• Quick Follow-Up: 26% of What?

    I’ve been trying to find a way to convert into an annual dollar amount the 26% figure calculated in my prior post, the amount of employer based health spending due to the tax subsidy. To do so I’d need to know total health spending by employer-insured individuals who are beneficiaries of the tax subsidy. I haven’t found that yet. Anybody know it?

    The closest I’ve found is the NHE figure for annual private health spending. It’s in the $700-$800 billion range. Even the low end of that is probably high because there is some private health spending outside the employer-based system. Also, not every dollar of employer-based insurance premiums avoids taxation. Employee contributions to non-Section 125 (non-cafeteria) plans are taxed. (Good luck trying to find a figure for what proportion of employees are in or out of Section 125 plans and what proportion of the premiums they pay. Some colleagues and I have been looking for the former for a while. I recall seeing figures that half of firms offer Section 125 plans. They’re probably the bigger firms so the majority of workers are probably in such plans.)

    So, it’s 26% of X where X is probably in the ~$400 billion range, but that’s a bit of a WAG. If right, that would make the additional spending due to the tax subsidy ~$100 billion per year or ~$1 trillion over 10 years. And that’s the price tag of health reform.

    I think someone can only believe the tax subsidy is not a big deal if they don’t understand it.

    • Austin –
      Though I’m not looking at the NHE dataset right now, wouldn’t annual private health spending confound individual-market plans and spending with employer/union plans, which are mostly tax-exempt? They would presumably also include out of pocket spending, which except for FSAs/HSAs, would not be tax exempt.

      Have you checked the Medco and Kaiser employer benefit surveys? While I really doubt they have non-Section 125 plans, I bet they have average and total health insurance spending. That would allow you to separate out the individual market from the employee group market. You would still have to account for union plans (Taft Hartley Act plans, etc.). I don’t know if the IRS / treasury publishes data on the amount of money going into FSAs/HSAs, but those small amounts might be used as well. I don’t know of anyone who publishes data for union plans.

      This nearly sounds like one of those monumental tasks for the NHE group at CMS. I’m somewhat surprised, however, that CBO hasn’t scored something like this, at least in terms of the federal portion of the tax subsidy.

    • I appreciate your posts. I don’t think the tax exclusion gets the attention it deserves, even though I take a slightly different view from yours.

      I’ve been privately outraged by the tax exclusion since around 1980, when I discovered that health benefits were not taxed, yet I was not allowed to deduct the premiums for my individual health coverage. I later became fascinated by the effects this was having on the overall state of health care.

      Ironically, in the past few years I’ve come to realize that I wasn’t getting screwed in 1980 after all. If my job had offered benefits, the premiums would certainly have been much higher, perhaps double what I was paying. There is no way that the tax exclusion would have compensated me for the higher premium.

      On the current topic– trying to estimate the change in health spending due to the tax exclusion seems tricky. The first question is, change relative to what? Without the tax exclusion, would there even be employer sponsored health coverage? I just don’t see the point of calculating a theoretical delta based on some elasticity estimates and a questionable assumption that employer plans would exist in present form in the absence of a tax exclusion.

      It seems unlikely that today’s defined-benefit, community-rated health plans would even exist, outside a few strongly unionized or government jobs with rigid benefit and wage structures. If small and mid-size businesses offered health benefits at all, they might be in the form of a fixed cash allowance only. Most community-rated employer plans wouldn’t even be possible, due to adverse selection.

      So what’s the baseline?

      • @Bart – Good point. It’s an inflated baseline. But it is inflated due to the tax exclusion. The back-of-the-envelope approach is pretty standard, not for the main line of a paper, but for a little illustration of the implications of an elasticity estimate. I think there is a lot of room for quantitative error without a change in the qualitative result. That is, even if I’m off by a factor of two or four, the amount of money involved is huge. The order of magnitude is very likely right. That’s really the point.

    • @GrandArch – I had also thought of the Kaiser/HRET survey but didn’t dig into it after I got sidetracked to NHE. I’ll check tomorrow. I’m confused about your concern about union plans. Maybe there is something I don’t understand about them. Are they or are they not tax exempt? If not, then they’d have to be tossed out. But I thought they were given unions’ concerns over the Cadillac tax. Maybe there is a distinction I’m not familiar with. Educate me, please!

      I’m not worried about OOP spending. I think all spending by plans, firms, and individuals in tax exempt plans should count. The point is to measure the total spending associated with tax exempt plan enrollment. Individuals will be more willing to spend more OOP since they are only paying a portion of the total cost. That effect should be captured.

      If CBO has documented this then neither I nor some of my very knowledgeable and connected colleagues are unaware of it. We’ve been looking. It is still possible we missed something. Someday if nobody produces the numbers I will. But it will be a while. I don’t have access to the data I’d need yet.

      • @GrandArch – Hah! I couldn’t wait until tomorrow and looked at the Kaiser/HRET survey just now. It can’t do what I want. At best one can compute total costs due to premiums since it has the premium distributions across workers. But that doesn’t address the OOP costs (which I think matter) and the cafeteria vs. non-cafeteria plan issue. So, it isn’t of much help. I’m declaring this unknown. The first one to do some decent work or point me to it will get prominent play on this blog.

    • Austin –
      Yeah, my reference to OOP costs was that something like Kaiser wouldn’t have them, so that’s a problem.

      As for union plans, I just mean that something like the Kaiser/HRET survey probably wouldn’t have them in their sample.

      Good luck!