• GOP’s “repeal and replace”—curbing tax exclusions for employer-based coverage

    As I previously noted, conservative health policy analysts James Capretta and Robert Moffit have now provided one of the best available roadmaps to Republican proposals to replace ObamaCare.  I noted six critical passages that deserve attention. I considered the first principle–moving from defined benefit to defined contribution–in my last post. I’m now going to go slightly out of order and consider principle #3 first:

    3.       In the context of employer plans, this approach would mean moving away from the unlimited tax break that is conferred on employer-paid premiums, and instead providing directly to workers a fixed tax credit that would offset the cost of enrollment in the private insurance plans of their choice.

    It’s hard to give a clean thumbs-up or thumbs-down here. Principle #3 commands considerable support from experts on both sides of the aisle. Democratic and Republican policy experts from Martin Feldstein to Douglas Holz-Eakin to Jon Gruber agree that tax subsidies to employer-provided coverage bring significant ill effects. The Congressional Budget Office reports:

    The exclusion of employers’ contributions for health care, health insurance premiums, and long-term care insurance premiums is the single largest tax expenditure in the individual income tax code; including effects on payroll taxes, that tax expenditure is projected to equal 1.8 percent of GDP over the 2013–2022 period.

    It is hard to justify such large tax expenditures on the grounds of either efficiency or equity. From an efficiency perspective, these policies encourage many people to over-insure, and thus to make inefficient use of medical services. From an equity perspective, these tax expenditures are poorly targeted.  The Pollack household, for example, receives more than $5,000 in the form of reduced income taxes as a result of these policies. Our school’s less-affluent support staff members receive notably smaller tax benefits than I do, even if they purchase identical insurance policies.

    This is a politically sensitive issue. Provision must also be made for certain high-risk occupations and for other special circumstances. Public and private unions have made wage concessions in return for generous insurance policies. Curbing or capping these tax expenditures would ding affluent and upper-middle-class people, whose desire to eliminate loopholes and to reduce moral hazard in the provision of health coverage may falter once people realize their personal taxes would go up.

    I thought that the Affordable Care Act’s Cadillac tax provided a reasonable compromise in curbing tax subsidies to high-cost insurance plans. President Obama and Democratic leaders get too little credit for this valuable but unpopular cost-control measure, which was enacted over the heated objections of traditional Democratic constituencies.

    I do have another major qualm about Capretta and Moffit’s plan, which so explicitly seeks to erode our traditional system of employer-based coverage. It’s now fashionable to label employer-based coverage an unfortunate accident of history, a practice that only exists because of quirks in the Internal Revenue Code. There’s certainly a lot wrong with traditional employer-based coverage. The most obvious problem is that families lose access to affordable insurance at the precise moment in which they are most economically vulnerable: when someone loses a job.

    Alongside these difficulties, though, it’s important to note the benefits of employer-based coverage. As Paul Starr relates in his terrific Remedy and Reaction, employer-based coverage started in earnest during the 1930s, through early Blue Cross plans. Large firms offered economies of scale in administration. They provided stable and favorable risk pools which made possible de facto community rating and guaranteed-issue health coverage for much of the American workforce and their families. Large firms also provided an important function as reliable purchasing agents for their workers.

    Millions of people today benefit from such arrangements. Yet as Aaron Carroll notes here, America’s system of employer-based coverage is now unraveling. A nice new paper in Health Services Research by Hao Yu and Andrew Dick documents the strong link between declining coverage and escalating health care costs, particularly in the second and third quartiles of the income distribution. These authors also document rising out-of-pocket costs that arise for similar reasons.

    Efforts that further unravel employer-based coverage—such as candidate McCain’s 2008 plan—will prove harmful if these concerns were left unaddressed. To their credit, Capretta and Moffit would start with workers at small firms. I remain concerned about the long-term trend, especially because proposed policies would be coupled with efforts to move workers into “low-premium, high-value” plans. Such an approach would be especially problematic for older or sicker workers who are now well-served by many employers.

    Providing workers with a fixed tax credit to buy outside coverage will only improve the system if workers enjoy secure access to properly regulated coverage, within a framework that ensured everyone reliable access to affordable coverage with due protections for individuals with high expected treatment costs.

    In other words, this path requires something like the new exchanges established under the Affordable Care Act. For reasons I will discuss later, I’m not confident that Capretta and Moffit would create the robust exchanges that their policies require.

    Austin Frakt, among others, has argued that conservatives should embrace ACA, which is as much a step toward their preferred market-based reforms as they are likely to get. On the substance, ACA actually is the bipartisan compromise many political moderates had hoped for in comprehensive health reform.

    Republicans may conceivably gather the votes (in Congress and on the Supreme Court) to strip ACA’s expanded insurance coverage and financial supports that help low-income people. I doubt they can do the same in enacting serious cost-containment efforts disliked by concentrated interest groups and by older, more affluent constituents at the core of the current Republican coalition.

    Especially in this policy arena, a more moderate approach would escew “repeal and replace” with “retain and revise.” Unfortunately, that’s not the world we live in.

    • Is it fair to call this the GOP’s replace plan (per the title of the post)? One might reserve that for when the GOP has legislation or, perhaps, when they have legislation that appears to have a chance of passing Congress.

    • I agree with Austin — fairest to call this Capretta and Miller’s plan, or a conservative proposal — though it does share some commonalities with plans that other Republicans have proposed.

    • The employer exclusion for health insurance is the largest tax preference that we offer.
      A recent study from the Bureau of Labor Statistics showed that employers and employees are spending $2 in health insurance premiums for every $1 dollar of retirement and savings.
      We have about reached our limit when the insurance premiums themselves are expensive, and we have to provide not only tax exclusions, but also subsidies.
      Can you imagine car insurance being more expensive than the car?

      Part of our problem is the insurance coverage itself. The more the coverage, the higher the price of the service will become.
      What we need to first provide, in the way of insurance, is an insurance policy which works like an effective policy should work.
      It should be dirt cheap, pay large amounts intermittently, and be a policy on which you hope never to collect.
      A $50,0000 deductible policy reduces traditional premiums by 80%.
      Then, we look at various ways of covering that gap, over time.
      3 of my partners and I are working with Milliman, an actuarial firm, on this very project.
      We hope to have numbers in the next week or two that we can work with, to achieve this worthwhile goal.
      Don Levit

      • Don,

        This is a worthwhile goal, but a very, very challenging one.

        I work in the property/casualty side of the insurance industry, and we have the luxury of dealing with claims that are far less frequent on average and also sell policies with capped payouts for claims (i.e. when we sell 100/300 limits for auto insurance, we know what our worst-case scenario is). Neither of these is enitrely feasible or realistic in the health insurance market.

        My fear about HSAs (your proposal is an expanded HSA) is the high correlation between those likely to use a lot of care and the negative impact their health has on their economic productivity. In theory, you can be healthy and contributing towards your (very) high deductible for many, many years, but once you develop a condition that requires you to exhaust it, you may need to do so for more than one consecutive year, and your newfound diminished health may make it exceedingly difficult, it not impossible, to replenish it for your next incident.

        I’d be interested in whatever non-proprietary information you can share on your efforts.

        • Mike:
          I understand the difficulty of continuing to pay large claims, year after year.
          The goal is to have 2 policies – a catastrophic policy, starting at $25,000-$50,000 of coverage.
          And, a paid-up policy that builds the underlying coverage, in 2-4 years.
          The objective is to pay large claims that could bankrupt families on an intermittent basis, not continuously.
          Yes, that will leave some families without coverage. However, if one looks at premiums paid to benefits received, maybe he can be grateful for what has been done.
          It is not our responsibility that health care is so expensive, that even the insurance is very pricey.
          It IS our responsibility to respond in an effective way to help pay those bills.
          The fact that chronic care may cost $50,000-$100,000 per year is not our fault.
          In fact, by trying to cover such claims, prices rise, rather than fall.
          My E-mail is donaldlevit@aol.com.
          Don Levit

          • But where you draw the line in defining “large claims that could bankrupt families” is going to have a serious impact on how effective any proposed solution is going to be.

            A plan that only covers individuals from the $25,000-$50,000 threshold and up still leaves a huge “deductible” that most in the bottom 3 quartiles of the income bracket are going to have difficulty coming up with. The families who lose coverage or can’t afford coverage fall onto Medicaid, etc. and that probably only exacerbates the problem.

            I agree that the high cost of care isn’t the insurance industry’s fault, but I think the proposals currently being floated miss the mark (HSAs, increased premium-cost sharing). Making the individual pick up the first $5k of costs doesn’t strike me as very effective, because most of the treatment that falls under this threshold is necessary, involuntary, and frankly, not the sort of thing that’s causing costs to spiral out of control. I would love to see an insurer develop what I’ll call a reverse HSA plan, where baseline treatments are covered, and the individual must purchase a supplemental policy or pay out of pocket for the types of exorbitant overtreatments (which are fairly easily quantified statistically) that are really driving costs up.

            • Mike:
              I agree with you that many people cannot afford the first $5,000 of coverage.
              That is why we are designing plans to build $10,000-$20,000 of coverage per year, for a very affordable contribution.
              While coverage starts from dollar one, even if his underlying plan has $10,000 of coverage – if he does not utilize any claims, his community-rated premium is based on a $10,000 deductible, not a zero deductible.
              There is also community-rated insurance to fill the gap in between, say, $10,000 and when the catastrophic starts.
              The goal is to build up paid-up coverage, that starts from dollar one, up to the catastrophic point, which starts between $25,000 and $50,000.
              Don Levit

    • Point taken, guys

    • It seems to me that along with the risk pool, one of the biggest benefits of employer-based insurance is the way it pushes people to buy insurance. Any non-covered cost comes out of your paycheck, so once signed up for, the policy will be paid until the employee loses his job.

      Without it and without a mandate, lower income people and people starting their careers may put off signing up for health insurance, or let it lapse when money is tight.

      I don’t think this is a reason to keep employer based insurance, but if Republicans ditch it, they should be aware of the side effects.

    • Having lived in countries with (US) and without (Switzerland) extensive employer-based health insurance coverage, I can say unequivocally that employers are NOT “reliable purchasing agents” for their employees. The employer’s objectives in negotiating terms with insurance companies overlap only slightly with employee’s objectives. Customer-service performance has to be truly execrable before it gets any attention at all from corporate HR types, which means that their focus is almost entirely on cost, and additionally a small concern about avoiding lawsuits. Other features of insurance that matter to employees get ignored. These would include things like
      – The list of participating physicians and facilities
      – Which medications are covered, and with what copay
      – Clarity and accuracy of billing statements
      – Timeliness of statements and of reimbursement

      There are certainly many causes of the very different patient experience between the US and Switzerland, but I am convinced that the mis-aligned objectives in employer-based insurance play a significant role.

    • We spend far too much energy (and money) in trying to insure things which we should prevent with price controls.

      No single operation should cost $50,000. No single drug should cost $40,000 a year.

      The only excuse for a $50,000+ expense would be if someone was hospitalized for two months or more. (at $1500 a day, which should be national per diem for all hosptals.

      Two months in-hospital happens very rarely, so rarely that Medicare Part A could pay all such claims and never miss a beat.

      Don Levitt is thinking creatively, but his entire enterprise should be unnecessary. No one should need $50,000 or $100,000 of health insurance.

      We need a national fee schedule –(Medicare ‘s schedule would do for a start) – and a pharmacy price review board — and a legal procedure to throw out unconscionable bills for emergency rooms.

      Read Joseph White’s still marvelous book called Competing Solutions. He describes the methods that 1980’s Germany, Japan, England and Canada controlled fees. We in the US have done virtually none of that.

      Don’t worry about insuring huge medical bills –outlaw them instead.

      Bob Hertz
      The Health Care Crusade

      • I can see the headlines now—“The USA, the world’s newest socialist member.”

        Have we really come to that to be our “answer?”

    • Bob:
      I agree with you that we should not be concerned about paying enormous bills, particularly on a year-to-year basis.
      How we go about it is a very complex “solution.”
      But the fact that insurance covers out-of-pocket expenses, at 100%, for example, under the current HSA legislation, after a set out-of-pocket expense, is foolish.
      If the cost of college is primarily due to the loans available, just imagine how expensive college would be if insurance AND SUBSIDIES TO PAY FOR COLLEGE INSURANCE WERE AVAILABLE, ALONG WITH TAX EXCLUSIONS!
      When the cost of insurance itself becomes too pricey, we have to, first, be more discerning how we spend our insurance dollar, and second, refuse to pay what we consider excessive costs for treatment.
      That may mean we do not receive the care we need.
      As hard as it is for me to say this, we have to start looking out for future generations.
      Either the cost of care will go down, or it will simply not be available, except for the one percenters.
      We have to be wise enough and radical enough to say “No!”
      Don Levit

    • “Martin Feldstein to Douglas Holz-Eakin”

      Martin Feldstein’s life-long goal has been the looting of the US pension fund (i.e., Social Security). IIRC, Krugman and DeLong have taken care of Douglas Holz-Eakin’s credibility.

      As for conservative proposals, it’s clear by now that they are lying. The individual mandate was copied from the Heritage Foundation/GOP plan in the early 1990’s. You know, the right-wing ‘alternative’ to the Clinton plan, which the right promptly dropped the moment that they didn’t need it as a potemkin fraud.

    • Note to Ron about a “socialist solution” —

      Based on the work of Joseph White and T.R. Reid, among others, the consensus seems to be that socialist nations provide about 95% of American health care for about 60% of the cost.

      The 5% they do not provide tends to be saving lives in extreme circumstances, such as late stage cancer and very premature babies.

      As for the cost savings in socialist nations, that tends to come from having a national fee schedule that is binding on all providers as well as all insurers.

      America has a more Wild West approach, where hospitals bill out enormous inflated charges, because who knows – some insurer might be stupid enough to pay the list price.

      If a given procedure costs the hospital $5,000, the hospital may as well send a bill for $30,000. The tougher insurance companies will demand an 80% discount and pay $6,000, so the hospital is just fine.

      If the patient is uninsured, they will be terrified by a $30,000 bill and will fill relieved if they can pay $8,000 in cash. If the patient pays nothing, the hospital can count the full $30,000 as its contribution to charity care.

      I bring these up to defend my belief that large medical bills should be dissected and examined, before we rush to insure them.