The debate over proposals to tax health insurance plans is confusing and frustrating. The proposals are usually described as a tax on “gold plated” or “Cadillac” health coverage. According to the media and many spokespeople on the Hill, these health plans with “overly generous benefits” supposedly encourage overuse of medical services and drive up the overall costs of health care. People express outrage that Wall Street executives have expensive tax-subsidized health benefits that include coverage for cosmetic surgery. Is this really a problem? If we fix this, will it raise lots of revenue and bend the cost curve? I don’t think so. The problem is not “Cadillac” coverage, whatever that is.
I know that some economists believe that people ought to have more “skin in the game” by paying a significant share of the costs of medical services they receive. I agree, but only up to a point. Health care services are not like other goods and services. If you give me more money, I might build a fancier house, buy a new car, go to more concerts, fly first class, etc., because I like all of these things. Frankly, I don’t particularly like going to the doctor, and I wouldn’t spend my extra income on more blood tests, CT scans, colonoscopies, or surgeries (ouch!). It’s fine to have modest copayments to discourage unnecessary doctor visits or to encourage use of generic instead of brand name drugs, but onerous cost sharing when someone is seeking medical care won’t solve our problem. A tax on “Cadillac” plans won’t raise much revenue, and it won’t bend the cost curve in any significant way.
A recent article by Alec MacGillis in the Washington Post makes the same points. Most of the experts he interviewed agreed that increasing copayments and deductibles is unlikely to slow the growth of health care costs. But I think this misses the point, or – to be more precise – mixes together two different issues. When people are making decisions about health care that affect their pocketbooks, there are two steps. Before deciding whether to go to the doctor or to undergo surgery, people have to decide which health plan to choose. Most people who work for large employers usually have a choice among multiple health insurance plans, usually an HMO and several PPOs. (For example, federal government employees in Portland, OR, can choose among plans offered by Blue Cross Blue Shield, Aetna, United, Kaiser Permanente, and several others.) The real issue is that most people don’t have much financial incentive to choose the efficient, high value health plan that is offered to them. Most large employers pay the full premium for employees (or a % of the full premium), regardless of the cost. These employers are, in effect, subsidizing the inefficient health plans and providers. And this is encouraged by the open-ended tax subsidy for employer-paid health benefits. If the tax exclusion were capped at a reasonable level, people would have to pay more for higher cost health plans, and they would benefit if they chose a lower cost plan. (For more background, there are some useful articles about this issue by Jonathan Cohn, Ezra Klein, and Paul N. Van de Water.) When I say “higher cost health plan”, I’m not talking about richer benefits; this is about higher costs for the same benefits. How can some insurers’ premiums be lower, even for the same benefits? Some have made investments in IT and streamlined their claims processing systems, so their administrative costs are lower. Some work closely with groups of physicians and hospitals that are committed to using evidence-based clinical practices and reducing unnecessary medical services. But why would an employee join one of these more efficient plans if they don’t get to keep the savings? And why would a health plan go to all the trouble of becoming more efficient if their customers are not price sensitive? The bottom line: the proposal to tax “Cadillac” plans has populist appeal, but it is attacking the wrong problem. Instead of making people pay more when they need health care, we should provide incentives for people to enroll in more efficient health plans. A cap on the tax exclusion of employer-paid health benefits – ideally, adjusted for income – would allow people to benefit from choosing a more efficient, high-value health plan. It would also encourage healthy competition and help to bend the trend of health care costs overall. Bill Kramer is an independent health care consultant, focusing on health care management, finance and public policy. Bill served as a senior executive with Kaiser Permanente for over 20 years. Most recently, he served as Chief Financial Officer for Kaiser Permanente’s Northwest Region. More information about Bill may be found at www.kramerhealthcareconsulting.com.