Status quo bias: one bias to rule them all

Yesterday the CBO dropped a whole bunch of wonk candy in the form of a report on options for reducing the deficit over the next decade. The full menu of health-related proposals can be found here, along with their estimated impacts.

Here’s the problem: the proposals are generally disruptive, on a scale way bigger than narrowed networks for a narrow slice of the population. Sure, a few only tinker at the margins—more bundled payment in Medicare, national malpractice reform, increasing cigarette taxes—but the savings they produce are marginal, too. Some items have big-ticket potential:

Proposed ReformSavings, 2014–2023 (Billions of Dollars)
Impose Caps on Federal Spending for Medicaid

105 to 606

Add a “Public Plan” to the Health Insurance Exchanges


Convert Medicare to a Premium Support System

22 to 275

Increase Premiums for Parts B and D of Medicare


Reduce Tax Preferences for Employment-Based Health Insurance

240 to 537


All five of those strike me as a wee bit ambitious, considering how firmly we as a nation seem to cling to the status quo.

Though it’s nothing new to people who think about health policy, I want to key in on limiting the tax exclusion for employer-sponsored insurance. It offers one of the biggest cost-savings among the options modeled—and here the CBO only proposes capping the exclusion, fully eliminating it would generate revenue north of $250B* annually. Among the options in that table, it’s likely the least fraught with partisan rancor.

First, a quick run-down of what CBO proposed; their estimated savings vary so widely because they modeled two possible scenarios. The first, saving $240B between 2014 and 2023, would tweak Obamacare’s Cadillac tax.

In the first alternative, implementation of the [Cadillac] tax would be sped up by three years, to 2015, and the thresholds at which contributions would become subject to the tax would be lower in 2018 and beyond than they would be under current law. Specifically, the thresholds in 2015 would be set at $7,970 for individual coverage and $19,910 for family coverage—which represent JCT and CBO’s estimate of the 75th percentile for health insurance premiums to be paid by or through employers in that year. After 2015, the thresholds would be indexed for inflation as measured by the CPI-U. In 2019, they would be $8,700 for individual coverage and $21,750 for family coverage, compared with $10,550 and $28,400, respectively, under current law. As in current law, the tax would equal 40 percent of the difference between total tax-excluded contributions and the applicable threshold. Similar to the provisions of current law, the thresholds would be 10 percent higher for retirees ages 55 to 64 and for workers in designated high-risk professions, but other adjustments provided under current law (such as those for age and sex) would be eliminated to simplify administration. That alternative would reduce federal deficits by $240 billion between 2015.

The more cost-saving iteration caps the tax-exemption on employer contributions, capturing $537B over the same time period. Caps like this often feature prominently in conservative reform proposals.

The second alternative would eliminate the excise tax and instead impose a limit on the extent to which employer-paid health insurance premiums and contributions to FSAs, HRAs, and HSAs could be excluded from income and payroll taxation. Specifically, starting in 2015, any contributions that employers or workers made for health insurance and for health care costs (through FSAs, HRAs, and HSAs) that together exceeded $6,420 a year for individual coverage and $15,620 for family coverage would be included in employees’ taxable income for both income and payroll taxes. Those limits, which are based on the estimated 50th percentile for health insurance premiums paid by or through employers in 2015, would be indexed in subsequent years for inflation using the CPI-U. The same limits would apply to the deduction for health insurance available to self-employed people. Capping the tax exclusions at lower thresholds than the ones scheduled to take effect for the excise tax would reduce federal tax subsidies. For example, in 2019, the caps for individual and family coverage under that alternative would be $7,000 and $17,000, respectively, whereas the current-law thresholds for the excise tax would be $10,550 and $28,400, respectively, in that year. That alternative would decrease federal deficits by $537 billion between 2015 and 2023.

As I was reminded during a Twitter exchange with a colleague last night, this is precisely the sort of reform that should enjoy broad bipartisan support. In wonkland, it already does. It isn’t incompatible with the framework of the Affordable Care Act, except insofar as capping the tax exclusion would make the Caddy tax redundant (an easy tweak). It offers something for both sides: liberals get to pare back a regressive tax practice while conservatives gain more price sensitivity among consumers (“skin in the game”, in the vernacular).

And this is precisely the sort of reform that will never happen.

Fiddling with the tax exclusion threatens to—get ready to clutch your pearls—change the insurance status quo for the more than half of Americans who receive coverage through their employers. That makes it a total political nonstarter, whether or not it’s a sound policy move (and many economists think it is).

Ire over Obama’s “like it/keep it” line is premised on the notion that the Affordable Care Act wouldn’t have passed if we’d had a more honest and nuanced conversation, because even the relatively minor changes it imposes would be unacceptable to the American people. And maybe that’s true—but if so, it bodes very poorly for us.

Until we can have an adult conversation about creating meaningful changes in our health care system—actual changes that actual people will have to actually feel—health reform debates will stay constrained to a bunch of pointy-headed types talking in circles around each other. *The CBO projected lost revenue at $246B in 2007, but I’ve seen estimates as high as $268B for 2011.

Adrianna (@onceuponA)

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