There has been a lot of discussion about Jonathan Gruber's HHS contract for technical analysis and modeling, and whether that contract compromises his objectivity in promoting the excise tax, which the Obama Administration has decided is politically necessary to include in order to pass health care reform.
I have not found a lot of analysis of what Mr. Gruber has said in support of the excise tax, however, and so I thought I'd diary my thoughts about his December 28, 2009 editorial in the Washington Post entitled, 'Cadillac' tax isn't a tax -- it's a plan to finance real health reform
I read this editorial carefully several times over, and I have to say, I can't believe this is the product of a leading health care economist. It's pretty lame, and I will now explain why I think so.
Mr. Gruber's short pitch for the excise is:
[The excise tax] would reduce the incentives for employers to provide excessively generous insurance, leading to more cost-conscious use of health care and, ultimately, lower spending. In other words, it "bends the curve." It would also be progressive, in that it would take from those with the most generous insurance to finance the expansion of coverage to those without insurance.
I like lists, so Mr. Gruber's list of reasons recommending the excise tax is:
- reduces incentives to buy overly generous insurance
- promotes cost conscious use of health care
- lowers health care spending
- progressive distribution of a tax exemption for employer-provided insurance.
Mr. Gruber then acknowledges the criticism that high-cost plans are often so for reasons other than excessively generous benefits, citing the higher costs employers with older employees must bear.
But instead of addressing this criticism head on, his response is:
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.
Essentially, Mr. Gruber has restated benefit no. four enumerated above to ignore the criticism against points one through three. That's some nice soft shoe there, Jon, but what the funk? The point we supposedly missed was the point you included as your top reason for employing this tax. If the idea is to bend the curve of health care spending, then you must address whether these high-premium plans are expensive because of the benefits they offer, and whether insureds consequently obtain health care they don't need.
To me, this discussion about excessively generous benefits is at the core of the argument. What are these benefits? In this editorial Mr. Gruber does not cite an example of an overly generous benefit, and in fact, I have yet to read an article in the mainstream media discussing these plans and investigating if there is indeed a correlation between generous plans and excessive spending by the insureds. I would think this is the least we deserve if we are supposed to accept this tax, but Mr. Gruber does not address this at all in his article, and so I suppose this discussion will have to be had in another forum.
Instead, Mr. Gruber, early in the article, turns his complete attention to the so-called progressive nature of the excise tax. He continues:
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.
I will stop here to note that I find this $250 billion number to be suspicious, and I wish Mr. Gruber had offered some citation to his source. I would hope that number represents the exemption on amounts above the proposed caps for plans that would be subject to the tax, since amounts under the arbitrary caps are not being considered "excessive" by proponents of the tax.
More importantly, I object to this notion of the tax exemption being called a "subsidy," but more from Mr. Gruber by way of illustration before I address this:
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. To understand how, consider two firms. One has an average insurance cost per family of $13,000, the national average. The other spends twice that much, $26,000 -- perhaps because its workers are older or perhaps because it provides much more generous coverage. Under today's system, a typical middle-income worker at the first firm gets a tax break of $4,550 while a worker at the second gets a $9,100 break. Taxpayers are literally sending twice as much money to the second firm simply because its insurance is more expensive -- regardless of the reason.
First, Mr. Gruber has not established high-cost insurance plans are generous and in fact acknowledges other factors often drive cost. If the reason for the high cost is an aged workforce, then isn't that a fair reason for exempting the cost, and doesn't it negate the cost-bending benefit Mr. Gruber claims for the tax? In short, the reason why a plan is expensive matters if you are proposing a tax upon it and claiming cost-curtailing benefits upon its imposition.
Second, taxpayers don't literally send money to firms as a result of the exemption on employer-provided insurance.
Third, tax exemptions are not subsidies, nor should they be discussed in terms of progressive taxation. The reason I say this is that the plans subject to this tax are disassociated with the income of the insureds. In plain English, Cadillac plans may in fact be part of a compensation package that, in total, would be considered a Pontiac. The whole idea of progressive income taxation is that people who earn more should pay a greater percentage of their income than people who earn less. By capping the value of health insurance employees will receive without regard to their income and their ability to replace lost benefits via a supplemental policy, the excise tax is actually regressive.
Amusingly, Mr. Gruber acknowledges later in his article that this tax will primarily hit middle income earners, since the wage increases that he thinks will subsequently accrue as employers shift into cheaper plans will go to those workers:
By my calculations the excise tax in the Senate legislation will raise U.S. worker wages by a total of $223 billion over the next decade, which would mean about $660 in extra annual earnings per employer-insured household by 2019. Moreover, the vast majority of those wage increases accrue to middle- and lower-income households; 90 percent would go to families with incomes below $200,000.
Of course, the wages that these workers gain will be subject to income and payroll tax, meaning that a tax benefit these workers now have will be lost, and that most of the revenues this measure generates a few years down the road will be by way of additional income taxes collected from middle- and lower-income workers.
Mr. Gruber hails this as "an innovate way of financing health care reform we so desperately need." However, in this article, at least, he has failed to make a convincing case for the cost curve-bending merits of an excise tax by his curious disinterest in examining the actual plans subject to this tax, their benefits and usage of them by their insureds. He also used some very suspect logic in promoting the tax as progressive, and inadvertently outed it as affecting mostly middle-income workers.
If the Obama Administration gave him a quid pro quo contract for that advocacy, they should ask for a refund.