• 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 Reform Savings, 2014–2023 (Billions of Dollars)
    Impose Caps on Federal Spending for Medicaid

    105 to 606

    Add a “Public Plan” to the Health Insurance Exchanges

    158

    Convert Medicare to a Premium Support System

    22 to 275

    Increase Premiums for Parts B and D of Medicare

    287

    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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    • ” the proposals are generally disruptive, on a scale way bigger than narrowed networks for a narrow slice of the population. ”

      Is this conjecture or has it been proven? Narrow networks can be devastating. We saw that with HMO’s decades ago.

    • Unfortunately couldn’t find an updated stat but 50% of American’s surveyed by KFF in 2009 opposed ending the tax subsidy. If that doesn’t sound “disruptive” I don’t know what does.

      http://kff.org/health-costs/poll-finding/chartpack-kaiser-health-tracking-poll-august-2009/

    • Did a swag at benefits from improved exercise, using an Australian study ( http://www.health.gov.au/internet/main/Publishing.nsf/Content/health-pubhlth-publicat-document-phys_costofillness-cnt.htm/$FILE/phys_costofillness.pdf ):

      “The analysis indicates that gross savings of $3.6 million p.a. in the health care cost of these three diseases could also be achieved for every 1 per cent gain in the proportion of the population who are sufficiently active”
      au_pop = 22.68
      us_pop = 314
      3.6 * us_pop / au_pop => 49.8413

      Each 1 per cent gain in sufficiently active, over 10 years, is worth $0.5 billion. Not large compared with the numbers above — +50% (which is completely unrealistic) is only $25B. (Less, because those are Australian dollars; more, because our health care system is less efficient, hence we save more by avoiding it; more because there are other diseases that benefit, but obviously they chose the most costly ones for this example).

      Which is a shame, because it works quite well for me. Damn shame I can’t health insurance to pay for something that actually works.

    • Many (most?) Republicans would want the tax increase inherent in reducing the tax preference for employment-based insurance offset by a refundable tax credit to buy health insurance (if the proposal was part of an alternative to ACA) or by a reduction in tax rates.

    • It seems to me the only way we get big stuff done in Washington for one side to co-opt the other’s ideas and engineer them into your end-goal.

      How did Clinton get S-CHIP passed? He gave R’s the block grants they wanted and cut medicare spending.

      How did Democrats get Medicare Part D? They didn’t force Bush to pay for any of it.

      How did Obama pass Health care reform? He stole the framework from Mitt Romney.

      Paul Ryan’s plans to reform medicare are pretty much applying the ACA to an older population. The “cadillac tax” in the ACA is a watered down version of John McCain’s 2008 proposal.

      My point is – you have to wait until your opponent supports something. Then you have to find a way to finnagle that something into your proposal, and hitch on what you want. That way the side that’s “losing something” can focus on the parts they wanted. The problem at the moment is the Republicans don’t seem to want anything other than cutting spending and winning elections. So we’re kind of in a rut in terms of creating reform.

      For more on this phenomenon I highly recommend “Getting to Yes”.

      P.S. I don’t agree with your conclusion that “it’s a political non-starter” in the long term. Only in the short-term. In fact, I expect within 20 years it will happen almost guaranteed in one way or the other.

    • Nowhere is there any discussion of why the market, that we apparently worship, isn’t working and how to address it. Hoping someone else figures it out (ie capping spending) isn’t a solution.

      If the cost of healthcare is a problem and a public plan is cheaper, why not just go to single payer?

    • ‘Bipartisan’ in wonkland’ is the opposite of bipartisan in the real world. For example, cutting Social Security and Medicare have far higher popularity in wonkland than with the overwhelming majority of the American people. That’s because the wonks either don’t feel they will need it, or simply that they are paid and promoted for advocating these cuts.

    • The public plan is the simplest solution and apparently doesn’t have the appeal to “wonks”. The idea that that the elimination of employer-based insurance tax breaks is somehow “rational” begs the problem with wonkish assumptions–they are out of tunewith what people want and and what works for many people. they’re the reason that 1960s urban renewal projects resulted in enormous concrete plazas around skyscrapers that no one uses, or housing projects that proved to be more useful for gangs to run than housing authorities.

    • In 2010 dollars, the excess cost of our nation’s health care industry could be estimated at $650 Billion: given a cost that year at 17.9% of GDP and a 13.4% of GDP optimal operating cost. The reduction represents 25%, based on a 13% or less operating cost of ALL the other developed nations of the world. The best cost improvement options cited above would total $168 Billion annually. At best, the improvement would represent only 25% of the annual excess cost of our nations healthcare. Even with the most optimal combination of benefit strategies, we need other strategies for improving the efficiency of of our nation’s healthcare industry. Putting aside price control and stringent rationing, what might be other strategies for improving the efficiency of the healthcare for each citizen? And, is it likely that ACOs and cost effectiveness research will actually make a significant contribution to improved efficiency?

    • You state: “… 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. …”

      I think you misunderstand the Cadillac Tax. The Cadillac Tax is based only on employer-sponsored coverage. So, for example, an individual’s personal check contribution to her/his Health Savings Account (not run through the employer’s cafeteria plan) would not be counted for Cadillac Tax purposes (as it only relates to employer contributions – either pre-tax contributions or actual employer contributions).

      However, that said, based on my 34+ years in the employee benefits arena, I can confirm that employers would much prefer a cap on contributions over a cap on benefits. American employers are already heading in that direction, anyway, by the substitution of DC for DB in pension plans, and the growing expansion in the use of DC concepts in health coverage.

      The other issue here is that the benefit mandates have to be adjusted – no lifetime maximum, annual maximum out of poclet expense limit. Fact is, because of demographics (the population covered, the locations, etc.), many employers are on target to trigger the tax NOT because they have “cadillac plans”, but because they have an unhealthy population (employees, spouses and children). This is certainly one of the reasons why employers would much prefer a limit on tax preferred contributions.

      Finally, such limits already apply in other benefit areas – pensions, defined contributions, etc.