Network News

X My Profile
View More Activity

Explaining the excise tax

If a new tax is passed and no one actually pays it, can it fund health-care reform?

It sounds like a zen koan for public policy students. But the Senate Finance Committee is banking on it. That is, in short, the theory behind the excise tax, which is projected to pay for a quarter of health-care costs in the first 10 years, and more after that.

On a superficial level, the policy is simple enough: Health-care premiums above $21,000 for families, and $8,000 for individuals, are hit with a 40 percent surtax. So if your family's insurance plan costs $23,000 a year, then $2,000 of it will be taxed at 40 percent. The tax will be levied on the insurer, who will in turn pass it onto your employer, who will in turn pass it onto you. But that's only if it doesn't work.

If it does work, your insurer will design more affordable plans that don't run afoul of the tax because your employer will refuse to purchase plans that do run afoul of the tax. That's the point of the policy: to give employers an incentive to become more value-conscious purchasers of health-care insurance. "Employers are not shopping very well," says MIT economist Jonathan Gruber. "They're signing up with Blue Cross or whichever insurer they know, because what do they care? They just pass it onto wages." But employers don't like wasting their money and workers don't like big jumps in health-care costs.

According to the Joint Committee on Taxation, the tax will raise a shade over $200 billion over the first 10 years, and more after that. The bulk of the money -- $142 billion, according to the JCT -- will come because people won't pay the tax. Employers are expected to choose cheaper plans, and redirect some of that money into paychecks. That means more of a worker's compensation will be in wages, and wages, unlike health-care benefits, count as taxable income. That's how the tax raises money even if it's not being paid.

The excise tax was not the first choice for most policymakers. Health economists think the primary distortion in the health insurance market is that insurance provided by employers is tax deductible. That means a dollar paid in health benefits is worth more to a worker than a dollar paid in wages. Originally, Sen. Max Baucus sought to fund health-care reform by capping the employer deduction. But unions and employers howled, and the Senate Finance Committee quickly backed off.

The excise tax was a compromise thought up in Sen. John Kerry's office. Actually, "thought up" isn't quite the right term: It was unearthed by a clever staffer combing old ideas from the 1994 reform effort.

The appeal of the proposal is that it has the same effect as capping the deduction, but with very different politics: It taxes "insurers" rather than "employers," which sounds a lot better. The tax, however, is passed down to employers, so the impact is virtually identical. If anything, the rhetorical populism obscures a policy that's actually a bit less progressive. The excise tax hits all qualifying insurance plans at 40 percent, regardless of the worker's income. Capping the deduction would mimic whatever tax rate the worker was already paying, which would mean lower-income workers would face a smaller burden. "The irony," says the New America Foundation's Len Nichols, "is that they made it more friendly to the unions, but they made it less friendly to the union’s workers."

They also made it more friendly to the deficit. Early on, the tax will hit relatively few people. The average cost of a family health insurance policy in 2009 was $13,375. In most cases, it takes a strikingly generous plan to pass that $21,000 threshold (there are a few exceptions, like workers in dangerous jobs who have health insurance premiums reflecting the risks of their occupation). But the trick of the excise tax is that the cap grows at the same rate as the consumer price index, plus one percentage point. That's a lot slower than health-care spending, which means that more and workers will see their policies bumping up against the tax. What begins as a tax on generous policies could quickly become a tax on average policies.

When a policy bumps up against the tax, a couple of different things could happen. One is that the employer just passes along the tax, either increasing premiums for the employee or taking it out of wages. The other is that the employer chooses a plan that's beneath the threshold. That plan might have a higher deductible, or more co-pays, or tighter networks, or less coverage for brand-name drugs. It will, in other words, be more like the managed care of the 1990s, which brought down spending and didn't hurt health outcomes, but which people really didn't like. "Managed care worked," says Gruber, "but workers didn’t know it. They didn’t see the benefit. We've got to make them feel the pain of not reforming and enjoy the benefits of reforming." In this case, the pain will be the excise tax. The benefit will be the higher wages they get, and the lower tax burden their children face, when their employers begin choosing higher-value policies. The question is whether they'll ever realize there's a connection between the two.

The other hope is that the rest of the bill -- in particular, the delivery system innovations and the modernizations of the health-care system's infrastructure -- will also work to push down costs, and so growth in the system will slow and the excise tax won't move down the income ladder. "It's an implicit bet on reform working," explains Harvard's David Cutler. "If we can't figure out how to make the cost savings work, the thing will blow up." That's true not just for the excise tax, but also for the subsidies, and for Medicare, and for everything else. If spending doesn't slow, then the system collapses. In that scenario, the excise tax isn't so much a tax as it is a cost-control measure. "The underlying goal is to provide a strong-enough incentive for reducing premiums that nobody has to pay it," says OMB director Peter Orszag. If we don't become a nation of tax evaders, in other words, the policy will have failed.

By Ezra Klein  |  October 20, 2009; 1:55 PM ET
Categories:  Health Economics , Health Reform For Beginners  
Save & Share:  Send E-mail   Facebook   Twitter   Digg   Yahoo Buzz   Del.icio.us   StumbleUpon   Technorati   Google Buzz   Previous: Lunch break
Next: Explaining the excise tax: part 2

Comments

I'm confused - instead of increasing wages, why won't employers just take that dollar not spent on health care and increase dividends? What's to prevent this from being a massive transfer of wealth (granted, not of much actual value as the health care dollar is not being spent productively, but value nevertheless) away from workers?

Posted by: reader44 | October 20, 2009 2:08 PM | Report abuse

unions are against the excise tax because they feel (rightfully so) that their membership cannot afford plans that reduce costs (ie, higher copays, deductibles etc) but its those plans that statistics show raise the cost of coverage more because of the greater access at lower price points. Once price points (ie copays) are raised, costs go down which explains the pricing. Employers of non-union employees have already been going to these higher copay plans for years. Now that you give them a target the only ones paying that $200 billion are the union plans.

This is the reason SEIU is stewing. They bought the election and now they're getting the shaft!

Posted by: visionbrkr | October 20, 2009 2:10 PM | Report abuse

"It's an implicit bet on reform working"; I would say this is about the right characterization and such risks should be okay; we have to take those.

Another related point - Congress enthralls itself by increasing AMT tax limit; at least for last few years. Same way if medical costs increase, they will enthrall themselves by increasing the limit and making a great show of 'tax cuts' to public. Other side of the coin will be - Conservatives will attack any such increase every year which Liberals will have to defend. In short, there will be annual 'brawl' with an opportunity for grandstanding by Congress folks; which they love anyways so much. I think we should look at it as positive since such brawls keep Congress busy from inflicting any more longer term damages....

Posted by: umesh409 | October 20, 2009 2:25 PM | Report abuse

"If we don't become a nation of tax evaders, in other words, the policy will have failed."

No, no, no. Not "tax evaders", it's "tax avoiders." Tax evasion is lying to illegally avert a properly assessed tax. Tax avoidance is changing your behavior to legally become not-subject to the tax.

And yes, we're already a nation of tax avoiders.

Posted by: karichisholm | October 20, 2009 2:34 PM | Report abuse

Anyone want to bet this will simply shift the cost to employees? A "cheaper" premium is the result of higher co-pays and deductibles. While this is a good thing, I doubt any "progressives" will agree with me about it...

Posted by: kingstu01 | October 20, 2009 2:40 PM | Report abuse

Reader - this has exactly been my complaint with this line of reasoning. It puts the burden on workers, and assumes that employers will pass on the savings - at a time of massive recession when "profitability" is such a powerful argument and when mass unemployment reduces bargaining power.

Posted by: StevenAttewell | October 20, 2009 2:43 PM | Report abuse


I have a bit of a hesitation around the excise tax because it presupposes employers (specifically, HR benefit managers), will make good choices.

That's not always been my experience. They can be a bit of a weak link in employer-based insurance if they don't understand benefit design. And employers who demand lots of customization (and that insurers who try to sell it to them) just add even further to the admin cost disparity between public and private payers.

Posted by: ThomasEN | October 20, 2009 2:46 PM | Report abuse

Here's the case for taxing some health benefits:

I have a 45 percent marginal tax rate (federal, FICA, Medicare, and state) and a 10-year-old diabetic child. In other words, because I get my health insurance through my employer, Uncle Sam, because of the employer exclusion, subsidizes 45 percent of the cost of my health plan.

The waitress at the local diner who served you and me breakfast last Sunday morning also has a 10-year-old diabetic child. Unfortunately, her employer doesn't offer her health insurance, so she gets no tax subsidy (except the paltry medical expenses deduction) when she goes to ehealthinsurance.com, and purchases health insurance for her and her 10-year-old diabetic child.

In other words, the waitress's tax dollars are subsidizing my health insurance. Does this seem fair?

Over the next 10 years, we are estimated to spend $3.5 trillion on the tax subsidy for employer-provided health insurance. Surely we can find a more equitable way to spend this money. Taking a mere $200 billion from this $3.5 trillion tax subsidy to pay for the waitress at the local diner with the diabetic child's health insurance seems like a good start.

Posted by: BradGabel2002 | October 20, 2009 2:52 PM | Report abuse

This needs a little more nuance.

"Managed care worked," says Gruber, "but workers didn’t know it. They didn’t see the benefit. We've got to make them feel the pain of not reforming and enjoy the benefits of reforming." In this case, the pain will be the excise tax. The benefit will be the higher wages they get, and the lower tax burden their children face, when their employers begin choosing higher-value policies. The question is whether they'll ever realize there's a connection between the two."

These same exact economists believe that higher health care costs have led to stagnating wages. In other words, the "pain" and "benefit"-- already exist today: if an employer chooses a higher-value policy today, they'll have more to offer in wage increases. There has ALWAYS theoretically been a benefit to employees to reform the system. The difference with the excise tax policy is that employers no longer have a tax advantage to do it as well. Which gets to the overall point: there's no question that putting in a new tax will dampen demand to some degree-- CBO estimated it to be $200 billion or so in overall effect. But the overriding dynamic remains-- if you're in HR benefits, do you really offer your employees a worse plan than last year, but tell them they'll be getting more in a wage increase than would otherwise be the case? Its hard to see this having a strong effect-- the real impact from employer-based insurance isn't the tax advantage "encouraging" overly generous health plans, but that cost inflation is a hidden cost on wage growth. Giving employees all of the money upfront and actually letting them choose a cheaper plan would be a much more powerful effect than an excise tax, which will be similarly hidden to employees as the overwhelming annual cost increases in plan costs that already exist.

This whole tax thing has taken on a life of its own. Traditionally, the tax advantaged nature of health benefits has been seen as a distortive effect that is a contributor to cost inflation. Increasingly, you read what Ezra wrote here: "Health economists think the primary distortion in the health insurance market is that insurance provided by employers is tax deductible." No, they don't. The primary distortion is that the cost increases are effectively hidden from employees. The SECONDARY distortion is the tax implications. We need to fix the hidden cost one. Wyden-Bennett did that. The excise tax is its poor man's cousin.

Posted by: wisewon | October 20, 2009 2:53 PM | Report abuse

"That plan might have a higher deductible, or more co-pays, or tighter networks, or less coverage for brand-name drugs. It will, in other words, be more like the managed care of the 1990s"

Ha! Yeah, the slight shift in benefits to get under the excise tax threshold will be just like managed care! Nevermind the fact that the benefits on plans that are just under the threshold will still be far too rich, and that this is just a microscopic shift rather than a wholesale change in philsophy.

"If we don't become a nation of tax evaders, in other words, the policy will have failed."

Sounds like a great idea, we won't implement good policy because the unions don't like it, instead we'll introduce even more deadweight loss of tax avoidance to an already ridiculously complicated system.

Posted by: ab13 | October 20, 2009 2:55 PM | Report abuse

It's actually pretty revealing to see this post come right after Ezra's AHIP-bashing post. He rips AHIP for what in his eyes is opposing good policy out of their own self-interest, but the unions who "howled" and killed the idea of capping the tax exclusion get a pass. Pretty much everyone knowledgeable on this knows that the tax-favorability of employer health insurance is a big reason for the growth in costs, and that moving towards ending it is good policy. Where is the snarky post ripping the unions like you did AHIP, since they are also preventing cost control out of selfish self-interest?

Posted by: ab13 | October 20, 2009 3:03 PM | Report abuse

*****I'm confused - instead of increasing wages, why won't employers just take that dollar not spent on health care and increase dividends?*****

reader44: Most employers are profit-seeking institutions. So, in SOME cases they will indeed merely increase dividends or retained earnings. But in other cases they'll invest in new equipment. Or in more advertising. Or in more research. Or in paying down debt. Or in increased payroll to chase/retain better, more productive workers. They'll use the money, in other words, to make more money, and SOMETIMES that means spending more on workers.

Posted by: Jasper99 | October 20, 2009 3:08 PM | Report abuse

ab13,

Because unions are not opposing the excise tax out of a desire to make obscene amounts of money like AHIP is. Unions oppose the tax because of legitimate concerns that in the near future there is a real possibility that many of their members will have to pay for premium increases they can ill afford. You are correct that this is a bit of a short sighted stance to take, but your desire for Ezra to write nasty things about people who are vulnerable strikes me as a bit perverse.

Posted by: nklein1553 | October 20, 2009 3:16 PM | Report abuse

re-arranging deck chairs on the Titanic.

In a globalized economy we can't build the social safety net on the back of employers. If we believe that health care is a right not a privilege then finance it with a sales tax so that both imported and domestically produced goods bear the same burden.

GE recently advertised for 90 positions in Kentucky paying $27,000/year plus benefits i.e $40,000 plus. Same job done 365 miles north in Canada would cost GE $27,000/year. As American's we are exceptional but with health care costs rising at 7-10%/year how long do you think US employers can carry a ball & chain around their ankle.

Shame on President Obama for not realizing this basic truth and perpetuating the employer based system. BTW Ezra you have to have an income to avoid/evade taxes.

Posted by: rds7481 | October 20, 2009 3:16 PM | Report abuse

Mo' taxes will solve everything.

Posted by: Tupac_Goldstein | October 20, 2009 3:21 PM | Report abuse

@SteveA: I guess to be fair my reservation goes away if the jobs situation improves and there is actual competition for employees. And to be really fair reducing health benefits and taking those dollars and spending them on things other than wages is happening right now anyways and will happen more and more if costs aren't contained; in fact reducing the incentive to spend on health insurance, while it may not grow wages, may at least relieve some of the perverse negative pressure on wages.

Posted by: reader44 | October 20, 2009 3:22 PM | Report abuse

"Because unions are not opposing the excise tax out of a desire to make obscene amounts of money like AHIP is."

They are opposing it out of a desire to continue using their monopoly power to extract higher than market wages and benefits out of employers and local governments.

My city and county are both going broke primarily because of growth in employee benefit costs, and the local AFSCME threatens a strike if the city dares to propose increasing the copay for doctors visits from $5 to $10, implementing a deductible, or actually asking for an employee contribution to health premiums. Spare me the fawning over these unions just fighting to keep their members from going bankrupt.

I'd also be curious to know what definition you are using for "obscene" amounts of money, when insurers only make 3-5% margins.

"Unions oppose the tax because of legitimate concerns that in the near future there is a real possibility that many of their members will have to pay for premium increases they can ill afford."

So someone else should pay for them? Those obscene benefits they demand are the very reason for those premium increases.

Posted by: ab13 | October 20, 2009 3:24 PM | Report abuse

ab13,

Perhaps obscene was a poor choice of words, but by obscene I mean tens of billions of dollars. See the tables in this link:

http://wonkroom.thinkprogress.org/2009/08/05/are-health-insurers-making-too-much-money/

As for looking at margins instead of gross profits--I posted this comment in a different post about a week back. I apologize if you've already seen it:

A few months back there was an interesting discussion over at marginal revolutions discussing the relative profitability of health insurance companies:

http://www.marginalrevolution.com/marginalrevolution/2009/09/how-profitable-are-health-insurance-companies.html

I'm not really an expert, but it was my understanding that using profit margins for cross-industry comparisons is not a terribly accurate way to assess how lucrative your business model is. Walmart has pretty low margins, but I don't think anyone would say Walmart isn't profitable. A somewhat better way of measuring profitability would be to consider various risk-adjusted return metrics. Looking at Return on Equity (ROE) or Return on Invested Capital (ROIC) for example, will reveal that the insurance companies actually do quite well for themselves (for starters, Aetna has 13.52% ROE. As a comparison, Pfizer, which is insanely profitable by just about any measure, has an 11.02% ROE). Not that looking at ROIC and ROE don't have their disadvantages too--higher levels of of debt financing have a tendency to inflate ROE, for example. I'm not trying to attack ab13 here, but insurance companies crying poverty while still making rather large gross profits (gross in the technical sense of revenue - cost) is a bit disingenuous. The real story is slightly more nuanced.

I'm not familiar with the particular story you are referring to with the local the AFSCME chapter threatening to strike over a $5 increase in co-pays, but if what you are saying is true then it is indeed silly on their part. My overall point is that everyone has to pay if we are going to increase coverage. I completely agree with you that union workers should be willing to sacrifice more. But, to conflate the monopoly power of insurance companies with union employees strikes me as disingenuous. We all have to pay, including insurance companies.

Posted by: nklein1553 | October 20, 2009 3:36 PM | Report abuse

ab13,

its not just your city. ITS EVERY CITY. States once the windfall from the stimulus plan ENDS will continue to struggle with furlough days, laying people off etc. How many billions of dollars in budget defecits need to occur before the "cadillac retiree benefits" that were sold to union membership need to be "re-thought". I'm sorry but when those cadillac benefits were done no one expected the people to not only live as long as they are now but also to live through illnesses like heart-attacks, cancer, diabetes, etc. Sure its good they're living longer but those costs were never accounted for and at some point, someone will have to pay.


Maybe those 70-80 year olds that have lived off those benefits for years, never paid into anything close to the amount they've gotten out in benefits need to go onto Medicare like the rest of the country.

Posted by: visionbrkr | October 20, 2009 3:43 PM | Report abuse

also if people saw what actuarily a cost change from a $5 to a $10 RX copay would save an entire group its mindboggling. And even worse is the fact that those groups (ie unions) still force the line to be held to where they are even though its hurting their members more. They'd be better off negotiating a tweek decrease in benefit and a percentage increase in pay. Although if they did that then maybe they'd fear they'd lose power over their union membership.

Posted by: visionbrkr | October 20, 2009 3:46 PM | Report abuse

@nklein:

Yes, I am familiar with those arguments against using profit margin. What it boils down is that people who want to believe insurers are making too much money will just look for a measure that they think proves it. Comparing insurers to other industries doesn't make any sense.

Insurers have an ROE much higher than their margin because on a relative basis they don't have a lot of equity capital. ROIC would be a better measure, and you'll find that those are lower.

But all of this misses the entire point. The reason the amount of money insurers make would be relevant is if that amount was having a large negative impact on how much we pay for insurance. If they are making "too much" money than our premiums ought to be a lot lower, correct? But this is exactly why the profit margin is what matters. If you think Aetna's 13.5% ROE is too high, how much would their profits drop to bring that to what you think is a "reasonable" amount, and how much impact would that have on what we pay for insurance? The answer lies in the profit margin. Cut their returns in half and you've lowered premium a couple points. Even eliminating every last dollar of profit, which I don't think you would advocate, only lowers premiums by 3-5%. That's eaten up in one year or less by the amount that trend exceeds inflation, and we're right back where we started.

The profit issue is a red herring.

Posted by: ab13 | October 20, 2009 3:55 PM | Report abuse

ab13,

I agree with you that the profit issue is a red herring. From my limited understanding of the evidence I believe you are correct in arguing that even if we did away with insurance companies entirely by reducing their margins to zero that would not end cost growth as some on the more liberal end of the spectrum maintain. I think most knowledgeable people agree that the number one driver of cost growth is over-utilization of procedures that do not lead to better health outcomes. What we need to do is find a way to change behavior. However, this does not mean that there is NO money to be had from insurance company profits. Insurance company profits are quite large in absolute terms. By including some pretty indefensible assumptions in their report AHIP seems to be motivated by a desire to keep ALL of these profits. It is their motivation that bothers me. AHIP represents some very wealthy people. Unions do not. From a policy perspective you are right ab1, changing the behavior of consumers (especially consumers who belong to a union) is far more important than increasing taxes on insurers. But changing behavior is a difficult thing to do. Trashing unions, who for all of their problems do represent people who are vulnerable, is not the way to go about convincing people that their behavior needs to change. Everyone needs to change, including insurance companies.

Posted by: nklein1553 | October 20, 2009 4:16 PM | Report abuse

Also, I don't really understand this comment:

"If they [insurance companies] are making too much" money than our premiums ought to be a lot lower, correct?"

Couldn't insurance companies simply be pocketing the extra money or paying it out in dividends (hence their high ROE), or in executive compensation? I mean this isn't a competitive market where economic profits aren't possible we're talking about here. Am I missing something?

Posted by: nklein1553 | October 20, 2009 4:25 PM | Report abuse

@nklein:
"However, this does not mean that there is NO money to be had from insurance company profits. Insurance company profits are quite large in absolute terms."

But the absolute dollars of profit are meaningless without the context of how much revenue it is earned on. Insurance is a risky business, you've got to have a margin priced in for that risk. And insurers need capital, and that capital has a cost.

From your link, those 5 insurers made about $8B in profits. You say they need to pay, so let's say we take half of that away. At the $7K per capita we spend on health care that's about half a million people we can provide health care. Not a trivial number, sure, but barely a dent in the uninsured.

And since we've cut the returns in half, we've reduced the availability of capital to the insurers, making their costs go even higher.

"By including some pretty indefensible assumptions in their report AHIP seems to be motivated by a desire to keep ALL of these profits. It is their motivation that bothers me."

Their motivation is to stay in business. Insurance is a competitive business, they are not earning more profits than they should be. Some aspects of the current plans could destroy the entire industry.

Posted by: ab13 | October 20, 2009 4:29 PM | Report abuse

@nklein:
"

Also, I don't really understand this comment:

"If they [insurance companies] are making too much" money than our premiums ought to be a lot lower, correct?"

Couldn't insurance companies simply be pocketing the extra money or paying it out in dividends (hence their high ROE), or in executive compensation? I mean this isn't a competitive market where economic profits aren't possible we're talking about here. Am I missing something?
"

What I meant is that saying insurers make too much money means that the prices are too high. If they made the "right" amount of money our premiums would be lower. But as I showed, the amount premiums would be reduced by is trivial, and would be wiped out by medical trend within a year or less. This is the whole purpose behind attacking insurer profits, to get that money back to the insureds or paying for care, but the amount of that money is too small to have a meaningful impact.

Posted by: ab13 | October 20, 2009 4:34 PM | Report abuse

People hated managed care in the '90s, so we're going to do it again and this time around we're going to add a tax on top of it.

There's a reason why the administration wants to push the onsets of these programs out past the 2012 elections.

Posted by: tomtildrum | October 20, 2009 4:48 PM | Report abuse

ab13,

I don't know how fair it is to call health insurance "a competitive business." A lot of these companies have very, very large market shares. Granted, some insurers with large market shares are non-profit, but still.

As for profitability, yes insurance companies have to keep a lot of capital on hand in the event that they have to pay out money for claims. I guess this kind of makes them like investment banks, no? At least what investment banks were like before they started this crazy 100:1 leverage insanity. But, high ROE (and to a lesser extent ROIC) seems to me to indicate that capital costs are not really all that high. If they were why would investors be making such great returns? Although to be fair, these returns have been down recently.

I'm not trying to argue that we can solve all of our problems by simply taxing the bajesus out of insurance companies. All I'm trying to say is that conflating unions and insurance agencies is not a good idea if what you're trying to do is change people's behavior. If you want people who are not so well off to give something up you're going to have to convince them that those who are very well off are sacrificing too.

Posted by: nklein1553 | October 20, 2009 5:13 PM | Report abuse

No democrat who supports exempting unions from paying their fair share will win in any state outside NY, Michigan,and California. It is un-American that overpaid, taxpayer funded union thugs will get a higher exemption that middle and lower class employees who took jobs and considered the benefits.

Democrats selling out reform to the slugs of society and scrEwing the taxpayers.

Posted by: Cornell1984 | October 20, 2009 5:55 PM | Report abuse

OK, so this is to make health care consumers price conscious.

What will be done to make the elderly price conscious consumers?

Posted by: jimk8mr | October 20, 2009 6:05 PM | Report abuse

@@nklein
"I don't know how fair it is to call health insurance "a competitive business." A lot of these companies have very, very large market shares."

With some notable exceptions the insurance market is very competitive. The places where there is not much competition are usually because of onerous regulations that make them unattractive markets, and you're usually left with just the Blues in those places. They are not any more profitable than the places where there is competition.

"As for profitability, yes insurance companies have to keep a lot of capital on hand in the event that they have to pay out money for claims. I guess this kind of makes them like investment banks, no?"

Umm, no, not at all like investment banks.

"But, high ROE (and to a lesser extent ROIC) seems to me to indicate that capital costs are not really all that high. If they were why would investors be making such great returns?"

I don't think you're fully understanding this. Insurers need capital, and investors want a return in exchange for providing that capital. This is true for both equity and debt. Those returns ARE the capital costs. The investing community provides the capital needed to run an insurer. The insurer has to price the business to earn a return on that capital. A riskier business requires a higher return to attract capital.

"All I'm trying to say is that conflating unions and insurance agencies is not a good idea if what you're trying to do is change people's behavior."

I'm not conflating them. I'm simply pointing out how misguided it is for Ezra to demonize AHIP because they opposed this part of the bill, which according to him means opposing the only cost control aspect of the bill, while simultaneously giving the unions a pass for opposing what would be a much better way to control costs and an overall better reform idea.

Intentions and motives don't matter here. The excise tax is a bad idea that won't control costs. Capping or ending the employer tax exemption is a good idea that would help control costs and put us on a path to a more workable system. If AHIP is out of line for putting their own interests ahead of reform, the unions are even more to blame. But you won't see Ezra demonizing them the way he has AHIP.

Posted by: ab13 | October 20, 2009 6:25 PM | Report abuse

Cornell1984,

I guess you didn't go to the labor school at Cornell then? This union bashing seems over the top to me. Whether or not the more generous benefit packages of union workers caused lower wages or lower wages led to union members demanding more generous benefit packages is a chicken and egg paradox that probably cannot be solved. The fact is, corporate profit levels have gone way up over the past thirty years or so without much of a corresponding increase in wages. So what are union workers supposed to do? Just take all kinds of cuts in benefits lying down so they can get screwed along with everyone else. I'm all for solidarity, but that seems to me to be a little much. Workers everywhere are getting hurt. But to lay that on unions strikes me as dishonest.

Posted by: nklein1553 | October 20, 2009 6:36 PM | Report abuse

ab13,

Maybe you're right and I'm not understanding this. From:

http://www.investorwords.com/4248/Return_on_Equity.html

[ROE] is how much profit a company is able to generate given the resources provided by its stockholders. Investors usually look for companies with returns on equity that are high and growing.

It's my understanding that ROE is just another way to measure profitability by looking at how much money share holders get back in return for their investment. By this measure insurance companies do quite well. Also, looking at gross profits indicates that insurance companies do quite well. Profit margin is profit/revenue, and by this measure insurance companies don't do all that well. But I don't see why profit margins should be the metric of choice. Dividing by revenue seems to obscure the fact that insurance companies are making a lot of money. I'm not trying to argue that that amount of money is enough to solve the cost-growth problem, only to argue that insurance companies are indeed doing quite well.

As for the the comparison to investment banks, I don't understand why the comparison isn't apt. Investment banks have to keep capital reserves in case their investment fails. Insurance companies have to keep money on hand in case their customers get sick and need to make claims on their policies. Seems pretty similar to me, but maybe I'm just dense.

I also agree with you that capping or ending the employer tax exemption is a good idea. Unions should re-think their opposition to this, but I can see where they're coming from. Workers in this country have been hurting pretty badly for a long time now. Even if I disagree with the union's stance on some issues I can't find it in me to condemn them for wanting to protect their members. Insurance companies, on the other hand, seem to me to be doing just fine. But maybe I'm wrong. I appreciate your explanations.

Posted by: nklein1553 | October 20, 2009 7:04 PM | Report abuse

@nklein:
"It's my understanding that ROE is just another way to measure profitability by looking at how much money share holders get back in return for their investment. By this measure insurance companies do quite well."

Yes, ROE tells you how much profit is earned per dollar of equity invested in the company. Insurer ROEs look better than their profit margins in large part because they do not have to rely solely on the equity invested. They collect premiums and a lot of it goes right back out the door to pay claims. They do have to hold capital for reserves to ensure solvency, pay unreported claims, etc, but much of the money they need to operate comes in the door in the form of premium payments.

When you say "they do quite well". compared to what? Compared to other industries that have different risks and capital needs? ROE tells you nothing about risk. What is the "appropriate" ROE for an insurer to earn? Will the capital they need still be available if those returns are forced lower by government fiat? With less capital available will the risk of insolvency increase to unacceptable levels?

"Also, looking at gross profits indicates that insurance companies do quite well."

Gross profits is a meaningless number. The fact that some companies are very big and their gross profit is a large number says absolutely nothing about performance. Is an insurer with a $10 billion dollar block of business that earns 1% profit of $100M a better performer than one that has a $1B block and earns 5%, $50M? It's twice as much money right? How much fluctuation in morbidity can each one absorb before becoming insolvent? What is the probability of ruin of each one? Which one would you rather invest your own money in?

"But I don't see why profit margins should be the metric of choice. Dividing by revenue seems to obscure the fact that insurance companies are making a lot of money."

It doesn't obscure anything. It shows you how much of the premium they get to keep for themselves. Why would you call putting something on a level basis "obscuring" it?

The reason the profit margin is the appropriate metric is because it gives the most insight into what we're really trying to solve when we're discussing insurer profits. The reason the profits would be relevant is because we want to lower the cost of health insurance. To do that we can lower the cost of the underlying health care, reduce administrative expenses, or lower the profit margin. Since the profit margin represents only 3-5% of the total cost, it is not a very good source of cost reduction. There's just not very much room to move there, which is why it is a red herring. We won't solve anything talking about profits.

Posted by: ab13 | October 20, 2009 7:39 PM | Report abuse

We wonder how GM's (excuse me OUR) sales of Cadillacs are doing now that the head of GM, Barack Obama, has seen fit to besmirch the brand by referring to "Cadillac" health insurance plans. I hate Cadillacs, too, Barack. And the people who buy them and the people who make them and offer them to the public. I think they should be taxed at 40% to get people to quit buying them and the company to quit offering them. Once we get rid of Cadillacs, we'll go to work on Buicks. Pretty soon you will all be driving little battery-powered Soviet-style box cars and your health insurance will be free, offered by only one entity and of
predictable quality. The US government will tax you if you do not buy health insurance and tax you if you buy too much of it to suit their tastes. Is this a great country or what?

Posted by: chatard | October 20, 2009 8:44 PM | Report abuse

i love how obama has done his second flip flop of health care reform (the individual mandate is the first) now that he is embracing mccain's benefits tax idea that he attacked in dishonest attack ads.

Posted by: dummypants | October 20, 2009 9:08 PM | Report abuse

This is insane -- or vicious. It incentivises employers and insurers to provide worse (less useable) insurance to the poor schmucks who are stuck with their offerings. That's reform?

Posted by: janinsanfran | October 20, 2009 9:37 PM | Report abuse

I don't think this tax can be avoided. I pay $14,000 for my Kaiser HMO plan, not counting dental or vision. By 2016 when the exchanges are fully implemented, this plan is projected to cost $21,000. The only way I can avoid the tax is to switch to a lower AV plan that will increase my out-of-pocket costs. No thanks, Barack.

Posted by: bmull | October 21, 2009 5:14 AM | Report abuse

The excise tax is a criminal idea; it is a back door tax on the middle class. As rightly pointed out the cost will trickle down onto the employee while the democrats can lie to our faces and say they did not increase our taxes.

Worst part is we middle class folks whom already pay for our own health coverage will get taxed to pay for someone else’s coverage. It feels like I am being punished for good life planning and being responsible; like success and careful spending is now a sin. How dare I move from lower middle class to upper middle class, tax people like me straight back to middle class and cause me to struggle as you lessen my compensation and take home pay while the cost of living increases.

Posted by: flonzy3 | October 21, 2009 1:10 PM | Report abuse

How come everytime the government comes up with a plan they say will be better for everyone it always means I have to pay out more of what I earn? I'm paying around $650 a year for my healthcare. The government says hey everyone needs coverage and we don't care what your thoughts are because we are the government and know whats best for you. Oh by the way its going to cost you triple of what you pay now but don't worry your benefits will stay the same. The really sad thing about all this is that even if the government had the money to do all these things that are done in my best interest, they would find a way of spending it all asking for more.

Posted by: rainman2 | October 21, 2009 2:24 PM | Report abuse

I think this is a stupid idea and it shows just how off track the entire health care "reform" effort has strayed.

The point of health care reform is supposed to be how to construct a sustainable financing model that will enable every American to get treatment when needed without bankrupting himself, his family or his country.

This proposal, has ZERO to do with that objective -- it's just an attempt to raise money to extend the broken insurance model to more people.

I don't understand why we would penalize anyone for being willing to pay for greater security. Why should any plan carry a surcharge just because it offers something that another doesn't? If one plan includes hearing aids or better rehabilitation coverage, what's wrong with that?

Instead of using insurance plans to raise money to subsidize insurance for others, why not just get rid of the employer exclusion? Let individuals exclude the value of their premiums (up to a "reasonable" limit) then pay whatever their marginal tax rate is on the remainder. That would much fairer than this stupid idea.

Posted by: Athena_news | October 21, 2009 6:53 PM | Report abuse

The fact of the matter is that there is no "health care reform" before Congress. There is only insurance reform. AND the only people who will benefit are the very wealthy and people who work for the government. There is no suggestion of reduction of costs or benefits for those who are the government payroll. If we really need to reduce benefits, lets get rid of all government provided health care that is more than that proposed for the lowest income non-government person. No member of Congress, or Court Justice, or the President gets more than Joe-on-the-street.
The figures that Congress is using to claim that their plan will reduce costs are false and misleading and the figures that claim that the US health care system is not good are also old, false, and misleading. ANYONE in this country, legally or illegally, can receive health care, drugs and supplies. I admit that they do have to apply for it and many get their care in the emergency room, but the fact is they all get care.

There are many ways to improve distribution of health care services in this country, Unfortunately, the Congress does not intend to use any of them.

Posted by: tenshi1 | October 22, 2009 2:44 PM | Report abuse

There seems to be some conflicting policy decisions going on.

1) Purpose of health insurance is to help the under-insured by mandating coverage levels (Gold, bronze, platinum, silver, etc.)

2) At the same time we are taxing cadillac plans, which will probably fall into the cagetories above.

3) Theory is that employers will shop smarter.... Well, which is it? Do they want employers to offer less-generous plans, or do they want the plans to cover more? Seems like we shouldn't be encouraging a platinum or gold plan under the exchange. The exchange is 'blessing' a plan with an actuarial value of 90%. Isn't that a 'cadillac plan'?

4) FSAs subject to 2 caps... $2,500 AND excise tax doesn't make sense.

Calculating the tax is going to be a nightmare for companies of all sizes. If the belief that the employer exclusion is the problem, then address that. Don't hide it under political cover of a complicated 'excise tax' that's going to drive everyones costs up.

Posted by: winstonsalemgk | October 23, 2009 10:54 AM | Report abuse

The comments to this entry are closed.

 
 
RSS Feed
Subscribe to The Post

© 2010 The Washington Post Company