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Healthcare Reform and Excise, Part III, or: “Are You Sure That’s a Cadillac?”

Posted Feb 15 2010 12:00am
Photo Courtesy of Wyrdlight

Photo Courtesy of Wyrdlight

Part II of this series described the general effects of the excise provision of the Senate’s Health Care Reform bill, the Patient Protection and Affordable Care Act (PPACA), as projected by CBO, JCT, and CMS.  The post concluded:  “The excise generates revenue, reduces affected premiums, and ‘bends the cost curve.’  So, what is the problem?”  Here, I will attempt to describe the problems with the excise provision as written in the Senate’s PPACA.

The most obvious flaw in the excise is its “kill-em all” approach to determining which plans would be subject to the 40% tax.  According to JCT, the excise would affect 27% of “single” employer-sponsored plans and 22% of “family” employer-sponsored plans by the year 2019.  It is hard for one to imagine that a quarter of all active employee health insurance plans are “Cadillac plans.”  Either the Senate was disingenuous in purporting to target “excess benefits,” or the excise provision was drafted in a grossly careless manner.  (Note:  The short excise provision in the PPACA uses the term “excess benefit” ten times.)

Simply looking at the text of the PPACA shows that the Senate failed to consider (or simply ignored the fact) that affected plans would be disproportionately composed of the following:

  • Plans with large number of women and/or older workers
  • Plans providing coverage in high-cost areas (as opposed to simply high-cost states)
  • Plans negotiated through collective bargaining
  • Plans covering those in high-risk professions that are not specifically exempted by the PPACA

These flaws garnered significant amounts of criticism, particularly from organized labor, whose members would be disproportionately affected by the excise.  During reconciliation of the House and Senate bills, labor unions achieved a tentative compromise with legislators regarding the excise, which would:

  • Exempt collective bargaining contracts, state and local workers and VEBAs through January 01, 2018.
  • Raise the threshold to $8,900 for single plans and $24,000 for family plans. (Taft-Hartley plans will be considered at the family rate.)
  • Add adjustments for gender and age, raising the threshold for plans that have significant numbers of women and/or older workers.
  • Raise the threshold for plans with workers in high-risk professions, affecting more than 9 million workers.
  • Raise the threshold for plans with retirees age 55 and up.
  • Exempt dental and vision costs beginning in 2015.
  • Raise the threshold on plans further if health care costs grow faster than expected from 2010-2013.

Putting aside the massive political implications, the compromise merely puts lipstick on the pig.  What about other affected “non-Cadillac” plans not exempted under the compromise?  What about the lost excise and income tax revenue?  How much would the compromise “un-bend” the cost-curve?

Furthermore, if affected plans choose to increase-cost sharing to avoid exceeding the premium threshold, the excise could actually decrease health and increase health expenditures:

If the excise tax pressures people to purchase health plans with increased cost-sharing (e.g., higher copayments), consumers may very well respond to this effective price increase by haphazardly cutting back on medical spending.  However, many of the interventions that are avoided may turn out to be health-improving and/or cost-effective. This problem is especially true for vulnerable populations. Research has demonstrated that low-income and chronically ill populations are generally harmed by higher cost-sharing and may actually incur higher overall costs in response to the introduction of this cost-sharing, as they cut back too much on the cost-effective managing of chronic conditions.

Research has found that the optimal cost-sharing rate for many chronic conditions and large classes of prescription drugs is very low or even zero. This same research shows that increased cost sharing in certain areas (e.g., prescription drugs or primary care) can lead to higher overall costs due to increased utilization in other areas (e.g., hospitalization).

Bad ideas are Congress’ second-most abundant resource.  Really bad ideas are its’ first.  The excise on high-cost employer-sponsored insurance plans constitutes the latter.  I hope that continuing to discuss the excise provision may deter Congress from considering any similar provision in future legislation.

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