This myth about the excise tax helping produce over $300 billion in wage increases is wrong, as was shown by Robert Reich, Laurence Mishel, and Josh Bivens at the Economic Policy Institute. I'll go more into detail on this below, and will cite from their research:
Mishel's paper, "Employer Health Costs Do Not Drive Wage Trends", notes that the size of health care costs, large as it is, is too small to explain the magnitude of the rise that occurred in wages during the late 90s. What's more, the rise in wages was most dramatic among lower-paid workers, who are much less likely to have any health care coverage on the job at all. He notes that about half of all U.S. workers currently do not receive health care coverage from their employers and, thus, could not have benefited from the theoretical health care-wages trade-off.
"Just as the sun doesn‟t rise because the rooster crows, moderating health care costs had little to do with why wages rose in the late 90s," Mishel said.
One of our kossacks, math4barack, went into this issue earlier today, and here's what he found from Mishel's paper:
EPI speaks the truth about this:
There is logic to their argument, but it is only skin-deep and deeper examination will show it to be simply not true. The logic can be seen looking at trends in health care premiums and wages—wage growth fared better in the late 1990s when health care premiums grew more slowly than in the early 1990s and wages performed poorly in the 2000s, a period when health premiums grew strongly again.3
However, digging just a bit beneath the surface reveals the following:
1. Health care costs are not large enough to substantially move wages as these proponents claim;
2. Examination of actual wage and benefit trends confirms that changes in the trajectory of health care costs did not materially affect wage trends over the last 20 years; and
3. The wage behavior described—accelerating in the late 1990s and more slowly thereafter—actually best characterizes wage growth for low-wage workers who have minimal access to employer-based health care. Conversely, this pattern of wage-growth over time is least pronounced for higher paid workers with the most health coverage.
A couple more snippets:
Clearly, this "health care theory of wage determination" is wrong, and other factors explain these overall wage trends.The simple explanation is that productivity accelerated in the mid-1990s, and the low unemployment (and hikes in the minimum wage) facilitated faster wage growth. That this wage growth disappeared entirely in the 2002-07 recovery is not due to faster health care cost increases but to weak employment growth and employers’ ability to achieve increased profitability rather than pass on productivity gains to workers. This reveals a fundamental flaw in our economy: productivity gains are not passed on to higher living standards for workers.
and
a point made by Jared Bernstein and Sylvia Allegretto in an analysis in 2006: About half of all workers don’t even receive employer-provided coverage. According to the U.S. Bureau of Labor Statistics (BLS), 47% of workers did not participate in employer-provided health care benefit plans in 2005. Thus, there is no health care squeeze that would explain the wage losses of nearly half the workforce. In addition, the BLS data show that among workers whose average wage was less than $15 per hour last year, only 39% participated in employer-provided health plans..... low-wage workers also lost the most ground in terms of real wages. Thus, those least likely to get health care experienced the greatest loss in real wages, the opposite of what the trade-off explanation would predict. (Bernstein and Allegretto 2006)
Josh Bivens and Elise Gould also make the case for the progressive tax on the wealthy as a better financing mechanism in the health insurance reform bill in their paper here:
The Congressional Budget Office (CBO) has estimated that the House surtax will raise $460 billion over the next decade while the Senate excise tax will raise $150 billion. Given the importance attached to making fundamental health reform deficit-neutral over the next decade, this not a trivial difference. The more money that is raised through these respective
instruments, the less money that has to be raised through other politically contentious means in the future.
Besides raising more money, the House surtax raises it more progressively. The bottom 99% of households will pay nothing in a given year under the House surtax. Only the top 1% of households will pay the surtax. Proponents of the Senate excise tax often argue that it, too, is a progressive revenue-raiser by supposing that there is a strong link between high incomes and high-cost health plans. However, this correlation is less consistent than is often thought. Research by Gould and Minicozzi (2009) using data on health plan coverage by private establishments shows that the size and/or age of an establishment’s workforce is a more important determinant of having high-cost health plans than the share of the establishment’s workforce that earns an above-average salary.
They also make the case that high-cost plans aren't high-value plans here below:
The assumption that high-cost plans are high-value plans is flawed. Many health plans are expensive because the population covered is older or sicker than average, but they still do not provide more comprehensive coverage. Moreover, this is a much larger problem than is often recognized. Gould and Minicozzi (2009) have shown that some of the most powerful predictors of a plan’s high cost are the size of the firm and the age of its workers.
This is surely not a coincidence—small firms and firms with older work forces tend to have less bargaining power with insurance companies and this leads to higher prices for insurance coverage that may be no more comprehensive than lower-priced coverage for larger or younger firms. It should be noted that the Senate bill recognizes this reality and specifically exempts some health plans (those covering high-risk professions, for example) from the excise tax or raises the threshold of the tax explicitly on the grounds that high-cost is not synonymous with high-value.
Furthermore, Gabel et al. (2010) find that only 3.7% of the variation in premiums for family plans is determined by a plan’s actuarial value, that is, the share of average medical expenditures paid for by insurance (instead of by out- of-pocket spending). It is also worth noting that the Joint Committee on Taxation’s (JCT) scoring of the excise tax indicates that plans with fewer enrollees are more likely to be affected by the excise tax. Given that previous research has shown that smaller firms pay premiums 18% higher than large firms pay for equivalent health coverage, it seems clear that this excise tax will be affecting many workers who have only high-cost—not high-value—health coverage
(see Gabel et al. (2006)).
Also, deaniac83 assumes that the 5% increase in health premiums this year is the average. Overall inflation this year actually was negative--and no one expects that to continue. Kaiser Family Foundationgoes into more detail on this issue:
The 5% increase we found in premiums is moderate by long-term historical standards. For example, two different times during the last decade premiums increased by 13% a year, in 2002 and 2003. This year's increase continues a multi-year period of relative moderation in premium increases. Still, over the last ten years premiums have increased by 131%, while wages have grown 38% and inflation has grown 28%. Consider this: If people (and businesses) are as concerned as they are now about rising health care costs in a period when they are actually moderating, how much more concerned will they be when rates of increase return to historic averages?
Let's do some very simple arithmetic. Start with a fairly conservative assumption: If we assume that premium increases over the next ten years will average what they did over the last five (about 6.1% per year), the average premium for a family policy in 2019 will be $24,180. That's a big number. On the other hand, if we assume increases revert to the average of the last ten years—an average annual increase of about 8.7% and a very plausible scenario—premiums in 2019 will average a whopping $30,803, a very scary number (Figure 1).
See below for the graph by KFF:
And here's more from KFF about how wages haven't kept up with the inflation in health insurance premiums over the past ten years:
Also, in response to the economic downturn and higher health costs, employers are more likely to shift to a cheaper plan with higher deductibles, co-pays, and increased cost-sharing as KFF found in their report on this issue.
We also asked employers whether they have reduced their benefits or increased cost sharing due to the economic downturn.
Twenty-one percent of employers offering health benefits report that, in response to the economic downturn, they reduced the scope of health benefits or increased cost sharing, and 15% report they increased the employee share of the premium. More large firms (200 or more workers) than small firms (3–199 workers) report increasing the share of the premium that the employee pays (22% vs. 15%).
And in their outlook for the future on employers and availability of health benefits:
Among those that offer benefits, large percentages of firms report that in
the next year they are very or somewhat likely to increase the amount workers contribute to premiums (42%), increase deductible amounts (36%), increase office visit cost sharing (39%), or increase the amount that employees have to pay for prescription drugs (37%).
Although firms report planning to increase the amount employees have to pay when they have insurance, relatively few firms report they are very likely (2%) or somewhat likely (6%) to drop coverage. Four percent of firms offering coverage say that they are very likely to restrict eligibility for coverage next year, and an additional 5% say that they are somewhat likely to do so.
Among firms offering health benefits but not offering an HSA-qualified HDHP, 6% say that they are very likely and 16% say they are somewhat likely to offer an HSA-qualified HDHP in the next year. A similar share of offering firms not currently offering an HDHP/HRA report that they are very likely (5%) or somewhat likely (15%) to offer that plan type next year.
The excise tax would incentivize employers to shift to a cheaper policy, so you wouldn't be able to keep your health insurance if you like it, and you'd have to face higher co-pays, deductibles, and increased cost-sharing. Also, the rate of inflation is showcases precisely why this excise tax is not properly indexed.
The excise tax would hit about 19% of employer-provided insurance, thus affecting about 30 million Americans, due to its not being properly indexed by 2016:
Specifically, an estimated 19 percent of workers with employment-based coverage would be affected by the excise tax in that year. Those individuals who kept their high-premium policies would pay a higher premium than under current law, with the difference in premiums roughly equal to the amount of the tax. However, CBO and JCT estimate that most people would avoid the cost of the excise tax by enrolling in plans that had lower premiums; those reductions would result from choosing plans that either pay a smaller share of covered health care costs (which would reduce premiums directly as well as indirectly by leading to less use of covered medical services), manage benefits more tightly, or cover fewer services.
And by 2019, it'd affect about 58 million Americans' employer-provided insurance, if not properly indexed, according to the Citizens For Tax Justice based on their calculations.
The caps above which the proposed health insurance excise tax will apply are set at $23,000 for family plans and $8,500 for individual plans, starting in 2013. These might seem like very high amounts, but they will dwindle rapidly in real terms over time.
That’s because the caps will be indexed only for general inflation plus one percent, rather than for the much higher rate of expected health care inflation. As a result, according to the Joint Committee on Taxation, the number of families and individuals who will be affected by the new tax will grow rapidly. from 9.1 million couples, single parents and singles without children in 2013 to 24.6 million "tax units" by 2019, with continued rapid growth thereafter. According to our estimate, those 24.6 million tax units hit by the excise tax in 2019 will include about 58 million men, women and children.