The “Patient Protection and Affordable Care Act” legislation passed by the Senate includes a steep excise tax on high-cost, so-called “Cadillac” insurance plans. Supporters of the tax believe it will discourage “excessive” insurance and “bend the cost curve.” The evidence suggests that it will mostly discourage adequate insurance for particularly risky groups, and “bend the curve” mainly by threatening quality of care for sicker people.
Excise Tax Likely to Lead to Reduced Benefits, Higher Cost Sharing and/or Less Care
Advocates for the tax present it as a way to reduce an unnecessary subsidy for “lush” benefits. Yet both survey data and expert testimony report that more of the variation in costs of plans is due to the health status, size of firm and location of the members than to “lush” benefits. To avoid the tax, plans will cut benefits and increase cost sharing, which is the major tool insurers have to reduce costs.
• A recent study in Health Affairs by the nation’s leading experts on employer-provided insurance could only explain 6 percent of the variation in plan costs by the extent of benefits and form of coverage (e.g. HMO, PPO, etc.).
• All government and private-sector analysts agree that the majority of affected firms will avoid the tax by offering plans that cover fewer services and increase patient out-of-pocket costs.
Higher Out-of-Pocket Costs Caused by Reduced Insurance are Dangerous
Advocates for the tax presume that reducing “excessive” insurance will only reduce waste and not affect the quality of care for those enrollees. Insurers have shown little ability to reduce their packages save by increasing cost-sharing. Advocates cite the Rand Health Insurance Experiment (HIE) to argue increased cost-sharing will do little harm. Yet both the HIE and subsequent studies found that:
• People who consume less care due to cost-sharing normally use less care that experts consider necessary to the same extent that they reduce care that experts consider superfluous.
• People who are most likely not to seek care because of cost sharing and most likely to need care because of a chronic condition, may well suffer negative health effects. If the workers subject to the excise tax are in unusually unhealthy groups, as will often be the case, the tax will target higher cost sharing on precisely the wrong groups of people.
• In the HIE, once a person entered the medical care system, cost sharing had little effect on consumption of care. “Cost sharing ‘worked’ almost entirely by reducing the number of medical care episodes for which treatment was sought.” The study did not find health care effects for healthier and wealthier people, but it also was fairly short and enrollees disproportionately dropped out of the plans with higher cost sharing.
• Subsequent studies have found that reduced utilization of some services due to cost sharing was associated with increased use of other services later. Amitabh Chandra, Jonathan Gruber and Robin McKnight found that higher cost sharing for physician services and drugs were associated with greater rates of hospitalization among retired public employees in California. A Canadian study of prescription drug cost sharing found that “when cost sharing for prescription drugs increased, the demand for prescription drugs decreased and the demand for physician visits increased.”
Employers Lack the Power to Control Health Insurance Costs
The literature about the health insurance industry, and simple observation, show that employers treat health insurance like any other business expense, continually shop and bargain, changing their benefit packages and trying to contain costs.
• It requires heroic assumptions to conclude either that employers have not been caring “enough” about costs given the tax exclusion or that, even if they cared more, they could do much about it, just because the tax code changed.
• What employers lack is not interest in controlling costs. They lack the power to control costs. There is no other advanced industrial democracy in which isolated employers are expected to get good deals from powerful insurance and medical industries.
The Excise Tax Is Not “Tax Reform”
Advocates for the tax believe it is a step towards eliminating a tax preference that favors higher-income employees, and so will make the tax system fairer. This is highly questionable.
• Because health benefits are a larger share of income for lower-wage workers, the current tax exclusion is a larger share of income for them than for higher-wage workers.7 In this sense it is “progressive,” not “regressive.” Conventional wisdom has it wrong.
• Advocates for the tax assume employers would give all employees the same money in wages that they now receive in health benefits. Not only do surveyed employers say they do not plan to do so overall, but there is no evidence that an employer that dropped $12,000 in coverage would give the same $12,000 raise to a worker earning $35,000 as to one earning $70,000.
The Excise Tax Is Bad Health Policy – and There Is A Better Approach
Taxing people with “excessive” health benefits may sound attractive, but the excise tax will erode health benefits and drive up costs for people with merely adequate health benefits.
• If it were true that health plans with high costs meant that benefits were excessively generous, none of these criticisms would be so important. But if high costs are associated not with particularly generous benefits, but with greater need for care, then the excise tax could contradict the whole point of health insurance, and of health care reform.
• Advocates who believe some benefits are excessive should support a simple alternative: Define a maximum benefit package, and eliminate the exclusion for coverage that exceeds that standard. That would avoid all of the inequities of the excise tax approach.