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The excise tax and its critics

If you're looking for the skeptic's case against the excise tax, Alec MacGillis's article is pretty comprehensive. I certainly see how people find it convincing. I'm just not among them.

The excise tax, as some of you will remember, imposes a 40 percent surtax on employer-provided health plans that cost more than $23,000 a year for families. So if your plan costs $23,200, you'd pay the tax on $200. But your plan probably doesn't cost that much. The average plan cost $13,500 last year.

Before you really get into whether the excise tax is a good thing, though, you have to be clear about what it is. It's generally compared with the House's surtax on the rich. But all taxes are not alike. 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.

To make that even clearer, the House's surtax will only be successful if people pay it. The excise tax will only be successful if people don't pay it. And if that happens -- and many economists, and the Joint Committee on Taxation (which is the CBO for taxes), believe it will -- it will give plans that hold costs down a competitive advantage over plans that don't, and it will send a signal to insurers that they're vulnerable if they don't crack down on spending.

The strongest argument that the skeptics make is that this is all good in theory, but it's doesn't work in practice. The administration has sold the excise tax as a populist measure, a tax on "Cadillac plans." It is that, at least in part. But plans aren't only expensive because they're generous. They can also be expensive because someone in the plan got very sick, or because the people in the plan are pretty old.

Before getting into that, it's worth remembering not to go too far. More expensive insurance really is more lush insurance. Anyone who has chosen between their work's PPO and its HMO knows that. And all employer-based insurance, right now, is exempt from taxes -- a regressive and cost-increasing decision that this barely begins to redress. This is a tax that should already exist, and it should exist on every dollar of health benefits, not just every dollar above $23,000.

But it is true, for many employers, that the variation in the cost of their plans comes for reasons other than plan generosity. But so what? If small businesses are getting a bad deal on the market because they're full of bad risks, then they now have the option to come into the exchange, which joins them to a far larger risk pool with far less variation. And within the exchange, the excise tax should work in a much more straightforward fashion. That's a transition we want to encourage.

As for plans for older folks being more expensive than plans for younger folks, the tax has a higher threshold for people over 55 (it's $26,000, assuming I remember correctly). But if that's not enough, then it's a perfectly reasonable idea to make it blind to age: You can tax the value of the plan if it were being applied to a demographically neutral group, and such ideas are under active consideration. That should take care of that problem.

For all that, no one should be under the illusion that this tax will not cause some pain, or upset some voters, or assail the plans of some middle-class workers. It will. But it's worth saying this very clearly: 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.

Compared to what we're going to have to do in the long run, the excise tax is small change. It won't hurt many people. It won't hurt folks badly. It has the chance to do some real good. And if it fails, it's easy to repeal an unpopular tax. But if the hope is that someone will discover a cost control that no one dislikes and that produces no losers, it's going to be a long while in coming. In the meantime, we need to start trying cost controls. Passing up this opportunity will only make the eventual reckoning worse.

By Ezra Klein  |  January 7, 2010; 6:20 PM ET
Categories:  Health Economics , Health Reform  
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"or reducing payments to providers (which would mean long waits and less access)."

Bull! That's the Canada fallacy.

Read T.R. Reid's book, for example. Long waits and less access as a means of reducing costs is a choice that Canada made. There are plenty of excellent systems around the world where providers get far lower payments and where there are not "long waits and less access".

Posted by: ethelmertz | January 7, 2010 6:43 PM | Report abuse


Posted by: etdean1 | January 7, 2010 6:51 PM | Report abuse

"The excise tax ... will give plans that hold costs down a competitive advantage over plans that don't"

Obvious point: plans that hold costs down already have a competitive advantage over plans that don't. You don't need a tax to accomplish that. Do you think companies don't already try to find cheaper plans? This is foisting the responsibility for controlling costs on those parties which are least able to control them!

The analogy with cigarette and other "sin taxes" is also flawed. The theory of sin taxes is they compensate society for costs associated with an individual's "sins". What individual sins is the excise tax supposed to compensate for? Getting older? Working for a small business? Working in a field where demographics make the average cost higher? (e.g. teaching, which has a disproportionate number of older women).

Posted by: alex50 | January 7, 2010 7:00 PM | Report abuse

Isn't employer-based insurance subsidized already? Isn't this more of a cap on a subsidy than a tax itself?

Posted by: chrismealy | January 7, 2010 7:03 PM | Report abuse

The cigarette tax is real money. For some nonprofits here in Cali, it's their only source of funding. Proponents of the tax, to their discredit, are usually unwilling to admit that this is at least partly about revenue. It is.

As for who will get hit first by the tax, it will be people in the exchanges. Within a decade we will probably see crazy situations where people are being subsidized in the exchange and also hit with the Cadillac tax. This has the potential to create a death spiral as healthy people flee to HDHPs. We'll hear many horror stories from people who are collateral damage.

Finally I can't argue with the idea that we might as well try everything. Except that there are better ideas that have been taken off the table, or are at least on life support. For example a strong employer mandate keeps the onus on businesses to keep a lid on costs. Jon Walker has others.

Posted by: bmull | January 7, 2010 7:05 PM | Report abuse

Where to begin with this...

"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."

What taxes are MEANT to do means absolutely nothing. All taxes change behavior and all expect to raise revenue. You seem as if you are trying to frame the debate in "good taxes" vs "bad taxes", labeling your 'behavior modification' taxes as the good ones.

"Before getting into that, it's worth remembering not to go too far. More expensive insurance really is more lush insurance. Anyone who has chosen between their work's PPO and its HMO knows that."

I've chosen both. I had major surgery with my HMO and have been happy with my 'lush' PPO. I currently have a choice between the two. Why on earth should the government consider it their business to 'incentivize' me towards the less 'lush' insurance? You also need to explain how something that is exempt from taxes translates to regressive and costly. Because the costs are not being artificially restrained? Please.

"For all that, no one should be under the illusion that this tax will not cause some pain, or upset some voters, or assail the plans of some middle-class workers. It will. But it's worth saying this very clearly: You cannot design a cost control that won't."

When you mandate that everyone has to have insurance, you are correct. You eliminate the citizens ability opt out and then take money from others to help them pay the costs you have inflicted on them. The difference between what we have now and what we will have when this disaster of a plan gets passed is that politicians will be the arbitrators of pain, inflicting it on the people least likely to cause them to lose an election. And we can't opt out of that.

Posted by: amaranthpa | January 7, 2010 7:13 PM | Report abuse

"no one should be under the illusion that this tax will not cause some pain, or upset some voters, or assail the plans of some middle-class workers. It will. But it's worth saying this very clearly: You cannot design a cost control that won't."

Yes you can. Try a public option, or allowing drug importation from Canada.

The excise tax is a completely unproven cost control measure that's grossly inequitable in it's effects - it penalizes people for getting older, working for small businesses, or being in certain lines of work (e.g. teaching, fishing, mining, etc.). The fact that it's grossly inequitable is not only unfair and penalizes people for behavior that does not have an adverse effect on society, it's also the trademark of a very badly designed cost control measure.

This "cost control" measure appeals to some because it appears clever and wonkish. Heaven forbid that we enact some of the simple and proven measures, like those that I mentioned. Amongst politicians it's popular because it hurts those poor slobs we call voters, whereas other measures would penalize the parties like insurance and pharmaceutical companies that provide ample bribes (oops, I mean campaign contributions) to said politicians.

Posted by: alex50 | January 7, 2010 7:31 PM | Report abuse

Your analysis is missing a lot, but one point needs to be hammered home:

"it will send a signal to insurers that they're vulnerable if they don't crack down on spending"

I think you fundamentally (blinded by ideology, much?) misunderstand what drives health care consumption. It is not the consumers - who really have little choice. Rather, it is the health care apparatus of specialists, hospitals, and medical devices. These are the entities that steer human behavior - at least considerably more than the so called "cadillac" consumers that you rail against.

Two side notes:
(1) "cadillac tax" is not merely a canard but a well-crafted epithet, meant to conflate decent health plans with the cadillac welfare queens of Ronald Reagan's dementia induced brain with union health plans.

(2) I have yet to here an explanation of why avoidance of the excise tax - the most likely route - is efficacious. Yes, it will reduce the aggregate price of health care plans (and not generate the precious revenue!) but will result in greater forced out-of-pocket spending; which I am not sure is a great aim. Further, you can argue that forcing Americans to "face" the true costs of their consumption is good and will reduce their "profligate" spending. But wont the added expense result in delay of necessary care,and further induce hazardous health care consumption, built on waiting too long for treatments - creating greater long term costs?

We can play the hypothetical game all day, but your wanton unwillingness to recognize realistic outcomes and traffic in a fantasist's dream is maddening and indicative of your political evolution (or is devolution) post American Prospect.

And stop invoking the authority of the economics profession as a backstop to your ideology. Throwing in your lot with the neoliberal policy crowd has as much credence as citing the flat earth society.

Posted by: ctown1 | January 7, 2010 8:50 PM | Report abuse

The problem with the current reform is that we are all losers.

Those with health insurance will pay more - premiums, co-pays, cost sharing, and utlimately taxes.

Those without health insurance will have severely limited options that will cost more than they can afford and give bare bones coverage with high out-of-pocket costs.

To really get good healthcare for all will cost much more money than Democrats are willing to ask us for - so they will take some money from the insured and give the uninsured less coverage and let Obama toot his horn in his speech.

Nobody wins - except Obama gets to toot his horn.

Posted by: mgd1 | January 7, 2010 8:57 PM | Report abuse

I don't buy Ezra's argument. This is based on the premise that people get cadillac plans so that they can abuse the medical system. No one likes to go to the hospital to have unnecessary tests or surgery done. But one should be allowed to buy an insurance policy with low deductibles by paying high premiums. For doing that the people should not be taxed!

If this taxes very few people than whats the use. We need to raise revenue by more progressive taxation.

The reforms have to be focused on the delivery end (hospitals and doctors) and not by threatening insurance policy holders.

I have said it before, the goal should be for everyone to have the so called cadillac plan (low premiums, low copayments and excellent care).

The ideal healthcare system would be complete coverage of all legal residents of USA with no copay or premiums (everyone would pay through a payroll tax on a sliding scale with exemptions for the poor-i.e., single payer system).

The reforms would be at the delivery end to hold hospitals and doctors accountable.

We will eventually end up in a single payer system once the insurance industry has milked the American public and realizes that the people have risen against it.

Posted by: ns3k | January 7, 2010 10:09 PM | Report abuse

Has anyone done any research to determine who actually owns "Cadillac plans"?

Seems like we're making assumptions that the people with these plans are simply healthy people who have expensive plans with a lot of frills. Is this really the case?

The other side of this too: What's to prevent insurers from simply shifting the costs of more expensive plans onto consumers in the form of higher deductibles and other out of pocket expenses?

Posted by: JPRS | January 7, 2010 10:49 PM | Report abuse

The whole tax exclusion is nonsense. I've been income taxes on my insurance (pretty close to $14k/year) since I started a company. Hopefully this is just the beginning and they start ratcheting it down all the way. If we end up making plans cheaper, but out of pocket costs higher, that would be the ideal scenario for consumer driven solutions.

Posted by: staticvars | January 7, 2010 11:30 PM | Report abuse

yeah, but Ezra, how would compare the excise tax to the employer mandate? wouldn't an employer mandate with real teeth have vastly fewer economic assumptions tied up with it and be a much easier political sell, i.e., people who work for Walmart shouldn't get Medicaid?

Posted by: ThomasEN | January 7, 2010 11:50 PM | Report abuse

Compared to what we're going to have to do in the long run, the excise tax is small change. It won't hurt many people...

Based on CBO projections the benefits tax will affect 30 million workers by 2016.

That's more than would be affected by the AMT (which only hits people earning over $90,000.00) and yet the Congress screams every year that 20 million!!! middle class Americans would be hit by the AMT if we don't "fix" it every year.

Posted by: cautious | January 8, 2010 1:34 AM | Report abuse

What business of the government is it to: "Change behavior?"
Hasn't anyone considered this fact: The two sectors of our economy that have seen the greatest price inflation since the end of WWII are: Education (taxpayer's fund about 90% of all K thru 12) and Healthacare (taxpayers fund about 50%, thru Medicare, MedicAid, the VA, etc.). In other words, where government is footing upwards of 90% of the bill, we've seen the greatest price inflation. So why doesn't anyone know this? Because the sleaze media - The Washington Post included - doesn't tell the "whole truth." Remember when you take the witness stand, you swear to tell the "truth, the whole truth and nothing but the truth." Well, the sleaze media doesn't do that. It only tells the truth as far as their socialist ideology is concerned. It doesn't commit overt lies, but it does leave out significant facts that might dissuade the reader from the Left-leaning viewpoint. A big example is Social Security. Most heads of Finance Departments in most major & minor universities will tell you that Social Security is the biggest Ponzi Scheme in world history. And certainly news organizations such as the Washington Post have the resources to do the research that would prove this obvious fact - but they choose not to. Why? Because it does not fit into their Left-Wing, Socialist world view. The don't "lie" about it, they just don't tell the "whole" truth. And when you tell only the "selective" truth it's quite easy to promote your worldview while maintaining the veneer of honesty!

Posted by: vince33x | January 8, 2010 3:03 AM | Report abuse

Richard Eskow, (over at The Huffington Post) a consultant with experience in health policy and finance, communications, and IT, has a column about this. (He has also held senior-level positions (including CEO) at several health and insurance-related companies.)

...Why do President Obama and his advisors keep touting the tax? And why do journalists like David Leonhardt of the New York Times keep asserting that "health economists" think it's a good idea? Uwe Reinhardt - the most respected health economist in the country - said the idea that "with high cost-sharing, patients will do the only legitimate ... cost-benefit calculus ... surely is nonsense."

The best-known advocate for the tax is MIT economist Jonathan Gruber, who was hyping it as recently as a week ago, without mentioning new and contradictory data.

Posted by: mikeryd | January 8, 2010 8:09 AM | Report abuse

Obviously, Ezra, you're young and you have a robust health plan. You're not choosing between a co-pay and whether you can afford your latest gourmet snack this week.

But a lot of us are. I've been paying for COBRA (without the subsidy) for the past 18 months and by the time I'm done writing that check, I'm really scraping by. A $50 co-pay is a deterrent to needed care -- which sort of defeats the purpose, don't you think?

And by the way, mikeryd, you may not be surprised to find that Jonathan Gruber was on a hefty retainer with HHS to advise the president on his healthcare bill - without disclosing his conflict, of course.

Posted by: uberblonde1 | January 8, 2010 8:37 AM | Report abuse

People being people cling to life. "Where there is life there is hope" goes the saying. There are some in the medical profession not afraid to tell us that this is very often not true. Nortin Hadlers book, "Worried Sick" states it very well. We get expensive treatments with little efficacy as the rule. The mammography news is an example. The upshot and it pisses folks off is that they might extend a life by finding a treatable tumor but it's just as likely you or yours will die of the stress of going through the process with false positioves and biopsies et al. I find it interesting that the UK has a generally healthier population apparently because people positively adjust their lifestyle just because their doctor tells them to. I don't think it is because they have better sense that their American cousins. I think it is their system where doctors interface differently and more positively with patients than we do.

Posted by: BertEisenstein | January 8, 2010 9:39 AM | Report abuse

You can see where Ezra's cost-control priorities are with this post. We could control costs and "change behavior" by passing single-payer or regulating the private health care market like public utilities, a la the Swiss or Dutch model. Or we could do it by forcing consumers on the other end to make financially difficult decisions about their health - ie forego taking care of themselves because it's too expensive as a result of the tax. Ezra accepts that our system can't do the former because the entrenched lobbies won't allow it, so he decides to go after the relatively politically powerless and unorganized group of hapless consumers as the path of least resistance. As someone said above, this isn't liberal - it's neo-liberalism telling the have-nots and people of moderate means that we have to subsidize the existence of vastly overpaid and inefficient insurers and providers whose primary mission is (for the former) NOT to provide care and (for the latter) to provide it as expensively as possible.

Gotta love Ezra - he's either agnostic or uncaring about cost-control measures that would help the rest of us, like single payer, a Hacker style public option, drug reimportation, etc., but he's going balls to the wall to make us pay the excise tax. He's a fighting "progressive!"

Posted by: redscott | January 8, 2010 9:48 AM | Report abuse

Hey kids, lets knock off this use of single payer as an argument. There aren't 60 votes, or even 50 votes, in the Senate for a single payer system. It's dead. Not going to happen any time soon. People should advocate for single payer when the next go-round of HCR is in the works, but right now it adds nothing to the debate.

Also, lets not forget the understated benefit of the excise tax: that it begins to correct the tax loophole that put us into the ridiculous system we have now where insurance is tied to employment.

Posted by: etdean1 | January 8, 2010 10:23 AM | Report abuse

"We could control costs and "change behavior" by passing single-payer or regulating the private health care market like public utilities, a la the Swiss or Dutch model."

Please explain your strategy to pass single payer in the House, let alone the Senate, then we'll talk about that.

And this bill does make significant strides towards treating insurers like public utilities. Banning pre-existing conditions + implementing community rating strips away one of the core workings of private insurance -- assigning risk and pricing accordingly.

Posted by: Chris_O | January 8, 2010 11:02 AM | Report abuse

"Everything has tradeoffs. Everything has losers."

Well of course. But this is a question of whose ox is getting gored, isn't it? The difference between the revenue choices of the House and Senate bills gives us the clearest choice between "oxen" to gore that we've seen in a long time. Do we inflict a small cut on those who will barely feel it, or do we cut to the bone those who are already just treading water?

Five percent of a million dollars is $50,000.00 That's not spare change, but it's not going to appreciably affect the million-dollar earner's lifestyle. Plus, there aren't that many of them. The most likely effect of the excise tax - an employer switching to plans that have higher co-pays and deductibles, most certainly will affect the lifestyle of the lower-middle class union members most likely to be hit with those higher costs. And there will be a LOT of them - up to 30 million according to the CBO.

You've been perfectly clear that you prefer the excise tax to the millionaires' tax. You've been disingenuous by refusing to acknowledge that this means that you'd rather see union members be the "losers" than rich people.

Posted by: KarenJG | January 8, 2010 11:10 AM | Report abuse

Significant strides my ass. All the CBO estimates indicate that this "reform" will not decrease health-care costs to a level we find in other major industrialized countries and will only marginally slow the increases we'd expect absent the reform. Barack Obama promised at various points on the campaign trail that we'd reduce health-care costs significantly with "reform" but we haven't done it. So we have relatively toothless regulation that won't address the looting we undergo at the hands of the insurers and the providers, while we stick it to union members and others who have foregone wage increases for reasonably robust health-care plans. And Ezra thinks we need to change the "behavior" of these folks because they're the problem!

Posted by: redscott | January 8, 2010 11:20 AM | Report abuse

Oh, wait... further research indicates that the 5.4% tax is only on income *above* a million dollars. So forget the $50,000. Families would only pay that much if they made TWO million dollars a year. The surtax on income under that first million is much, much less: 1 percent on income between $350,000 and $500,000; 1.5 percent on income between $500,000 and $1,000,000.

Posted by: KarenJG | January 8, 2010 11:21 AM | Report abuse

Call him the Cadillac Consultant. He's Jonathan Gruber. One of the most quoted defenders of President Obama's proposal to tax so-called "cadillac" health care plans, and a big defender of the more-conservative Senate version of health care reform, has secretly received nearly $400,000 from the Obama administration to consult on... what? Health care reform.
Washington Post writer Ezra Klein cited Gruber on October 21:
Earlier in the day, I'd been talking to MIT economist Jon Gruber about this issue. "There are a few things economists believe in our souls so strongly that we have a hard time actually explaining them," he said.
You trot out Obama's toady and don't let your readers know about it? your credibility is gone!

Posted by: obrier2 | January 8, 2010 11:48 AM | Report abuse

Why not simply reconfigure the entire tax code deficit neutral including health benefits as taxible? That wouldn't affect the overall tax of anyone today, but we'd all feel the impacts immediately of rate increases.

Oh, did you say it should be politcally possible? Sorry.

Posted by: keilprti1 | January 8, 2010 12:15 PM | Report abuse

Ezra's analysis misses several points:

* A 40% surtax is higher than the top rate for federal income tax. Why such a punitive rate?

* It would seem that organized labor would be hit hard by this tax, since unions negotiated good health plans and often agreed to wage concessions to keep the plans. Is pissing off organized labor before a midterm election a good idea? After all, it worked so well in 1994 with NAFTA and GATT.

* The threshold isn't indexed to health care spending. Soon more and more of us will be paying that tax.

* Forcing people into plans with very high co-pays discourages people from seeing doctors until they are severely ill. Simple-minded economic analysis often misses this point.

The House bill addresses funding by imposing a small tax on millionaires; they will still be paying less than they were in the 1990s.

Yes, costs matter, which is why we could have used a strong public option, or a Medicare buy-in, or both, and why we should have allowed the government to negotiate rates with the drug companies, which is the main source of the explosion in costs.

Posted by: JoeBuck1 | January 8, 2010 6:10 PM | Report abuse

Who should be getting less

Healthcare consumers (that's us)
Healthcare administrators (ins companies)
Healthcare providers (doctors, hospitals, drug and device companies)

The exise tax hurts consumers the most.

Let's get more from the providers and administrators.

Posted by: srw3 | January 8, 2010 7:37 PM | Report abuse

All the rest of this article aside, I just don't get how Ezra can call the current system of not taxing health care benefits 'regressive'. The definition of a regressive tax is one that is takes a greater percentage of the wealth of those at the bottom of the income ladder. A Sales tax is a prime example. The tax exemption on health care benefits, which generally cost the same regardless of how much you earn, is highly PROGRESSIVE in that the value of the plan is a much higher percentage of a low income than a high income. Hence, the value of the tax break is highest for those with low income. This is why it's so popular.

However, whether it's regressive or progressive, the current exemption is separate from the issue of whether not taxing the plans is ultimately making them more expensive. It might be, but it also seems naive to assume that the mere presence of a surcharge will result in more cost effective care. It's far more likely that inflation will quickly close the gap between existing plans and the surcharge ceiling, resulting in a tax on every plan that will either be paid by disgruntled taxpayers OR by their employers.

The least likely outcome is that insurance companies will streamline costs to keep premiums down. Really, with a monopoly, what's their motivation? It's like this fantasy idea Obama has that reduced health care costs would be converted into higher wages. Riiiiiiight. I never figured Obama for a Brooklyn bridge buyer.

Posted by: cometboy | January 9, 2010 1:03 PM | Report abuse

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