From my days as a general policy wonk instead of a health policy wonk, there were two common sayings on optimal taxation policy:
“Lower rates, broader base”
“Tax the bads, subsidize the goods”
Yes, policy wonks are not wordsmiths, but I want to focus on the intersection of tax policy and healthcare policy that is implicit in the second shibboleth.
Taxing the bads usually means declining long term revenue as over the long term, fewer people consume the bad thing. A classic recent example is the use of high levels of cigarette and other smoking tobacco taxes to fund the Childrens Health Insurance Program (CHIP). In 2009, CHIP was reauthorized and expanded. The federal share of the program was to be paid for with a $0.61 per pack increase in the federal cigarette tax. There is a long term problem with using a tobacco tax to fund CHIP — tobacco usage is going down and has been going down for over a generation now as we as a society are starting to approach the point of having smokers fully internalize the costs of smoking. This trend will continue as cigarettes and other tobacco products are more heavily taxed.
The basic mechanism is higher cash prices for cigarettes keeps non-smokers from becoming addicted smokers because they never try or they never quickly get to a pack a day. Long term smokers will brand shift downwards or less likely quit if they are cash constrained, but cash constrained non-smoking 17 years olds will grow up to be non-cash constrained 51 year old non-smokers. We’ve decided as a society that tobacco usage is a bad that we really want to significantly reduce or eliminate over the long term. So we’ve been taxing a “bad” to subsidize a “good”, health insurance for kids.
Over the long run, tobacco taxes of any level will be insufficient to fund CHIP. But that is a long run failure that is a win. The failure will be that far fewer people will be smoking and long run health will be improved even as long run healthcare costs decrease.
The Affordable Care Act has several sets of policies where massive failure would be a greater policy win than massive “success”.
From a CBO point of view, the individual mandate and the employer mandate are expected to be significant funding sources for the coverage expansion. These are taxes on either being uncovered despite being able to afford insurance or free riding by having employees be covered by publicly subsidized insurance instead of privately paid group insurance. Less coverage (all else being equal) means higher tax revenue (and lower subsidy expenditure) so a “better” CBO score in regards to the net deficit/surplus impact of PPACA. However the policy goal of PPACA is more coverage not less. In a world where no one paid the individual mandate penalty because everyone was insured, the CBO score would look ugly but the policy goal would have been achieved. This is a situation of taxing a bad to subsidize a good.
The Cadillac tax is similar.
Sarah Kliff at Vox has a good explainer:
The Cadillac Tax places a heavy 40 percent tax on the most expensive health insurance plans. In 2018, it kicks in for individual plans that cost more than $10,200 and family plans above $27,500. The tax only hits the part of the plan above the threshold — so in 2018, an individual plan that costs $11,200 would get a $400 tax.
Traditionally, the government doesn’t tax employer-sponsored insurance. This has created a huge incentive for companies to spend more money on generous insurance plans and less on cash wages….
The whole point of the Cadillac tax was to push employers in the opposite direction, and offer their workers less robust benefit packages….
The Cadillac tax is projected to raise a significant amount of revenue both directly and indirectly as employers shift compensation from what would be highly taxed Cadillac benefits to lower taxed wages.
Employer groups and unions have been acting fairly aggressively to shift their plan designs away from possible Cadillac incurring designs even as the tax does not kick in for another three years. There are three ways to shift the cost curve to avoid the Cadillac tax. The first is to count on a general slow down of health care costs so that annual premium growth is low enough to never hit the Cadillac threshold. This is a bet on the general economy, prescription costs, health care productivity growth and demographics. It is a big bet with minimal local control. If the economy grows rapidly with decent levels of inflation (3% or 4%), presciptions costs crater as anti-trust regulation is used as a hammer, and health care suddenly becomes way more productive than the general economy, then this is massive policy win even if there is very little Cadillac tax revenue gained directly or indirectly.
The other two ways of controlling exposure to the Cadillac tax at the employer group level. It is a matter of reducing cost per service and/or the number of services being offered. Cost per service control can happen through a combination of narrowing networks, bundled payment reforms, reference pricing, pre-authorization and PCP gatekeeping requirements. The bluntest tool to limit service utilization is through the increase in cost sharing by either higher deductibles or higher co-insurance/co-pays. This system does a good job of reducing utilization over all. It does a tremendously horrendous job of reducing only unneeded or extraneous care.
Cost control measures through narrowing networks that exclude high cost or ineffective or inefficient providers are a net win as that lowers both local group costs, and long run costs as the excluded providers either get their acts together, lower prices or leave the market so average cost per service trend decreases. That would be a massive policy win even if Cadillac tax revenue comes in under expectations. Utilization reduction through blunt measures is more of a mixed bag.
A good long term measure if PPACA is working as intended is if Cadillac tax collections are coming in at or below projections. Lower levels of Cadillac collection is a net good thing even as it providers a financing problem.