people I respect that involve numbers I don’t always know who’s right.

In yesterday’s Washington Post, an MIT economics professor named Jonathan Gruber presented an enthusiastic endorsement of the excise tax on “Cadillac’ health insurance policies. Gruber calls it “an innovative way of financing the health reform we so desperately need.” On the other hand, in today’s New York Times, Bob Herbert says the tax “will hammer millions of middle-class policyholders, forcing them to scale back their access to medical care.”

So who’s right? Hell if I know. Maybe they both are — the excise tax is a means of financing health reform that will impact many middle-class policyholders. Or not. Hard to say. Note that Ezra Klein is less enthusiastic about the tax than Mr. Gruber but less alarmed than Mr. Herbert. Exactly how the tax would impact individuals depends on a lot of other factors, apparently.

A “Cadillac” policy according to the Senate bill is a policy whose costs exceed $23,000 annually for family coverage and $8,500 for individuals. The excise tax would be a tax paid by the insurance companies on the amounts over those thresholds. In other words, if a family policy costs $24,000 a year, the tax would be levied on $1,000. This tax would impact all qualifying policies; the income of the policy holder is irrelevant.

However, no one seems to know exactly how many of these “Cadillac” policy holders are out there. The average costs of family and individual policies are lower. For example, the average cost of an employee-benefit family policy in 2009 is $13,375, according to the Kaiser Family Foundation. So who would be impacted? Right now, I don’t know. If health care costs continue to rise as fast as they have in recent years, eventually it would suck in just about everybody, however.

Non-group individual HMO policies, by which I mean policies that are not in a group plan, here in New York are a lot more expensive than $8,500 a year, and I assume the excise tax would apply to those also. One of the frustrations of trying to purchase individual plans here is that the companies don’t give you choices — here’s our HMO plan at $900/month, take it or leave it. A plan with lower premiums but, say, higher co-pays might be welcomed by some people, and the excise tax would force Empire Blue Cross to come up with such a policy.

But, ultimately, the success or failure of the entire health reform process depends on getting costs under control. Various provisions in the bills — such as the dreaded mandates — are there to reduce cost, and if they work the “Cadillac” plan provision possibly won’t be that big a deal to that many people. If they don’t, then yeah, I can see how the excise tax could result in a bite.

For that reason, it seems to me to be a bit deceptive to take one part of the reform plan and examine it outside the context of the rest of the plan. Bob Herbert’s arguments are compelling, but they seem to assume that nothing else about our health care “system” will change. For that reason, I’m not sure he’s right. Maybe he is, but not necessarily.

According David Leonhardt at the Times, a study by the Center on Budget and Policy Priorities, “a liberal research group,” endorsed the plan and said liberals should like it. Another endorsement from the wonks. On the other hand, Dartmouth economics professor Andrew Samwick says,

I am not a fan of the excise tax on so-called “Cadillac” health plans. I would need to be convinced that the reason why the premiums are so high is unrelated to the health characteristics of the insured group. What if the premiums are so high because the insured group is old or has large families? Simply including all plans in the ex post risk adjustment and reinsurance aspects of the bill is the right way to even out premium costs in the face of differences in the insured group. And if people want to spend more on their own health insurance, through high-quality services or (to my thinking) inefficiently low deductibles and co-pays, why stop them?

Well, as I said above, in some situations the insurance companies aren’t providing a lower-quality, lower-cost choice. But the larger point is that on this bit of the Senate bill, reasonable people disagree.

Update: Ezra Klein responds to Bob Herbert.

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