The point of the Cadillac tax

I largely agree with Alec MacGillis’s take in a Washington Post piece that officially publishes tomorrow:

Health-care providers in the United States have tremendous power to set prices. There is no government “single payer” on the other side of the table, and consolidation by hospitals and doctors has left insurers and employers in weak negotiating positions. […]

The 2010 law does little to address this. Its many cost-control provisions are geared toward reducing the amount of care we consume, not the price we pay. The law encourages doctors and hospitals to join “accountable care organizations” that have financial incentives to limit unnecessary care; it beefs up “comparative effectiveness research” to weed out inefficient treatments; and it will eventually tax the most expensive insurance plans to restrain consumers’ superfluous use of health care.

Such measures could reduce redundant tests, emergency room visits and hospital readmissions, which would help control the costs of Medicare, where the government sets rates. But they are less likely to lower prices outside Medicare and stem the growth of private insurance rates.

MacGillis slipped quickly passed something. That tax on “the most expensive insurance plans to restrain consumers’ superfluous use of health care”–the excise or Cadillac tax–does target the growth of private insurance rates. In fact, that’s its very purpose. It will gradually erode the employer-sponsored tax subsidy that the vast majority of health economists believe contributes to overuse of health care and labor market distortions.

Beginning in 2018, the excise tax will impose a 40% fee on employer-sponsored health insurance premium prices above a threshold ($10,200 for individual coverage and $27,500 for family coverage). Beginning in 2020, the threshold will grow at a rate tied to overall inflation. To the extent health care costs exceed overall inflation (and historically they have, by a lot), the excise tax will hit a larger and larger share of premiums over time.

Businesses and individuals aren’t going to like that. Therefore, insurers won’t either. So, the expectation is that, at least to some extent, insurers will be motivated to craft policies that avoid the tax, develop innovations to reduce health care costs, and drive harder bargains with providers. This will also likely mean that more health care costs are shifted from premiums to out-of-pocket expenses. That should encourage lower utilization and/or lower prices too.

It isn’t that there is nothing in the health reform law to put pressure on private insurance rates. There is, the excise tax. The major danger is that the tax will be delayed or further eroded. It ought to be accelerated and strengthened. At a minimum it should be supported. One way to do so is to not overlook the import of its role.

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