Is Taxing Expensive Health Benefits the Key to Health Care Reform?

January 14, 2010 in Health Care "Reform" by RangelMD

MIT economist Jonathan Gruber knows what’s driving health care costs upwards. According to Gruber it’s caused by rich people (and union members) who buy expensive health care plans (either separately or from their employer) at rates starting at $708 per month for singles and just under $2,000 per month for families. Gruber and many in the press call these coverages  “Cadillac” Health Insurance Plans to underscore their luxury status as a product targeted towards the rich (and because almost all other well recognized luxury car brands are foreign which would leave them open to accusations of anti-Americanism).

Currently, employer provided heath care plans including the Cadillac plans are not taxed as employee income and Gruber and many in the Senate want to affix a 40% excise tax on these high value  plans for the dual purposes of using this revenue to help subsidize health insurance coverage for low to no income Americans AND to ultimately reduce health care costs by reducing the use of these plans. In his Washington Post Op-Ed article from December 28th, Gruber laughingly denies that this would be a “new tax” but rather an “elimination of an existing tax break”. However, employees who are healthy enough may never see a dime of benefit from these plans before turning 65. These plans are tax breaks as much as regular exercise and a healthy diet are “tax breaks” or “tax loopholes” if they reduce one’s health care expenses and effectively increase net income. I.e. in Gruber’s world, anything that increases net income is a “tax break”.  It’s also interesting to note that liberals are still apt to use semantics to avoid looking like old school tax and spenders.

But the real problem comes from Gruber’s claim that expensive health care plans are increasing overall health care costs and his understanding of just what a “Cadillac” plan is or is not. Gruber’s claims are primarily based on the simple observation that over the last 20 years, higher health care cost increases have correlated with negative median household income growth. What is the mechanism for such a correlation? Gruber and Washington Post writer Ezra Klein believe that employers control a slider that passes savings on health care costs directly to employees and vice versa as health care costs wax and wane. But I can show you a graft that reveals a direct correlation with the full moon and bizarre patient behavior but this doesn’t prove causality in correlation like the moon and the tides.

In the very least, the correlation explanation is simplistic and fails to mention other economic forces that likely had a far bigger impact on wages and health care costs. For one, the income growth curve correlates very closely with periods of economic growth and shrinkage in the last 20 years and not only do wages fall during recessions but health care costs increase faster during economic downturns. Prices for products and services would be expected to fall during a recession but health care is something that people don’t or can’t cut back on and health care is massively supported by the tax payers and the Federal government is the only entity able to generate massive deficits to sustain funding during periods of decreased tax revenues. Additionally, this potential for growth in periods of economic contraction makes the health care industry an attractive target for investors looking for safer harbors to park their wealth in a recession and this capital influx can drive more growth and so on and so forth.

It could be argued that slowed health care cost increases during the mid to late 1990s contributed some to income growth during this time but the overwhelming cause was a massive economic expansion fueled  by improvements in productivity. And high inflation and stagnant growth is the likely reason why income growth has been very flat since 2003 despite slowing health care cost increases. In short, the income growth and health care cost curves are reflective of their separate connections to much larger economic forces rather then the relatively minor influences or associations they have on each other.

Then there is the small problem that only 47% of US employees participated in an employer provided health care plan (2005 data) and the income/health care cost curve correlation falls apart under subgroup analysis.  Those workers who saw the largest wage growth in the economic expansion of the mid to late 1990s were the least likely to be covered by employer sponsored health insurance.

What exactly is a “Cadillac” health care plan? What exactly is the value of a “Cadillac” plan? I don’t know and neither apparently does Gruber. Unlike auto or homeowners insurance which scales up based on the value of the asset that is covered, health insurance scales up with the number of people covered, their ages, and the number and types of co-existing conditions but NOT necessarily with the number or type of benefits covered. A study by NORC found that only 3.4% of the cost of health care insurance is due to generous benefits given to its members.

This makes sense since, after the basics of medical care (office visits, hospitalizations, surgeries) there is not much left to cover that would justify these expensive plans. Do they offer free gym memberships, valet parking for office visits, or home delivery of medications? At those prices, they better. Otherwise, these Cadillac health care plans appear to be little more than “white elephants” whose primary value comes from padding employee benefit offers to make employment packages appear more attractive to executives and union membership during salary and benefit negotiations. Excise taxes are designed to decrease the use of products like cigarettes or alcohol and with a 40% tax on an otherwise massively over-valued insurance product, these Cadillac plans are likely to become as rare as real white elephants and leave little if any impact on health care costs or the expected bounty in tax revenues. That’s a double failure waiting to happen.

Health care is expensive because it requires extensively trained professionals and expensive equipment and supplies to deliver it and under the current delivery system there is very little cost transparency and few checks on over-utilization by both providers and patients. It’s an economic system that does not follow the standard model of supply and demand constraints and will instead respond with massive inflation as a result of the influx of billions of tax dollars specifically directed towards health care utilization instead of the coffers of insurance companies. An excise tax in this context would have the same effect as stealing from the rich and raising prices on the poor. But if this makes liberals like Gruber happy then so be it.

The one thing that Gruber hasn’t been very open about was the fact that he received just under $400,000 in 2009 from the department of Health and Human Services for the “continuation of technical assistance for evaluating options for national health care reform”. He apparently did not disclose this fact when writing various articles in support of the excise tax nor when he was among several supposedly independent economists who signed a letter addressed to the President in support of health care reform.  It’s considered to be very unethical and improper when other professionals don’t disclose financial relationships and conflicts of interest but thus far Gruber seems to be shrugging this one off despite how much is at stake and how many millions may be negatively affected by poorly written and misguided legislation based on his recommendations.

On a side note: being a physician and a blogger of some repute, I would like to let the Obama administration know that I would be perfectly willing and able to lend my support to any health care policy initiatives and sign any letter for an amount that is 3-4 x what they normally pay me to see Medicare patients. But . . with the caveat that I would be openly disclosing my sponsor(s).

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