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.
Capping the tax exemption at the cost of catastrophic health insurance, as Tom Leith suggests, seems very misguided to me, for the simple reason that it reinforces the disastrous “insurance model” of American health care. There should be *incentives* for patients to have regular physicals and for those with chronic conditions to get appropriate care from specialists. The problem, as the original article points out, is not that people go to the doctor too much or that their getting too much care. The problem is that the care is delivered inefficiently.
“Instead of making people pay more when they need health care, we should provide incentives for people to enroll in more efficient health plans.” … or we should educate people on what is the more efficient plan. I don’t think it is a problem of incentive, most people just understand what plan is best for them.
Rule of thumb data and pretty close is that 20% of insured are large or jumbo groups with multiple health plan choice with varying participation costs. This segment is shrinking. Around 70% is small group without an individual choice but no underwriting. 10% and growing fast is individual plans with ultimate choice, high cost (total participation), and underwriting to make it work–concept of insurance.
I agree with Kramer’s premise here, but wonder about this:
“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.”
I’ve never worked for an employer where I had a choice. And if what often hear is true, that most people are employed by small businesses, I suspect MOST people with private insurance don’t have a ‘choice’ in that sense -their benefits administrator does.
I quibble here because I really see this talking point of choice (how much we have, how much we demand in any reformed system, how much is fair) as being handled too cavalierly by all sides. Does anyone know good statistics on this?
> I see you were listening to NPR this morning 🙂
That’s a good guess Margalit: I did (mostly) listen to the DR Show, missed Morning Edition. But really I’ve been reading Aristotle’s _Politics_, the Pope’s recent encyclical, and thinking about Chesterton’s _What’s Wrong With the World_ again. Also just read Cannon’s _Healthy Competition_ and of course lots of other stuff linked and referenced by THCB. It seems to me the main problem we’re having goes back to the founding: are we Jeffersonian democrats, or Hamiltonian democrats? And so I think the question “shall there be more or less government involvement in life” is malformed. On the DR Show today they talked about monetary and industrial policies a lot and did touch on the main question “What is the purpose of an economy?” which ought to be at the root of every policy decision.
We should go have coffee again and catch up.
Hey Tom, I see you were listening to NPR this morning 🙂
> 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.
I don’t quite get what the income adjustment accomplishes, but a cap on the tax exclusion might be a useful, politically feasable thing with a great big if, apropos Maggie Mahar’s recent article:
IFF* we’re not going to have a single premium-collector or a single payer. If we’re going to not mess too much with the structure of medical insurance, this question makes sense.
With this IFF in mind, I’d cap the exclusion at the cost of a so-called catastrophic policy. Anything else isn’t really insurance, properly understood. If there is a person who truly “can’t afford” a $200 PCP visit or a $100 course of antibiotics, he doesn’t need medical insurance, he needs an adequate income.
This is the big question in our country: where is the line between public and private life, what is the balance between personal responsibility and social responsibility? What does it mean to be simultaneously a citizen of Missouri, a citizen of The United States of America, and a member of the St. Louis Ethical Society, a Catholic, or an Elk? How united are the states, anyway? What is the unifying principle of the nation? Shall we follow what David Brooks has called “The Conservative Way” or shall we adopt “The Liberal Way”, if we want to avoid overheated terms, the “Distributist Way” or the “Collective Way” ?
Now that I think of it, maybe a new sort of tag might be useful on THCB: “Collective” and “Distributist” representing the tendencies of the policy or proposal under consideration.
*that’s mathematician for “if and only if”
I find it ludicrous to even use the term “cadillac” health care plan.
We have ALL- rich and poor- been duped and swindled by a US medical enterprise whose interventions don’t work or are unsafe about 1/3rd of the time!
That my colleagues is the REAL untold story.
Dr. Rick Lippin