The Takeaway: Holiday Hangover Edition
Just before the holiday recess Congress completed work on a budget package that included what some have described as “blows” to the ACA. Here’s a belated reaction to a couple of the most discussed provisions.
Unpacking the Cadillac Tax Debate
Foremost among the alleged blows to the ACA is a two-year delay in the so-called Cadillac tax. Starting in 2018, the ACA imposes a 40 percent excise tax on health plans that exceed a specific dollar threshold. The tax was supported by many liberal economists but opposed by unions, business groups and insurers.
Does delaying (or repealing) the tax undermine the ACA? Not really. As written, the Cadillac tax has three problems:
First, the tax is on high-cost plans, not high-value plans. There are other reasons besides the value of plans that factor into cost, especially demographics, geography and occupation. The ACA makes some attempt to adjust for these factors in implementing the tax, but these provisions are not likely to be entirely successful. As a result, there would likely be some inequity in how the tax is administered, with people living in higher-cost parts of the country, or working in higher-risk occupations, paying more even if they don’t have more comprehensive benefits.
Second, proponents argue that the exclusion of the value of health benefits from income taxes is a benefit that disproportionately benefits higher income households and that the Cadillac tax is a partial corrective that moves the tax code in a progressive direction. However, the actual incidence of the Cadillac tax is not so clear cut. It is true that someone making $250,000 is in a higher tax bracket than someone making $50,000 and therefore the value of the tax exclusion is higher for the higher income household. But if each of these hypothetical households has $10,000 worth of health insurance, the exclusion is only equal to 4 percent of total income for the person making $250,000 but 20 percent of income for the person earning $50,000. Each new dollar of tax liability represents a bigger increase in taxable income for lower-income households.
Finally, the heart of the problem with the Cadillac tax lies at how one understands the excessive cost of the U.S. health care system and how the tax would likely act on that cost. Especially with regard to private insurance, the primary sources of high cost and low value are excess administrative costs and high unit prices.
Faced with an increase in the cost of benefits, employers could respond in a number of ways. One way would be to preserve the value of coverage while lowering the price through a combination of narrower networks and value-based benefit design. And indeed we expect movement in this direction. However, the path of least resistance that many employers would probably take would be simply reducing the scope of coverage by imposing more cost-sharing on employees. This would particularly disadvantage lower-income and sicker workers.
So is delay a “blow to the ACA”? The answer depends on your view of the likelihood the tax would spur positive change versus shifting health costs onto working families. It could be argued that delaying the tax is an improvement of the ACA rather than a blow against it. Certainly that is the position taken by such ardent ACA backers in Congress as Democratic leaders Pelosi and Reid.
On a more basic level though, the Cadillac tax is a sideshow. It is incidental to the operation of the law. Unlike some other policy changes that have been proposed in Congress or litigated in the courts, such as changes in Medicaid coverage or the three-legged stool of market reforms, tax credits and Individual Responsibility Requirement (aka the individual mandate) a delay or even repeal of the Cadillac tax does not prevent the ACA from operating as it was intended. The provision is logically separable from the heart of the law.
Nothing to Brag About
Another so-called blow against the law relates to limiting the ability of HHS to operate the risk-corridor program. One of the ironies of insurance pricing is that there can be a kind of self-fulfilling prophesy. If carriers expect claims experience to be low, they can offer lower premiums, which in turn attract a larger and healthier risk pool. On the other hand, if they expect claims experience to be high and offer high cost plans as a result, they are likely to attract fewer and higher cost enrollees.
Risk corridors can serve as a form of temporary government guarantee to help launch new insurance markets. Pricing insurance coverage in the absence of historical information about the underlying health of enrollees is inherently difficult and financially risky (providing a government insurance backstop for a financially risky private venture is by no means a new or particularly liberal idea — the same basic idea was used in Medicare Part D and also in the nuclear power industry). By splitting that risk between insurers and the government, the risk-corridor program is designed to help create a virtuous cycle of encouraging more carriers to enter the market and to price aggressively.
Although some have claimed that blocking public contributions to the risk corridors stops a government bailout of private insurance, there is likely no long-term effect on public spending. That’s because the government will ultimately have to make good on its obligation to insurers. The budget provision has more to do with the timing of spending than the ultimate amount. Also, the effects of undermining the risk corridors cut in opposite directions. To the extent that fewer people enroll as a result, costs go down, but to the extent that insurance premiums rise as a result of the change, spending will go up.
While in the end, the effect of delaying risk corridor payments to insurers is likely small, the provision is clearly not helpful in terms of the smooth operation of the ACA and that is certainly its intent. While spending would not change much, the result could be slightly higher premiums and slightly fewer enrollees. Whether that is something to be proud of is another story.