The overwhelming majority of people who have private insurance are covered by their employers. That will still be true under any of the proposed reforms. So it's worth looking at what happens to premiums in the employer-based market after a given plan takes effect.
If the plan is the Senate plan, then according to the CBO, not much changes. Average premiums might be as much as 3% lower than they otherwise would be. On the other hand, they might not change at all.
That's actually rather surprising. We've been hearing a lot over the last few weeks about the transformative power of the excise tax on high cost plans, which is supposed to really incentivize the kind of delivery services reform that could hold down medical cost inflation. Indeed, the effect is supposed to be so powerful that almost all the revenue estimated from the excise tax actually comes from employers buying cheaper health insurance than they otherwise would and passing those savings onto employees in the form of wages, which the employees then pay taxes on. By 2019, that excise tax is supposed to be generating $34 billion a year for the treasury.
But according to the CBO, while the excise tax will exert downward pressure on large group health insurance premiums, other factors--like the requirement that children be eligible for dependent coverage up to the age of 26--will push them upward. The result is a maximum savings of 3%, a minimum of 0%. The CBO notes that because so many people are affected, even small changes can produce significant revenue.
That zero does make me sort of wonder what might happen to all that revenue. The excise tax is basically the entire revenue side (there are a bunch of provisions that also effect revenues, but they roughly balance out; if the excise tax doesn't raise as much as anticipated, there will be no extra revenue to cover new spending, unless something else also changes).
The logical chain that leads to the excise tax raising this extra revenue indirectly is economically pretty sound, if complicated. But it also works the other way. If other employees are getting more expensive coverage, presumably their wages go down, and they pay less in taxes. If the total average change in employer premiums is 0%, then I would assume that the total revenue raised by the excise tax will be very close to zero.
Of course, it may be that the people who will be affected by the excise tax are wealthier than those who will not. Indeed, I assume many of them are. But the differences would have to be huge for the effects of the excise tax to grossly outweigh the loss of taxable income on the other side of the ledger. And a lot of people getting Cadillac insurance seem to be public employees and union members who have exchanged higher wages for plusher benefits; they're not paying a 40% marginal rate on any extra wages they'll get out of this.
Update: I got a little clarity on this from a source in the know, and the reason it's close to zero is not offsetting upward pressure. That's because those tables cover the per-person cost, so even though adding dependents raises the per-policy cost, it pushes down the per-person. (Note: the excise tax is leveled per-policy). The explanation for the zero is simply that all of the effects are small, possibly approaching zero, and so zero is included as the upper bound of the range.
As the report says, this market is so large--a trillion or more--that even small percentages can raise significant tax revenue. But my source confirmed that the closer the eventual number approaches to zero, the less revenue that excise tax will be raising.
Copyright © 2010 by The Atlantic Monthly Group. All rights reserved.
This comment is tangential to your post's point at best, will add little to the discussion of your thesis, and stems from a stupid little ideological glitch in my own language-processing facilities.
You said " . . . that excise tax is supposed to be generating $34 billion a year for the treasury."
To "generate" something, in my mind, implies some productive or transformative force that adds to systemic value.
A tax does not "generate" anything. It confiscates what has been generated by others.
A new and imaginative means of imposing a tax generates wealth just as much as a bank robbery generates wealth. Using that word gives the activity more dignity than it deserves.
Does the CBO take into account the upwards price pressure that will be exerted when thousands of healthy people dump their coverage, pay the minuscule (relative to insurance) fine, and wait until they get sick to buy insurance?
I rarely hear anyone address this and I don't understand why this won't explode costs by flooding the pool with the sickly and inviting the healthy to get out. Its a massive disincentive for the healthy to buy healthcare- particularly when you are axing the 'Cadillac' plans that might attract the young and affluent as nice job perks.
I'm 33 and I've never hit my deductible. I'd be crazy not to dump by insurance in 2012 and buy it if I get sick enough to justify it.
I doubt many people will take this course of action if the legislation allows it. Most people aren't stupid enough to risk the huge bills that might result from an accident that takes place while one is uninsured. I mean, what if you spend a few days unconscious, and rack up $50,000 worth of bills by the time you get around to buying coverage? Also, while insurance companies won't be able to refrain from selling such people a policy, presumably the government could allow them to utilize a 30 (or 60 or 90) day waiting period for policies to take effect -- to cut down on precisely the kind of gaming the system you warn about. And the government could also, of course, simply make it illegal to turn down the group coverage provided by work unless you can prove alternate coverage. I'm not sure if either bill calls for such measures, but the point is it's not hard to think of some simple strategies for reducing or eliminating these sorts of potential problems.
I agree with your larger point, though: the existence of guaranteed issue necessitates putting some teeth into the mandate requirement.
I think the odds of being unconscious for multiple days with my wife or a family member unable to buy me insurance is so vanishingly small i can live with the risk. Even if i get hit by a one time disaster outside of a car accident (or which i could insure medical through the auto plan), bankruptcy is always an option.
It's not the potential 50K that scares people- its the half million dollar cancer treatment over several years etc. Take that risk off the table and I think a lot of people will decide to take their chances.
Agreed. For many, the premium increases combined with either potential taxes stacked on them or degraded coverage, would make it worth evaluating whether it is worth having insurance until facing a lengthy treatment illness. Otherwise there is money to be saved that might or might not have to be used for more minor issues.
Maybe so. Like I said, the existence of guaranteed issue means the government -- either with the initial legislation or with HCR 2.0 -- is going to have to give the mandate teeth. The most straightforward way to do this is to make opting in to group insurance the default required by law at places of employment -- and require workers to prove alternate coverage if they want to opt out. Obviously other strategies would have to be used to deal with people in the non-group markets. One suspects the various countries that achieve universality via mandates might offer suggestions. Ultimately, the IRS will get involved, I would imagine.
Re: It's not the potential 50K that scares people
In what alternate reality is that true? I have a solidly upper middle class income-- and I sure the heck would be scared about incurring an unexpected 50K bill. In fact, I've always been decently insured precisely because I know a bill that size (or even decidedly less than that) would be quite ruinous. And bankruptcy is not an easy (or certain) process. These days many people can't even file Chapter 7 but will be looking at an onerous five year repayment plan under Chapter 13 instead. I'm sure you can find some idiots who don't care, but I think most people (at least most middle class people-- the poor will be on Medicaid) will be responsible in this matter. To the extent they are not today it's due the fact that insurance premiums are beyond their reach-- the subsidies will help rectify that for persons of modest income. And people with health issues find insurance almost impossible to get outside a workplace plan, which problem will definitely be solved by this reform.
The overwhelming majority of accidents that leave you unconscious and require emergency surgery are either auto-related, or occur on the job. Moreover, even for those, it is often the rehab and follow-up care that are so expensive, not the immediate surgery.
Mark,
Yes, this is why they are also trying to force every citizen to buy insurance.
The nightmare scenario for premiums will be if the SCOTUS decides forcing people to buy health insurance is unconstitutional, because now the situation Mark describes above is one rational actors should find appealing. I'm not sure if they could strike down just the mandates or if the whole 2,000+ page bill has to go too.
The really ironic thing is the one group of people who will be able to avoid buying insurance is illegal immigrants.
This will make an interesting constitutional issue. Unlike other forms of mandated insurance, the forced purchase here is not to cover harm you might cause others or their property.
But as I understand it, the penalty for not buying insurance is like 1000$ (at least in the senate version). Obviously they are stuck between crushing the poor guy really cant afford a plan and the guy making a rational decision- but given the politics of that I just don't see Congress creating the type of harsh penalty (say tens of thousands of dollars) that would kill the incentive not to buy.
And it seems to me to be a progressive problem- as more people get out premiums rise creating yet more incentive to get out.
It's a typical nasty political compromise. The CMS estimates that aside from the people who are put on Medicaid, and thus not part of the insurance system, 12 million new people will have insurance—and 18 million will pay the penalties. That is, more people will choose to remain uninsured than not, which says that the penalties will not be high enough to get people insured. But that thousand a year will make things more difficult for the people who pay it. So it looks to be an act of punitiveness for its own sake.
Of course, the reality of the matter is that the cost of health insurance is going to be a genuine hardship for many people. I've looked at the CBO estimate, which has single people like me paying four or five hundred a month for insurance, and another $1900 a year for out-of-pocket spending on health care. That's all very well, but when I had health insurance, for about that much a month, I didn't visit my doctor or dentist for two years, because I never had spare money for office visits; I worried about paying the rent some months! If you raise the penalties high enough so that it actually is a worse deal to be uninsured than to pay for insurance, you'll see not merely unhappiness and resentment, but rage, I think. Especially in young people who are currently uninsured, and who will pay a disproportionately high rate to subsidize people my age.
The country is already headed for catastrophic conflict between the young and the old, from the collision of Social Security and Medicare with demographic and fiscal reality. This is only going to make it worse.
Yes, I agree. And it will be politically messy to punish those people by increasing the penalty. They can try to stigmatize those people as "irresponsible" but I think that's a hard sell in America where people generally expect to be left alone.
I think you meant: "exchange lower wages for plusher benefits..."
Don't worry.
The more bureaucracy you add, the more costs go down.
It's science!
The same science that's behind:
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A tax that is purely a punitive measure based on the premium price, rather than coverage composition, will not last long. It's a bad tax that could get the axe once its impact is fully felt.
Megan, You completely misread the CBO report and thus your points are quite wrong.
#1 The effects of the excise tax are not included in the 0-3% number.
From the CBO report page 9.
Big whoops!
#2 You conflate immediate cost changes with long run cost growth, making your post not only wrong in fact, but wrong in theory.
The change in premiums from things like increasing the number of people covered, or changing the allowable treatments and dependents is essentially a one time change in premiums. Whereas, the cost problem with healthcare is the long run growth, a continuous rather than instantaneous increase in premiums; a type of growth which something like the excise tax is particularly well suited to deter.
CBO page 26:
Because of the way the excise tax threshold is indexed, we're looking at an effective removal of the employer healthcare tax exclusion by inflation!
If this #2 is not clear to you, I can make a plot that clearly demonstrates the distinction. 'Cause, if you don't appreciate this difference it is essentially impossible to clearly evaluate any healthcare policies.
1) I think you may be more in error. The figures above appears to refer to the per-policy cost; Table 1 is per person, and discussed in the previous paragraph. It is, to be sure, ambiguous what "the figures above" refer to, but I discussed this with someone in a position to know, and they confirmed my interpretation. Specifically, when I asked whether the revenues from the excise tax's indirect effects would decline as that 0-3% figure approached zero, I was told that that was correct.
2) The CBO did a one year analysis. I discussed what they discussed. I am certainly grateful that you are willing to put your mad stats skillz at my service, I am afraid that this would do no good, because there are confounding effects, as well as the difference between per person and per policy costs. There are both downward and upward pressures at the policy level, though the mix tends to improve at the per-person level.
#1 You should ask your "someone in a position to know" again. Maybe they don't know as much as you think they do. The document mentions that they account for the excise tax separately more than once(CBO page 5):
Also, from the CBO director's blog:
http://cboblog.cbo.gov/?p=434
If they said it once, you could plead textual ambiguity. They specify repeatedly, the director's blog is particularly clear in context. You messed up. Time to post a correction.
#2 A. I'll admit I certainly do have "mad stats skillz" as well as superlative CBO report literacy, but my "skillz" aside, you couldn't help but second guess the subject matter of the CBO report before, suddenly you are bound to their rubric?
B. Whether they be costs or benefits, they constitute a continuous function that is proportional to change in overall costs, whereas the regulatory and subsidy changes take the form of a step function. For the purpose of making a coherent point, this distinction needs to be clear. The CBO,with different verbiage, is certainly not hesitant to make this clear.(So I guess it actually is on topic....)
C. The claim that there are ambiguous "confounding factors" without something specific is equivalent to the claim that we can't do any economic forecasting. There are always confounding factors. Economic forecasting is the art and science of eliminating these sources of error. Maybe it's true that economic forecasting doesn't work, but if you feel that way your constant commentary on these topics is extremely disingenuous.
It was an off the record conversation, so I really can't say more. But it is someone who is eminently qualified to describe the meanings of the report. That person is also the one who described the confounding factors that affect the excise tax, such as ceilings becoming floors, a process that will grow over time as insurance companies get better at gaming the system. This could mask any secular cost decline in various sectors.
If they are as or more qualified than the director of the CBO, then you should persuade them to post a correction on the CBO directors blog. You are basically saying that when they said "excluded" they really meant "included" which is confusing enough that it merits a clarification.
If you can't explain the contradiction in the text posted by the CBO you are, at minimum, failing to communicate, and more likely engaged in face-saving political hackery.
So please explain to me what they mean below(From the director's blog):
In the first paragraph of the quote they describe the 0-3% reduction for employer plans. In the second paragraph the director notes that the 0-3% premium reduction doesn't include the effects of the small business tax credit. In the third paragraph the director notes that the 0-3% premium ALSO EXCLUDES the effects of the excise tax.
Your current response is essentially "Nu-uh! My secret friend disagrees but I can't/won't tell you why." Why not improve this response by explaining how the CBO blog could be so incredibly misleading?
In response to all the comments about the financial penalty for not buying insurance. I agree that teh Senate bill's penalty provides an insufficient incentive. However, there is a non-financial incentive that made it's way into the Senate bill that may fix the problem. the Senate bill would set an annual open enrollment period for buying coverage through the exchanges. People would not be able to buy coverage outside the enrollment period, except for life changes (marriage, divorce, job loss, etc). This could prevent the problem of people waiting until they're sick/injured before buying coverage.
Of course, the devil will be in the details: 1) how long will the open enrollmentr period be? 1 months sounds ok. 6 months obivously too long. and 2) will we have the political will to force people to bear significant costs because they refused to buy insurance?
I've looked at the estimated annual rates . . . and note that those are "average individual rates": I'm 59, so my rates will be higher . . . and there is no way that I can afford to pay them. So the "incentive" effects of having a limited enrollment period are nonexistent for me. In our current situation, I'm living with the prospect of dying for lack of medical care if I get something that costs more than my accumulated savings; I can live with it under the proposed limited enrollment period setup. And a lot of young, healthy people will make the same calculation, and with a lot less risk than I'm taking.
So I think you guys will then have to decide how much you're prepared to do for a bunch of uninsured people, and whether you're prepared to let us become insured on a moment's notice when something really bad happens to us.
Part of the calculation is whether the actuarial value of an insurance policy to me is greater than the difference between the cost of the policy and the cost of the fine for being uninsured; if you make the fine high enough, it reaches a point of "well, I might as well just get insured, because the net cost is only X." But part of it is, simply, whether I can afford to pay for it at all. I see a lot of people blithely making assumptions about what other people can afford; but when you come right down to it, the person who has to pay is the best judge of the hardship involved.
Of course, there's an alternative strategy. I'm self-employed. I could voluntarily cut down the amount of work I do, till I fell into one of the heavily subsidized brackets. It would make me less productive, and lower the quality of my life; but the latter effect would be less if a big chunk of my earnings was going to forced purchase of health insurance. And as for being productive . . . I want to be productive to make my life better; if my being less productive makes things cost more for a bunch of people who voted to force me to buy expensive insurance I can't afford, that's an external cost. Too bad for you, but why should I care about your interests, when you're indifferent to mine?