Aaron Carroll sent out the beacon. He quotes the abstract of a recent Health Affairs paper:
It’s often assumed that high-cost health insurance plans—sometimes called “Cadillac” plans—provide rich benefits to plan subscribers. Health reform provisions that treat these plans like luxuries may be misguided. Only 3.7 percent of variation in the cost of family coverage can be explained by benefit design (actuarial value). Benefit design plus plan type (HMO, PPO, POS, or high-deductible plans) explains 6.1 percent of this variation. Industry type and medical costs in the region also play a role. Most variation in premiums, however, remains largely unexplained.
Then he muses
I’m not sure how people still envision the excise tax working to reduce costs.
I need a health care economist to provide a reasoned take on this peer-reviewed study and explain why it’s wrong, or how the excise tax will function in light of its findings.
I’m looking at you, Austin.
One of the embarrassing limitations of the glorious institutions with which I am affiliated is I cannot access newly released online Health Affairs articles. So, if I’m to review the one Aaron references he’ll have to send me the PDF.
However, let’s presume the results are reasonable. Then there would seem to be an awful lot of variation that has nothing to do with excessively lavish benefits (due to regional pricing differences, practice patterns, policyholder risk, etc.).
The first question I would ask is: rather than look at variation in premium levels, to what extent does generosity and plan type explain an indication of being above or below the Cadillac tax threshold? Perhaps there is a lot of variation in level not explained by those things but those things do a good (or better) job of predicting whether or not the plan is an outlier. Put another way, the authors don’t seem to have hit the nail on the head here, though they are very very close (and having not read the paper maybe they have another model in there that didn’t make the abstract).
Second, I don’t think the Cadillac tax is well designed in many respects. Some of these have been discussed by others (Klein and Volsky). My personal take on its limitations is that it is not a measure of premium affordability, which is what it should be, because it leaves out income. See my post on Regulated Compensation.
Having said all that, in theory anything that is taxed should experience a lower demand. Therefore, one would expect that individuals and employers will seek lower premium plans to avoid the tax. In doing so they have to give up something and it can only be benefits or show up in the form of increased cost sharing. That could induce lower utilization and therefore lower costs overall. Perhaps insurers will try harder to create plans with lower premiums (to woo employers). One way they could do so is by negotiating lower rates with providers if they can. Economic theory would suggest they already get the lowest possible rates given market power. So I don’t know that there is much to gain there.
On the whole, the tax is quite a ways removed from the real problems, which are over-utilization of low efficacy care and high unit prices. Were I to design a tax I’d want to target those things.
The Cadillac tax is blunt but it raises revenue while avoiding the politically difficult fight with providers. That seems to be what the White House and Democrats are seeking (at least Senators). I’m willing to accept putting off the real tussle over health care costs for now just so we can achieve some important insurance market reforms and set up some structures (do some pilots and demos) to prepare for that fight later, which is what current legislation would do. But someday, and quite soon–but not this year–we’ll have to return to the cost issue in earnest.
The Cadillac tax is a stop gap measure, but nobody should fool themselves into thinking it will solve the real cost problem. Meanwhile it seems to be irritating a lot of people so I’m beginning to wonder if it is as politically savvy as it may have once seemed.
