Myth-Making on the Misnamed Cadillac Tax

The Senate bill taxes the old and sick stuck in high-cost plans to pay for health care reform. The House taxes the rich. Defenders of the Senate's excise tax appear incapable of absorbing counterfactual information, as health care analyst R.J. Eskow pointed out in a post on Huffigton Post yesterday.

I agree. As the old saw goes, everyone is entitled to their own opinion, but not to their own facts. And what we're seeing now as the debate winds down to its final weeks is myth-making on a grand scale.

Take Ezra Klein's posting on the Washington Post website yesterday, for instance. Here, in order, are the inaccurate representations he makes about the tax:

"The House's surtax is a tax that's meant to raise revenue, much like an income tax. The excise tax is a tax that's meant to change behavior, much like a cigarette tax."

The excise tax is slated to raise $35 billion a year by 2019 -- more than any other provision in the bill. Eliminating extra payments for Medicare Advantage, which raises $22 billion that year, is the second largest revenue raiser.

The assumption that Klein and the Congressional Budget Office make is that 80 percent of that money will come from higher taxes paid on higher wages, since most employers will reduce the generosity of their plans to get them under the cap to stay competitive. Voila! That bends the health care cost curve down.

But where's the curve-bending (the changed behavior) in this plan? The CBO admits that health care spending under reform by 2019 will be 20.9 percent of GDP. Without reform? It's projected at 20.8 percent of GDP.

"More expensive insurance really is more lush insurance. Anyone who has chosen between their work's PPO and its HMO knows that."

The latest study on this subject published in Health Affairs, a peer-reviewed journal, says just 3.4 percent of the extra cost in high-cost plans is attributable to extra benefits.

The reason why PPOs seem more expensive is that employers usually put all the extra costs of a PPO plan on the employee who choses that option, and they feel it directly in their paycheck. According to the 2009 Kaiser Family Foundation survey, the average PPO family plan cost $13,719, the average HMO family plan cost $13,470. Big deal. Earth to Ezra Klein: Take a good look at the numbers in the survey and you'll understand why high-cost plans are not high-cost because of extra benefits.

"All employer-based insurance, right now, is exempt from taxes -- a regressive and cost-increasing decision that this barely begins to redress."

The tax exclusion for health benefits is not as regressive as most analysts claim, and repealing it is very regressive, at least for workers whose employers don't slash benefits to get their plans under the cap. The reason is simple. Health benefits are evenly distributed (except for true Cadillac plans, like those enjoyed by the executives at Goldman Sachs). Employer contributions for health benefits are the same whether the head-of-household works in the mailroom and earns $25,000 a year, works in the sales office and earns $75,000 a year, or works in the front office and earns $125,000 a year. At firms with high cost plans because they have older and sicker workers with more chronic disease, each employee is offered the same, say, $25,000 family plan.

Now let's look at the income and tax implications of that plan. For the mailroom worker, the benefit represents a 100% boost in wages. The sales office worker gets a 33% hike, and the front officer worker gets a 20% increase. Health benefits are very progressive.

The tax implications? Just the opposite because the income tax is progressive. By excluding that benefit income from taxation, the mailroom worker saves $2,500 in taxes (at a 10% rate); the sales office worker saves $4,500 (18% rate); and the front office worker saves $7,000 (28% rate).

Now let's add in the 40% excise tax. Each worker under the Senate plan will be charged $800 for their plan (40% times the $2,000 "excess" benefit). Since they get no extra income because their employer decided to keep the high-cost plan (which at least 20 percent will under the CBO's projections), that's an effective tax rate on the mailroom worker of 3.2%; on the sales office worker of 1.1%; and on the front office worker of 0.6%.

How progressive is that? How does a very regressive new tax redress the lack of tax progressivity in a benefit that is very progressively distributed?

"No one should be under the illusion that this tax will not cause some pain . . . You cannot design a cost control that won't. The health-care cost problem is not a problem of the rich and famous. It is not a problem that can be painlessly solved by limiting insurance company profits (much, much too small) or reducing payments to providers (which would mean long waits and less access). Everything has tradeoffs. Everything has losers."

Now we get to the nub of the argument. Klein speaks for the army of economists and analysts who refuse to take on the special interests in health care who charge high prices, order unnecessary care and refuse to practice evidence-based medicine because refusing to do so pads their bottom line. Reducing payments to providers will result in long lines and less access? I am used to hearing such arguments from the lips of drug industry lobbyists and the physician guilds, whose average salary is now north of $300,000 a year and most of whom will not lose one dime from health care reform. It's somewhat shocking to read it in one of Klein's blog postings.