Private Insurance in Medicare: Language and Details

One barrier to reasonable discussion of the important details for any private option in Medicare is language. Premium support, competitive bidding, vouchers are thrown around willy nilly. Sometimes the words are meant by speakers to be self-evidently bad, other times good–what does it all mean?

From chapter 7 of my book Balancing the Budget is a Progressive Priority on the future of private insurance options in Medicare comes this (bolding added here):

I distinguish three approaches to purchasing private health insurance with support from the government to defray the cost. They may seem similar, but are very different in reality. And within each of these three varieties noted below, there are innumerable policy distinctions that could be made. Within the broad category of premium support, the version below that I term competitive bidding is an idea worth trying, in both the elderly and non elderly population. The other two are probably not.

The first approach is the use of an Equal Value Voucher. An equal value voucher is when everyone gets the same amount of money to go and purchase health insurance. The main effect of such an approach is to fix the total cost to the federal government, and essentially to shift cost differences to individuals. This is not being actively proposed by anyone as a Medicare policy, but this is similar conceptually to block granting the Medicaid program to the states. The federal government would fix their cost, and shift the remainder to the states in the case of Medicaid, or to the patient if you had an equal value voucher proposal.

The second approach is an Administratively Set Voucher. This is where an amount is provided to people that enables them to purchase private health insurance, but the key detail—how much money is provided to purchase insurance—is set administratively as opposed to by market forces. The current Medicare Advantage program, and really all earlier variants of Medicare HMOs were administratively set vouchers. The amount of money provided was determined in relation to the average adjusted per capita cost (AAPCC) of Medicare in a given county; it was set at 95 percent of AAPCC for two decades in an attempt to reduce costs until the mid-2000s, when the amounts were greatly increased with a policy goal of increasing participation in private plans. However, the amounts were still administratively determined. A company that could provide care cheaper than the value of the voucher simply pockets the difference as profit.

Rep. Paul Ryan’s plan passed by the House in April, 2011 to transition over time away from the current Medicare program and toward a system of providing money for the elderly to purchase private health insurance is also an administratively set voucher program. In fact, his linking of the amount provided to the elderly in the future to purchase health insurance to overall inflation, which grows much less slowly than health care inflation, shows what can happen with an administratively set voucher program: the value and therefore purchasing power of the voucher would greatly erode over time.

Competitive bidding occurs when the amount of a voucher provided to a patient with which to purchase private health insurance is determined by the actual cost of an insurance policy that covered a set of services (defined benefits) in a given health care market. This price would differ by market, and would be set through competitive bidding, in which insurance companies were each seeking as much business as possible. Setting the voucher amount at the price at which the lowest bid company was covering the specified benefit package would incentivize other insurance companies to aim to provide better care for less money and therefore gain market share. Insurers could compete on provider network, wellness programs, or internal efficiency. If insurers charged a higher premium than this competitive bid standard for a given area, the patient would have to be willing to pay the extra amount if they wanted to sign up for the higher priced plan, as the government would only pay the lowest bid amount in a given market. If properly constructed, cost could drop and quality could increase.

The ACA exchanges are the closest thing we have to competitive bidding at this point, although there are worries that the premium subsidies provided in the out years could erode under some circumstances. Competitive bidding is a good thing to try in the exchanges, and it also a reasonable thing to try in Medicare. The key is that the amount of premium subsidy provided to patients must be set by the cost of an actual reference health insurance policy that is readily available in a given market.

Senator Wyden and Rep. Ryan’s plan proposed in December, 2011 may fall in the competitive bidding realm, because of how the amount provided by government to Medicare beneficiaries would not be set administratively, but would be set via a bidding process between private insurance companies (note: the details are important and the plan is not in legislative language as of this writing). Further, this proposal would maintain traditional Medicare, though it would have to live under the limits of the competitive bidding framework as well, with patients receiving cash payments if plans (or traditional Medicare) were able to provide health care to their covered population for less than the competitively determined bid amount, and being expected to pay more if the premium was higher. [note: the 2012 House budget included an option to remain in traditional Medicare, unlike the 2011 budget]

Without some shared language, there is no hope of a reasonable policy debate.

SCOTUS on Thursday; on Friday we still need a deal

The Supreme Court has set Thursday, June 28, 2012 as the last day of its term, and their ruling on the Affordable Care Act should be released shortly after 10am that day. Tyler Cowen has a useful note of caution to those who think they want the law struck down:

If the Supreme Court strikes down ACA in part or as a whole, and you did not like the law in the first place, do not assume you should be happy. It is far from obvious that we will end up with something better. I do hope that today (or later this week) is not simply a big exchange of anger and recrimination. No matter what happens, America still needs health care reform and this will require cooperation across the ideological spectrum.

The heart of my book Balancing the Budget is a Progressive Priority is that we need a long range sustainable budget, and that a necessary, but not a sufficient condition to getting one is a deal on health reform that identifies some steps we are willing to actually take. We have got to shift health reform away from being a political football, and into something that both political parties bear responsibility for seeing through. This piece provides what I claim to be what the beginnings of what a health reform deal would look like if the two “sides” actually negotiated based on their policy interests (more , more, more). My book nests health reform as central to the drive for a long range sustainable budget because health care costs are the primary cost side problem long term.

And it will take a tax increase over historical levels in the long run given any plausible level of spending if we are to ever have anything near a balanced budget again. And keep in mind, for all the discussion of the Ryan health reform plans, the primary House committees (Ways and Means and Commerce) where the heavy health policy lifting will have to be done have taken no steps beyond being clear about what they are against in the 17 months that Republicans have controlled that chamber. What that means on the meta level is that the Republican party:

  • claims to have a long range balanced budget as a key policy goal
  • Is opposed to one of the things it will take to get one (a tax increase) and has no plausible plan for the other (health reform)

In other words, they have no chance of achieving their stated goal, especially when you factor in their preferences for Military spending.

As I have said over and over, the Republicans desperately need a health reform deal, and seem to be the last to know. Think of how much political capital the Democratic party invested in passing the ACA, and then consider the likelihood that Republicans would ever invest this much in any health reform effort. Not going to happen. More important than the politics, the entire country needs for the two parties to reach some sort of a deal, so that we can address the human suffering caused by lack of health insurance, while beginning to take steps to address health care cost inflation that is unsustainable as the baby boomers move into Medicare and Medicaid.

Thursday will come, but so will Friday.

CBPP Analysis of Dem Supercommittee offer

The Center on Budget and Policy Priorities (CBPP) has a new paper analyzing the recent Democratic offer to the Supercommittee (called Democratic Offer in tables) below, that concludes that it is “to the right” of the President’s Fiscal Commission as well as the Gang of 6 proposal from the summer.

The Democratic proposal contains around $900 Billion ($2.2 Trillion v. $1.3 Trillion) less in tax increases than did the Fiscal Commission and has higher cuts from Medicare and Medicaid and other programs, when using current policy as the baseline (Table 1). When using the Fiscal Commission’s “Plausible Policy” as baseline, the amount of revenue raised by the Democratic Supercommittee proposal is far less ($1.3 Trillion v. $0.4 Trillion) than what was proposed by the Fiscal Commission (Table 2 below).

A few points on all this.

  • Like picking the tall kid in backyard basketball, if you can pick one thing in a policy debate, pick the baseline!
  • The most newsworthy aspect of this week for me was that Senator Baucus (D-MT) was the Supercommittee member who presented the Democratic Offer. He voted against the Fiscal Commission report, and was the only Senator on that Commission who did vote no. As Chair of the Senate Finance Committee, he is powerful, so his support may be a key source of the movement “right”.
  • When I think of the past year in terms of the deficit/policy debate, I wonder how different things might have been had President Obama embraced the Fiscal Commission report in his budget? Given that he essentially produced another budget later in the Spring in response to Rep. Ryan’s budget, and given what he offered to Speaker Boehner in the debt ceiling negotiation, I think it would have been both better politics as well as better policy to have embraced the Fiscal Commission recommendations in his budget.

Blahous on CLASS, reform

I respect Charles Blahous a great deal as an analyst, and I like him and think that he is a nice guy. In fact, I brought you a series of interviews with him last May on the Medicare and Social Security Annual Trustee reports. However, I find his latest at e21 on the CLASS Act and health reform generally to be frustrating, because it focuses on deconstructing (CLASS and the ACA) without offering something better.

I agree with him that CLASS as passed wouldn’t work, but it is just as clear that there are policy options that could make it work and address LTC. Imagine the impact a post by him (Medicare and Social Security Trustee) offering solutions might have–saying something like “CLASS was flawed but how we deal with LTC is also flawed, and the the current default is for Medicaid to be on the hook for massive nursing home expenditures. Here is how we could move to implement a voluntary LTC insurance program. This is good for the country.”

However, I respect the idea that an adversarial political system creates better policy through the competition of ideas. Yet, in health reform, conservatives seem to be far clearer about what they are against as compared to what they are for (I mean this generally, and am not singling Blahous out here). When I hear Republicans say “lets repeal Obamacare and we will then pass common sense reforms” I can only think why didn’t you do anything from 2002-06 when you controlled both branches of Congress and the White House?*

I can respect the adversarial argument, and have spilled about 50,000 words saying the key to a long range sustainable budget is a compromise on health reform. However, it takes two sides to compromise. The House of Representatives owes it to the country to move ahead and begin marking up bills like the Patients’ Choice Act, and Rep. Ryan’s Medicare reforms in the committees with jurisdiction such as Commerce and Ways and Means to show us what they would do. They need to commit to the details so that the CBO can weigh in and we can look at both the fiscal impact and effect on the uninsured of their ideas under the same bright lights to which the ACA has rightly been exposed. And then we can decide what to do.

*Many of my conservative friends will say they did worse than nothing, they deficit financed the Medicare Part D drug benefit during this period.

Patients’ Choice Act Needs to Meet the CBO

As I noted Thursday, Rep. Paul Ryan‘s speech last week embracing the Patients’ Choice Act (PCA), completed the “replace” part of his call to “repeal and replace” the Affordable Care Act.  While the details of Rep. Ryan’s plan differ for the various parts of the system, the overriding idea is moving toward a defined contribution from the federal government, instead of a commitment to providing a given level of insurance coverage, shifting costs to either individuals or states. The outline of Rep. Ryan’s overall “replace” plan is:

  • Medicare (45 Million persons in 2011). No great changes for those now covered by Medicare, or who will be so covered in the next 10 years. However, for those who become eligible for Medicare more than 10 years from now, they would receive a voucher with which to purchase private health insurance. Eventually, Medicare as a government insurance plan would go away with the death of the last beneficiary, replaced by this system of private coverage.
  • Medicaid (60 Million persons in 2011). Block grant the program to states, fixing the cost to the federal government and shifting the balance to the states.

These two policies were adopted  in broad form (235-189) when the House of Representatives passed its Budget Resolution on April 15, 2011, and have been much discussed; I am not going to get into them (Austin has written a lot on the Medicare proposal). I am going to instead focus on the last part of Rep. Ryan’s replacement strategy, the Patients’ Choice Act, that would directly impact around two-thirds of the U.S. population almost immediately if passed:

  • Privately insured (160 Million persons in 2011) and uninsured (50 Million persons in 2011). The Patients’ Choice Act represents Rep. Ryan’s vision for how health insurance would be remade for persons who are not elderly and not poor enough to qualify for Medicaid. In short, the tax preference of employer paid insurance would be repealed, all persons/families would get the same tax credit with which to purchase private health insurance, either inside or outside of state-based exchanges. The premium levels are far below average premiums today, meaning they would finance only catastrophic levels of coverage. There are many details that need to be considered. I outlined some of them last week.

I am going to drill down on these details by going through several of the key Titles of the PCA over the next couple of weeks. However, the punch line for this analysis is clear regardless of what I think:

  • the House Republicans need to mark up the PCA in committee (Commerce and Ways and Means for sure, perhaps Budget), pass the bill out of the relevant committees, and see what the CBO has to say about them.

Politically, it is an advantage to “have a plan” but not commit to the nitty gritty details. The PCA has been around for a while, having been introduced into the 111th Congress on May 20, 2009 but has never been scored by CBO since it did not see the light of day in the last Congress because the Democrats controlled the House of Representatives. However, the Republicans have controlled it for the past 9 months, and there is nothing standing in their way of filling in the blanks, passing the  PCA out of committee(s) and seeing what the CBO has to say. To paraphrase what a Little League umpire once told me, the PCA is nothing until CBO tells us what it is. Only then can the country understand the replace part of repeal and replace.

From the archives: Patients’ Choice Act

Paul Ryan‘s speech on Tuesday outlined the balance of his “replace” strategy to go along with the Medicare and Medicaid reforms passed in the House Budget. A House Budget Committee spokesman confirmed via email that they are not introducing new legislation, but that Ryan’s efforts will be built upon the Patients’ Choice Act, introduced into the 111th Congress on May 20, 2009. Some of my blogging about the PCA (many links) is here and here. I wrote the following column in the Raleigh, (N.C.) News and Observer on July 24, 2009 about the Patients’ Choice Act. I think it holds up pretty well 26 months later as outlining the key issues with the PCA; I will blog more about them in the future.


Sen. Richard Burr, R-N.C., is a co-sponsor of the Patients’ Choice Act, the major Republican health care reform alternative in Congress. It has yet to be “scored” by the Congressional Budget Office (CBO), and important details are unclear. However, this Act would represent a consequential change by repealing the tax exclusion of employer-paid insurance premiums and replacing it with tax credits. The Act differs in many ways from the Democratic bills in Congress, but there are some points of potential compromise.

The Act would provide an advanceable, refundable tax credit ($5,710/ family or $2,290/individual) that non-elderly individuals would use to purchase insurance. States would arrange “health care exchanges” through which private insurers would voluntarily offer plans that would be mandated to provide a benefit package similar to what Congress enjoys.

The plan would increase insurance coverage (how much is unclear) and likely result in an increase in deductibles of those covered. This is because the amount of the tax credit is less than half the current average premium ($13,000 family; $5,000 individual) of a private insurance plan. As premiums fall, deductibles rise, exposing individuals to more of the actual cost of their care. This aspect of the Act has the potential to reduce use, and therefore costs.

Employers could still pay premiums on behalf of their employees, but this would be taxable income. If a high-deductible plan costing less than the tax credit is chosen, the balance is placed in a Health Savings Account (HSA). Families can put $5,950/year ($3,000 for individuals) into a HSA and the money can be used to pay for care or insurance premiums. Individuals would be more involved in arranging their own insurance under this plan.

The biggest question is how the state insurance exchanges would work. There is no individual mandate to purchase insurance, but the Act envisions states developing automatic enrollment provisions whereby persons would be signed up for high-deductible plans when they did things like renew a driver’s license, unless they opted out.

This “soft individual mandate” is important because the plan bans health insurers from denying coverage based on pre-existing conditions, so you need a way to get healthy people into the insurance pool.

Because the tax credits can be used to buy plans both inside and outside of the state-based exchange, there is a danger that only the sickest patients will seek coverage via the exchange, since coverage cannot be denied. If this happened systematically, it could result in death spiral whereby only poor risks are included in exchange-based plans. However, the Plan notes that exchanges “shall develop mechanisms to protect enrollees from the imposition of excessive premiums, reduce adverse selection, and share risk.”

While the devil is in the details, this vagueness provides an opportunity for compromise, as the risk adjustment provisions for setting premiums from the Kennedy-Dodd Senate HELP committee bill (on which Burr sits) could fill in the blanks and are noncontroversial. These provisions allow for the consideration of family structure, actuarial value of benefits, geographic area and age only in setting premiums (premiums couldn’t vary more than 2 to 1, oldest to youngest).

Both plans ban exclusion on the basis of pre-existing conditions. And if auto enroll procedures are aggressive, there may only be semantic differences between Burr’s approach and the individual mandate which is included in all Democratic bills.

The cost of the tax credits in the Patients’ Choice Act alone is likely to be larger than the amount saved by repealing the tax exclusion for employer-provided insurance. And a big question is how many persons would be insured by the Act. These two crucial pieces of information will only be available after the CBO scores the bill. The CBO is playing the role of umpire in health reform, judging all bills in terms of their cost to the federal treasury and impact on insurance rates.

Several provisions in the Patients’ Choice Act would reduce the plan’s cost to the federal government, but these costs would mostly shift to states. The most notable such change is the proposed block-granting of the federal share of Medicaid’s long-term care coverage of the elderly and disabled, which might reduce the federal cost by up to $600 billion over 10 years.

However, this would either increase state costs, or necessitate changing how care is provided to such persons, with the impact on access and quality of care being unclear. The plan includes several other provisions, such as changes in how Medicare Advantage plans are paid, means-testing Part D prescription benefits and a modest malpractice reform.

The most intriguing aspect of the Act is the creation of a Health Services Commission, to be run by five commissioners appointed by the president and confirmed by the Senate. The purpose of the commission is to “enhance the quality, appropriateness, and effectiveness of health care services through the publication and enforcement of quality and price information.”

A systematic look at the Medicare program (treatment coverage decisions, payment approaches, quality improvement strategies) that was insulated from Congress in a manner similar to the military base-closing commission would be a good first step toward addressing cost inflation in Medicare in a comprehensive and reasoned manner. Lessons learned from Medicare could then be applied more broadly to the health system.

Any such effort will undoubtedly be called rationing by those wanting to kill it, and quality improvement and cost-effectiveness by those arguing for it. Whatever we call it, we must begin to look at inflation in the health care system generally and in Medicare in particular.

Super Congress v. IPAB

NY Times has published a short story on the 12 member Super Congress made up of sitting Representatives and Senators that must propose a $1.5 Trillion deficit reduction by Thanksgiving. Their proposal will be receive preferenced voting status or unpalatable budget cut triggers will go into effect.

Here is a roundup of posts I have written on IPAB, which is a part of the ACA. It would recommend payment reductions in Medicare if overall Medicare growth targets were not met. There are many similarities between IPAB and the Super Congress, with the main difference being that the Super Congress is more powerful than IPAB, and the fact that all 12 members of the Super Congress are elected members of Congress and not appointed by the Executive Branch and confirmed by the Senate (as with IPAB).

A couple of points about the Super Congress:

  • If the Super Congress just shaves $1.5 Trillion in deficit reduction from an otherwise unchanged whole (meaning tax system, health care, Social Security), that is still not going to provide a long term sustainable budget.
  • If you ever want a sustainable budget, you have to have a robust health reform plan. The ACA is a start, but we need to do more and it is the only plausible vehicle we have (keep the numbers 218, 60 and 1 in mind which is what it normally would take to repeal or tweak the ACA).
  • The Republicans have been free riding on the anger generated by the ACA. By that I mean they have no credible health reform plan, certainly not one that can address cost and coverage concerns. So long as they have no health reform plan, they do not have a credible long term deficit reduction strategy to move us toward a sustainable budget over the next 30-40 years.
  • No, they have the Ryan plan, you say? Two points: First, it is a Medicare and Medicaid reform plan that repeals the entirety of the ACA coverage expansions, meaning there would be 32 Million more uninsured in 2021 than there would be by default now. It is possible that is their ultimate plan for the 2012 election (focus Medicare and Medicaid only while not addressing coverage issues), but I don’t think that will work politically. Much of the public believed them when they promised the replace part of their pledge to ‘repeal and replace’. Second, the House committees that will have to consider and mark up the detailed Medicare portions of the plan haven’t done anything on them yet so far as I can tell. Until they pass the details out of at least one of these committees it is not a plan so much as it is a fantasy.

The country needs a political deal on health reform so that we can move ahead and address health care costs. It will be a 30-40 year struggle to get a sustainable health care system. The Super Congress is the last chance for this Congress to do anything consequential policy wise. Here is hoping they will not only tinker around the edges but seek a plan that could transform health reform for a toxic partisan battle into a something that both parties can get some credit for. Most importantly, let’s hope we can come to some way forward in which both parties will share responsibility for improving the health care system. It is a long shot, but we really do need a Super Congress that thinks big.

update: this one wasn’t my best and had lots of errors. More coffee, less rush needed. Sorry about that.

House IPAB Hearings-II

Two House Committees will hold hearings today on IPAB. There is a great deal of hypocrisy in the Republican criticism of IPAB, especially that levied by Rep. Paul Ryan, because he co-sponsored legislation in the 111th Congress (The Patients’ Choice Act) that proposed two boards comprised of what he know calls ‘unelected bureaucrats.’ I posted on this last night.

A second line of criticism levied against the IPAB is the tried and true charge of rationing. This criticism is also hypocritical. My reading of the Patients’ Choice Act, Co-sponsored by Rep. Ryan in May, 2009, shows that the two boards he would have created have more power to ‘ration’ and control the practice of medicine than does the IPAB. Don’t take my word for it, read the relevant section of the bill (pages 205-216). You will hear plenty on IPAB at the hearings…as you do, keep the following in mind.

The 15 member board (Forum for Quality and Effectiveness in Health Care) proposed by Rep. Ryan would:

  • Have the goal of promoting transparency in price, quality, appropriateness, and effectiveness of health care (sec. 813, p. 211-12)
  • Will create guidelines to reach this goal (sec. 813, p. 212)
  • Guidelines must follow standards of research and the best evidence and present findings in an understandable format ( sec 813, p. 212)
  • To develop guidelines, the Director of the Commission can contract with outside, private entities to complete research (sec 813, p. 212)
  • The Board was directed to produce their first guidelines by January 1, 2012
  • The Board was to bring forth recommendations each year, and not only when certain cost inflation targets were not met as with IPAB (sec 814, p. 213-14)
  • The Board has more teeth than the IPAB. Here I will simply reproduce the text of the Patients’ Choice Act, sec. 814(a)(b)(1)-(2) p. (214):

(b) ENFORCEMENT AUTHORITY.—The Commissioners, in consultation with the Secretary of Health and Human Services, have the authority to make recommendations to the Secretary to enforce compliance of health care providers with the guidelines, standards, performance measures, and review criteria adopted under subsection(a). Such recommendations may include the following, with respect to a health care provider who is not in compliance with such guidelines, standards, measures, and criteria: (1) Exclusion from participation in Federal health care programs (as defined in section 1128B(f) of the Social Security Act (42 U.S.C.1320a–7b(f))).(2) Imposition of a civil money penalty on such provider. [emphasis mine]

When you listen to the hearings today, think of these facts. Especially in the case of Rep. Ryan, who has put himself forward as a truth teller who is helping our nation address our fiscal woes. He needs to explain how he could propose the use of unelected boards to promulgate guidelines, and grant them the authority to ban providers who don’t follow such guidelines from participating in Medicare and Medicaid and/or impose a civil penalty, and then say what he has said about the IPAB.

It is possible to change ones mind. Rep. Ryan and others may have thoughtful reasons for changing their mind, but they have so far offered no thoughtful discourse on IPAB. And if you do change your mind with a track record like that noted above, I would expect you to say something like “I used to support boards similar in concept to IPAB, that actually had more power to shape the health care system than does IPAB. I no longer do so because”….

Maybe the hearings today will fill in the blank.

Tax Reform and Health Care Costs

On the heels of the Ryan budget comes word that the President will release a long term deficit reduction plan Wednesday, the details of which are unknown. This week, I am going to look back at several aspects of the Fiscal Commission final report that was released in December, 2010 to provide some context for the coming debate.

It is worth recalling that the report was approved 11 to 7, but that it needed 14 (of 18) yes votes to guarantee an up or down vote on the Report in Congress.*  12 of the 18 members of the commission were members of Congress at the time, and it is interesting that 5 of the 6 U.S. Senators on the Commission voted for the report, while 5 of the 6 members of the U.S. House voted against it.  If there is momentum towards any sort of bipartisan health reform deal or long range deficit reduction approach that includes tax reform, Medicare, Medicaid or Social Security, it could be expected to bubble up first in the Senate, where a bipartisan gang of six has been discussing deficit reduction along the lines of the Commission report.

Tax reform is the general term for alterations of the income tax code, and includes changes in marginal tax rates as well as deductions and tax credits. The last major tax overhaul came in 1986. Over time, Congress has enacted many deductions and credits which are together called tax expenditures, and which either reduce a persons taxable income or directly reduce their income tax owed. Tax expenditures serve to advantage some tax payers over others, based on their circumstances (such as having children). Each of these changes were no doubt well intentioned policy changes, but they serve to reduce the amount of tax revenue received by the Treasury just as increases in explicit spending does (Military, Medicare, Agricultural subsidies, etc) and are viewed by some as unfair since many benefit relatively high wage earners. Further, they are not as widely understood as is direct spending to increase the budget deficit. To achieve a balanced budget, the ins (taxes) must match the outs (explicit spending and tax expenditures). There is a trade-off between marginal rates and tax expenditures and different combinations could raise the same amount of revenue, holding all else equal. These seemingly esoteric tweaks of the tax code are very important policy choices.

One of the key tables in the Fiscal Commission Final Report, is Table 6 on p. 29:

This table demonstrates the relationship between the marginal tax rates of the 2010 (and current) tax code** and what a revised tax code with fewer and lower marginal tax rates could be IF different combinations of tax expenditures are removed.  If all expenditures are removed (like the home mortgage deduction, preferential tax treatment of employer paid insurance, child tax credit, deduct money given to your church, etc.) then the lowest rate would be 8% and the highest 26%.  Note, that in each of the 3 scenarios shown, $80 Billion is dedicated to deficit reduction in 2015; the point being that if the increased revenue is spent on new programs, or to finance further tax cuts, there will be no deficit reduction effect. Fewer and/or smaller tax expenditures mean lower marginal rates, and vice versa, all else equal.

The Fiscal Commission identified an illustrative tax reform plan that ended many tax expenditures and capped others. Table 7 on p. 31 of the Fiscal Commission report details the mix of tax expenditures that would remain, and which would result in a lowest marginal rate of 12% and a top one of 28%. I want to highlight what this illustrative plan did to the tax exclusion of employer paid health insurance.  From Table 7 (this is only part of the original table, the full table is at the end of the post):

The Fiscal Commission illustrative proposal would cap the tax exclusion of employer provided health insurance at the 75th percentile of premiums in 2014, and slowly move to end this tax expenditure totally by 2038. If the 75th percentile of premiums was $23,000 in 2014, then if your employer paid $23,000 or less for your health insurance in that year you would incur no tax liability on those premiums. If your employer paid $25,000 in premiums, for example, then $2,000 of this (amount above the cap) would be taxable as income in your marginal tax bracket. In 2038, the full amount paid by an employer on behalf of an employee for health insurance would be taxable income. The excise tax on high cost health insurance that is set to come into force in 2018 via the Affordable Care Act would be reduced to 12% under this proposal. Overall, this proposal would do two things as compared to ACA.

  • Address the tax treatment of employer paid insurance in 2014 instead of waiting until 2018 to do so via the excise tax on high cost insurance; this would increase the cost saving potential of the ACA.
  • Help focus attention on the fact that it is people like me who get employer based insurance who benefit from this tax expenditure.

The tax on high cost health insurance could work to slow health care costs by putting downward pressure on premiums in the same way that capping the tax exclusion could; indeed, there should be some tax on high cost insurance that would have the same impact as capping the tax exclusion at a certain level.  However, I believe that it would be preferable to achieve most or all of this effect via capping the tax exclusion instead of imposing the tax on high cost insurance because it would help to highlight that the subsidy flows to employees receiving the health insurance. The high cost excise tax was sold rhetorically as a tax on insurance companies, while it is actually just a capping of a now unlimited tax benefit that flows to persons obtaining insurance from their employer. This subsidy is not understood by most employees. During the health reform debate I became obsessed with asking coworkers about the amount of tax free income they received via Duke’s employer paid health insurance premiums. Most said none. They were of course wrong, and I work at a school of public policy! Further, I believe that it would be simpler administratively than imposing an excise tax on high cost health insurance. The exact mechanism through which the tax on high cost insurance will be levied and passed onto employers and employees is unclear to me, but the tax would have to be passed on to have the intended effect, which is to incentivize less generous insurance as relatively expensive policies are taxed. Capping the tax exclusion has the same health policy goal.

Reforming the tax treatment of employer paid health insurance is a simple way (that is politically hard) to slow the rate of health care cost inflation. If the country turns to tax reform in the next weeks and months, health policy types shouldn’t tune out, because changing the tax preference of employer provided insurance is likely the most consequential way of improving the cost saving potential of the ACA, or any health reform alternative that I can imagine.

*I am unsure of what ‘an up or down vote in Congress’ would have really meant since the entire plan is not in legislative language.

**note the scheduled rates for 2011 in table 6 did not come to pass as the 2010 rates were extended in Dec. 2010.