• 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.

    • Very true, health care reform is designed to allow insurance companies to negotiate rates that squeeze inflation expectations out of our system. However, our president insists on demonizing insurance companies and is silent to the pricing power held by hospitals and doctors.

    • Austin
      In the two modes of thought:

      1) US consumes too much; FFS, volume driven medicine overwhelming system. Yet, see Aaron’s post on Friday. Pills, LOS, beds, imaging–all averaging less than OECD for the most part.

      2) We pay more for pills, salaries, administration

      3) Yes to more caths, chemo, critical care

      Lots of cognitive dissonance and misunderstandings in the simplified messages we get. While i know the data driven nature of your writing, speculate a bit on root causes if you could.

      Is it more Dartmouth-esque in that many areas “we do too much, ” or like Reinhardt, “its the prices stupid?” I know the right answer is both, but where is the bigger problem.

      If the latter, its a supply side issue and seems regulators ought to prevail (all payer for hospitals, reference pricing for Rx). If former, demand side, more in the way of CDHC (I use the term loosely in this regard) should drive change.


    • ” It [Cadillac-plan tax] 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”

      Is there really “overuse” of health care in the US? Living in Canada where a visit to the doctor is essentially free, you’d think that overuse would be a greater problem here. But you never (or rarely) ever hear anyone talking about the problem of overuse.

      • @Ken Hamer – To argue against the tax subsidy is tantamount to believing it leads to over (or inefficient) use. The general thinking is that many, though perhaps not all, employer-based plans are too generous. Of course the right approach is value-based insurance design: provide rich benefits for services and individuals for whom they have proven effective, otherwise not so much.

        There is an under-use problem too. Some without insurance do not get enough care. There’s another type of under use too, lack of compliance with medical plans or follow through. Even when it doesn’t cost an individual much they might not take their meds or monitor their condition.

      • @Ken Hamer – I think what I wrote in my last reply was confusing. It confuses me anyway. Let me try again.

        By subsidizing employer-sponsored insurance through the tax system, we’re making an explicit choice to provide more generous coverage to workers. Moreover, it’s a regressive subsidy. Higher income workers get a larger tax subsidy. That leaves less general revenue for subsidizing coverage for others and, in particular, those who have less and are less able to purchase care from which they could benefit.

        This is inefficient, even if the extra care workers get by virtue of the subsidy is, on balance, beneficial to them. Those tax dollars “spent” on the employer-sponsored insurance subsidy are better spent (more efficiently spent) on providing care for others.

        How does one justify subsidizing employer-sponsored insurance at the expense of lower subsidies (or no subsidies) for others? A similar question could be asked about Medicare benefits for high income/net worth individuals. It matters how we spend taxpayer money. Giving more to one group means less for another. If we’re spending the money anyway, I’d rather distribute it in a way that maximizes overall welfare. Others might just rather not spend the money. Either way, it argues for a lower tax subsidy for employer-based plans.

    • @Brad- I love to speculate on root causes, but I think that does get us in trouble. I think that is how we get lots of physicians, nurses, PhDs and other people looking at the same numbers, those who do look at numbers, and come up with such different conclusions. My suspicion is that since we are dealing with biological systems mixed with money and emotions, that the answers will be too complex to reduce to simple answers. I would prefer we use data as much as possible, and when possible, run models to confirm solutions. A long winded way of saying it is probably supply and demand and other things, some of which we cannot measure well, like fear and hope.


    • Steve
      Agreed. The data is available, perhaps not as fully formed as we want or need, but that does not mitigate against using best evidence to begin to craft interventions.

      In that spirit, price vs volume is a big deal and distinction, and thought leaders and problem solvers (read govt, markets) will need to implement solutions. Like being half pregnant, unlikely that CMS or big private payers will shift global policies one way, if evidence points another, ie, reduce volume on a procedure that is priced too high but is not overperformed. You can take that in the other direction as well. Of course, we can pick and choose value based approaches as Austin describes above, but those are small potato changes for focused interventions.

      Bottom line, was looking for an economists perspective given the different schools of thought.

      Having said that, i do follow the lit closely and enjoy this subject and know the difficulty in assessing landscape. However, seems like folks have differing opinons on prices vs volume, and flushing out a bit is helpful in crafting solutions.

      Thanks for feedback Steve

      • @Brad F, Steve – There is much confusion around price v. volume, levels v. rates of change, and US v. other nations. A terrific paper would sort all this out in a rational way. I’m not aware of one. I am also (still and somewhat) among the confused. Here’s what I (think) I know and (know) I don’t know:

        US prices far exceed those of other OECD countries. In many key respects our volume is lower. The product, costs, are higher, as is the rate of change in those. Is that because of the relative rate of change in prices or volume or both?

        Now, sticking with the US and focusing on Medicare for the moment, that program has implemented systems to control price but done very poorly on volume. That is, I believe Medicare’s cost problem is a volume one, which is not to say anything about whether that volume is too high or low in some objective sense. And, as we know, volume levels, and rates of change, vary geographically, itself raising a number of important and (to me, at the moment) confusing questions. Our national experts in that area (Chernew, Berenson, Fisher et al.) have written many papers in this area, as you know. But I am not expert in it. I haven’t sorted it all out for myself. I’m not sure they have, but I don’t know.

        That was Medicare. What about the rest of the market? Chernew has written an Am. J. Man. Care paper on this topic finding positive correlation in commercial market and Medicare volume and negative correlation in prices. Thus, if Medicare suffers a volume problem, so might the rest of the market. Where it’s “the prices, stupid” in general, it’s less so for Medicare and vice versa.

        Meanwhile, there (may be) problems of over-use or inappropriate use for some populations and for some procedures or specialties while, at the same time, there is an under use problem for some. I’ll write more about this in early November, summarizing Cutler’s take.

        I find all of this very confusing. And we haven’t even begun to get into what policy would do to all of this. If you’re expecting me to sort all this out right now, you’ve got the wrong guy. I’d love to be that guy but I’d have to do vastly more reading and thinking. If you are aware of any papers or books that do exactly this–explain all of the above differences, what they mean, and what to do about it–I’d love to know about them. Based on what I’ve read it seems various authors focus on one or another element of these issues, ignoring the others. Thus you get stuff that suggests overuse is the main problem, other stuff that says it’s prices, others that say it’s lack of access, and a lot of confusion about analysis of US w.r.t. itself (over time) and international comparisons.

        I’m going to turn the above into a post, somewhat cleaned up. Look for it soon. (Here it is: http://theincidentaleconomist.com/wordpress/health-care-is-confusing/ . Continue the conversation there please.)

    • Best non-answer I have ever read. Looking forward to follow up posts on this very interesting topic.

      HA Blog gives same question the treatment: