Health Care For America Now

Those that promote the so-called "Cadillac" excise tax on workers' health care plans sell the tax on two arguments: First, that the tax will cut health care spending, and second, that the tax will increase wages.

As MIT's Jonathan Gruber (who's on the payroll at HHS) put it in the Washington Post:

And when firms reduce their insurance generosity, they make it up in higher pay for their workers. We saw this in the late 1990s, when the rise of managed care temporarily lowered insurance costs, and wages rose in real terms for the first time in many years. But as soon as managed care was weakened and health costs rose again, we once again saw flat or declining real wages in the United States.

The theory goes that if you start taxing workers' health care plans for the first time in American history, employers will cut heath care (apparently that's a good thing) and put that money back into wages.

Lawrence Mishel and the Economic Policy Institute is out with an eye-opening new study demolishing the second of those two claims. The report states:

Proponents of this theory point for evidence to the latter half of the 1990s, a five-year period when wages were growing rapidly while growth in employer health care spending was relatively constrained. They contrast the period from 1995 to 2000 with the periods from 1989 to 1995 and 2000 to 2006, when wages stagnated while health care costs grew much more rapidly.

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.

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.

The idea that if we were forced employers to spend less on health care (by taxing health care plans) they would therefore spend more on wages is not borne out by the evidence.

So what arguments are proponents of this tax on the middle class - which will hit one in five health care plans offered at work by 2016 - left with? That the excise tax is a way to control health care spending. But the proponents of this argument make the classic mistake of confusing lowering health care spending with shifting health care costs.

What will happen when a 40% excise tax kicks on plans with higher premiums? Companies will lower the value of the plans (lowering the premiums under the threshold for the excise tax) and make up the difference by raising the amount employees have to pay out of pocket. Or, employers could simply cut benefits. In other words the health care that is now paid for by the insurance plan will, after the excise tax, be paid for by the worker. It is possible that cost shifting to the worker could lower costs in the short run if workers don't spend as much on care, such as not going to the doctor when they have symptoms or postponing that dental clearning. But what if the symptoms were actually the first sign of cancer? Or the lack of preventive dental care led to expensive dental surgery later on? Their delayed care will be more costly - not to mention the consequences for their health.

The excise tax idea is, therefore, directly at odds with the other main goal of health reform - to get people better care. Taxing health care benefits is designed to get employers to spend less on health care. That policy will directly shift costs to you, and that means higher deductibles, less choice of doctors, and worse health benefits.

Ironically, for those who champion the proposal, the idea is less about policy than about revenue. The excise tax pays for a large part of the Senate health reform bill. But this is again contradictory - if the tax works and does reduce health benefits by moving employers and employees to non-"Cadillac" plans, it will raise less money. The two goals are at odds.

While proponents like Ezra Klein say that the excise tax is a good way to control costs, and that any cost control is going to "cause some pain," there are many better ways to control costs and pay for reform that involve reigning in powerful corporations, not shifting costs and "causing pain" to people. Ideas in the House bill like the public option or negotiating the prices paid for drugs in Medicare would cut health care spending without taxing the benefits of the middle class, shifting costs to workers, and/or making their coverage worse.

As EPI proves, health care costs are not taken out of wages. A tax on health care plans may indeed "control costs," but it does it by making health care worse or shifting costs. Instead of getting better health care at lower cost, which is what you'd get if we had, say, a public health insurance option, you're more likely to get what iphelgix, an IT worker who's health care plan is classified as "Cadillac" and will be taxed, expects: Worse benefits for workers, or rising health care costs at work.

The basic promise of health care reform is to guarantee good, affordable coverage for all. Much of what is in health care reform legislation does that. But the excise tax does just the opposite: It makes good health care less affordable. It should not be part of the legislation that Congress will soon pass.