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The difficulty of cost control

MIT economist Jon Gruber talks up the excise tax:

[T]here have been numerous criticisms of the Senate financing. Perhaps the strongest is that some insurance plans will be "unfairly" burdened. For example, firms with older employees may have higher insurance costs not because their plans are more generous but because the employees themselves are more expensive to insure. Thus, many claim that this is a tax not on excessively generous insurance plans but on those who happen to have high insurance costs.

But this argument misses an important point: The assessment proposed in the Senate is not a new tax; it is the elimination of an existing tax break that is provided to exactly these firms. Under current law, if workers are paid in wages, they are taxed on those wages. But if they receive the same amount of compensation in the form of health insurance, they are not taxed. As a result, the tax code has for years provided a large subsidy to the most expensive health plans -- at a cost to the U.S. taxpayer of more than $250 billion a year. To put this in proportion, the cost of this tax subsidy to employer-sponsored insurance is more than twice what it will cost to provide universal health coverage to our citizens.

The excise tax on generous insurance plans would simply offset this bias for the most expensive health insurance plans -- and only on a partial basis.

The excise tax has been sold as a sort of populist corrective to lavish plans, and it may, in certain cases, play that role. But more generally, it is the beginning of redressing an insane tax quirk that's driving health-care costs upward, and that no doubt benefits some people of middle income. Henry Aaron's idea to "base the tax on high-cost plans not on each company’s actual cost, but on the cost of each company’s plan as applied to a population of standardized age distribution," makes a lot of sense, but even after modification, the tax will hit many who are not plutocrats, and they will be much more upset about the tax than any of its supporters will be happy about it.

Our health-care system is quite bad, but it's also got a lot of winners within it, and even more people who think they're winners. And cost control, even in the best-case scenarios, will hurt some of these people directly long before it helps everyone else indirectly. That's why it's going to be so difficult.

By Ezra Klein  |  December 29, 2009; 8:12 AM ET
 
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Comments

This is exactly why we should just raise income taxes on the wealthy. It's a no-brainer way to raise more revenue in a progressive fashion without any additional bureaucracy. Of course it's too logical to actually be considered by Congress.

Posted by: AuthorEditor | December 29, 2009 9:15 AM | Report abuse

"But this argument misses an important point: The assessment proposed in the Senate is not a new tax; it is the elimination of an existing tax break that is provided to exactly these firms."

This is a dishonest argument. The way to equalize tax treatment of health insurance is to declare all health care as compensation and treat everyone the same.

If Gruber were really interested in equal tax treatment for all, he would not be advocating this stealth reduction of benefits. Health benefits should be included on earnings statement as part of total compensation and a new exemption for health insurance (an above the line exemption for everyone, not an insufficient deduction available only to those who itemize) implemented.

Individuals who pay for their own insurance would be treated more fairly and employees with Cadillac plans could either pay tax on the extras or opt for a less expensive plan.

The excise tax actually undermines individual choice and responsibility since the expected result will be to diminish coverage for employee-paid benefits and reduce the options available to those who already pay for their own coverage.

"And cost control, even in the best-case scenarios, will hurt some of these people directly long before it helps everyone else indirectly."

Health reform was supposed to reduce the cost of care, not reduce expenditures by eliminating care. Reducing coverage for "extras" like vision and dental may improve the bottom line for employers but it won't result in a better overall health for anyone.

Posted by: Athena_news | December 29, 2009 9:17 AM | Report abuse

Seems simple to me, tax all of the plans. As an owner of an S-Corp, I've been paying taxes on my insurance for years. I don't think you will really lose union support on this, they don't want to be exposed.

Posted by: staticvars | December 29, 2009 9:18 AM | Report abuse

Same sort of sloppiness and dishonesty that I pointed out adheres to Klein and Krugman, yesterday. Gruber is eternally full of sloppiness and dishonesty, too.

--"Under current law, if workers are paid in wages, they are taxed on those wages. But if they receive the same amount of compensation in the form of health insurance, they are not taxed."--

That's sloppy and incorrect. Not "they are not taxed", but "that amount is not taxed." One may infer what Gruber means, but it isn't what he said, and one wonders how deeply such laxity creeps into the rest of his work.

Also, the notion that not being taxed on a portion of one's earnings is a "subsidy" and that it is "a cost to the U.S. taxpayer" is the worst sort of cheesy dishonesty. It is, at essence, a corruption of the definition of the word "subsidy". A subsidy is an amount that is paid, not an amount that is not confiscated. Being "allowed" (the term is laughable in what is ostensibly a free country) to keep one's own earnings is not a subsidy. The grasping citizenry does not have a divine right to a portion of the fruit of one's labor. Governments endeavor to institute arbitrary "legal" rights, thusly, but my neighbor no more has a right to part of my earnings than do I have a right to a portion of his. Propagandizing otherwise is disgraceful.

Posted by: msoja | December 29, 2009 10:14 AM | Report abuse

At von Mises, today:

"Mussolini is dead, but his fascist idea lives — the idea that the individual is the creature of the state, that he exists for the state, that he has no rights except what the state gives him and can take away."

http://mises.org/daily/3942

Gruber's and Klein's claim to a portion of their fellow's earnings is a slice of Mussolini's fascism.

Posted by: msoja | December 29, 2009 10:39 AM | Report abuse

"The excise tax has been sold as a sort of populist corrective to lavish plans, and it may, in certain cases, play that role."

It'd be nice for you to actually just say that the excise tax was sold on dishonest rhetoric. The number of Goldman Sachs-type plans are extremely small, and aren't worth talking about. This tax, which itself is being dishonestly presented as an excise tax simply so Obama can maintain he hasn't broken a campaign pledge to raise taxes on those with less than 200K-- this tax is designed as Gruber suggests to slow the rate of premium growth by removing incentives from favorable tax treatment. Talking about the superich plans is significantly more dishonest than when Republicans talk about the estate tax being about farmers and small business. The latter at least makes up a couple of percent of the estates that are taxed. The Goldman Sachs plans are a small fraction on one percent.

Just because they have the right polocy doesn't mean they should get a pass on selling with with extremely high levels of spin. Someone needs to held them accountable for both.

Posted by: wisewon | December 29, 2009 10:41 AM | Report abuse

When did Jon Gruber, who created a system in Mass that results in people deferring care and many exemptions from the indivdiual mandate due to poverty, plus absolutely no cost control, become God in this debate?

Every consulting firm in the country that works for employers has said what will happen with this tax: Employers will cut benefits. There are no "extra" monies for wages, because the health cost increases will eat up any potential savings employers could receive. In other words, employers will be able to maintain health costs by cutting plans. Do people spend less when they have a higher deductible? The research is not persuasive -- studies show smart purchasing comes from targeted benefit chagnes, e.g., target disease maangement to diabetics, cardiac patients; deal with end of life care; increase drug compliance, etc. Research does not show that cutting benefits decreases costs -- costs are driven by the condition and quality of treatment, not by the benefit package.

For the whole story on the excise tax, see the following:

http://www.rollcall.com/news/41838-1.html

http://www.thehealthcareblog.com/the_health_care_blog/2009/12/the-coming-clash-over-cadillac-plans.html

http://www.nytimes.com/2009/12/29/opinion/29herbert.html?_r=1&ref=opinion

http://www.ourfuture.org/blog-entry/2009125221/what-your-favorite-blogger-may-not-be-telling-you-about-health-reform

http://www.salon.com/opinion/greenwald/2009/12/29/health_care/index.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+salon%2Fgreenwald+%28Glenn+Greenwald%29&utm_content=Google+Feedfetcher

Posted by: kaylamom1 | December 29, 2009 11:01 AM | Report abuse

As I asked in the comments at Gruber's article, in what bizarro universe is punishing people with good insurance the solution to the problem of too many people with poor or no insurance? The excise tax is ridiculous as a path to the goal stated, it only makes sense if the true goal is to reduce access to health care for the middle class.

Posted by: KarenJG | December 29, 2009 12:36 PM | Report abuse

"before it helps everyone"

Tell me how either the house or the senate bill is going to help the 4-6% of people that won't get into the new system. Oh, right. It won't.

This continual refusal to accept that current "reform" will not result in a universal health care system, and that extending the current "reformed" system to accommodate those 4-6% "exempted" from the system would likely double the cost, is nothing more than the ostrich approach to reform.

So we may whittle away at the 45,000/year deaths from not having health insurance. Maybe making it "only" 20,000/year deaths from the 20 million still uninsured. Where will the political will and funding come to attack that problem?

We get a half-baked solution to bring about half the uninsured into the new system, and all our pundits and wonks can say is continue the meme that "it helps everyone."

Bah, humbug.

Posted by: jc263field | December 29, 2009 1:05 PM | Report abuse

"As I asked in the comments at Gruber's article, in what bizarro universe is punishing people with good insurance the solution to the problem of too many people with poor or no insurance? "

This is the question that Ezra and his co-believers refuse to address. It is one thing to say that people should be prepared to pay for additional coverage; it is entirely different to argue that taxing plans that provide "too much" coverage out of existence is somehow beneficial to the rest of us.

If the argument is that more generous plans encourage over consumption of care because beneficiaries of those plans are divorced from the cost, the solution is to just make people who want that additional coverage to pay for that "excess". Increasing out of pocket costs for everyone (which is what everyone agrees will be the employer response) and rendering truly comprehensive coverage out of reach for all but the wealthy does ZERO to address our underlying problems -- which are primarily due to uncontrolled provider charges.

The objective of health reform should be to put us on a path to ensure that every US citizen has access to needed treatment without bankrupting himself, his company or his government.

Anyone who believes that reducing coverage for vision, dental work, or hearing will somehow put us on such a path is deluding himself.

Posted by: Athena_news | December 29, 2009 1:15 PM | Report abuse

Any reason you didn't post my previous comment?

Posted by: kaylamom1 | December 29, 2009 1:52 PM | Report abuse

msohja: "Also, the notion that not being taxed on a portion of one's earnings is a "subsidy" and that it is "a cost to the U.S. taxpayer" is the worst sort of cheesy dishonesty. It is, at essence, a corruption of the definition of the word "subsidy". A subsidy is an amount that is paid, not an amount that is not confiscated."

When I give $100 to charity, and I'm in the highest tax bracket, the government subsidizes my donation by $36 through the income tax I didn't have to pay (plus whatever capital gains tax I avoided by donating appreciated stock). Yes, it is a subsidy; I don't know how else one would describe it.

"Gruber's and Klein's claim to a portion of their fellow's earnings is a slice of Mussolini's fascism."

Godwin's law! (Really, under that characterization, any taxation amounts to "a slice of fascism," and that's obviously very, very wrong. But I'm learning that reality doesn't matter to some people.)

Posted by: dasimon | December 29, 2009 10:55 PM | Report abuse

--"When I give $100 to charity, and I'm in the highest tax bracket, the government subsidizes my donation by $36 through the income tax I didn't have to pay "--

Utter, complete nonsense. It's *your* money. Having it *not* stolen from you is *not* a subsidy.

It's the idea that *your* money belongs to the state that *is* fascism.

Posted by: msoja | December 31, 2009 8:25 PM | Report abuse

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