Krugman: The health insurance excise tax

[ProSense]

The health insurance excise tax

OK, clearly I have to weigh in on this. Should there be a limit to the tax deductibility of employer-provided health insurance, which is what the excise tax in the Senate bill is supposed to fix?

My answer is yes, but the final bill should address the criticisms.

The argument for limiting the tax exclusion is that the tax break on health insurance encourages over-spending, so limiting it could help in the process of “bending the curve”. More generally, since we think the United States spends too much on health for not-so-good results, it makes sense where possible to pay for expanding coverage from the health sector itself. Both arguments are reasonable.

The counter-arguments seem to run along three lines.

First, there’s the argument that many “Cadillac” plans aren’t really luxurious — they reflect genuinely high costs. That’s surely true. A flat dollar limit to tax deductibility has real problems. At the very least, the limit should reflect the same factors insurers will be allowed to take into account in setting premiums: age and region.

Second, there’s the argument that any reductions in premiums won’t be passed through into wages. I just don’t buy that. It’s true that the importance of changing premiums in past wage changes has been exaggerated by many people. But I’m enough of a card-carrying economist to believe that there’s a real tradeoff between benefits and wages.

Maybe it will help the plausibility of this case to notice that we’re not actually asking whether a fall in premiums would be passed on to workers. Even with the excise tax, premiums are likely to rise over time — just more slowly than they would have otherwise. So what we’re really asking is whether slowing the growth of premiums would reduce the squeeze rising health costs would otherwise have placed on wages. Surely the answer is yes.

The last argument is that this hurts unions which have traded off lower wages for better benefits. This would be a bigger issue than I think it is if the excise tax were going to kick in instantly. But it won’t, giving time to renegotiate those bargains. And bear in mind that this kind of renegotiation is exactly what the tax is supposed to accomplish.

A last general point: we really don’t know what it will take to rein in health costs, but that’s a reason to try every plausible idea that experts have proposed. Limiting tax deductibility is definitely one of those ideas.

Bottom line: the details of the excise tax should be fixed, but it’s on balance a good idea.

[jpak]

1. Krugman hates unions!

:evilgrin:

[bread_and_roses]

3. No, but I wonder if he's ever sat at a bargaining table? Cause he's wrong

He's wrong about this, and he's wrong to endorse an idea that lays the burden on workers by being in place of a progressive income tax on the wealthiest. But then, this entire Bill is so botched, so awful, so huge a transfer of more wealth to Big Insurance and Big Pharma, that there is really no point in arguing one point. The whole thing should die, and I hope it does. It accomplishes NONE of the reforms that were fought for. As for "paying too much for health care" - well, maybe we ought to look at why that it, and lay the blame squarely where it belongs - on Insurance and Big Pharma - instead of on workers and ordinary people just trying to get their health care needs met.

But I'm done with this here - I am so sick of people putting lipstick on this ghoul just so Obama can have a "victory." Let's see how many union members are willing to give up their time and money to elect Democrats after this. Personally, I won't. And I don't think I'm alone.

[Phoebe Loosinhouse]

2. We do know what will rein in health costs, the rest of the world has figured it out - SINGLE PAYER

I can't believe anyone can say or write this with a straight face-

"we really don’t know what it will take to rein in health costs, but that’s a reason to try every plausible idea that experts have proposed".

We absolutely do know what will rein in costs - they just don't want to do it because all the politicians (with just a few exceptions) are corrupt lackeys of entrenched industries that line their personal coffers. There will never be greater proof of this than Health Care "Reform" as it's laughingly called.

I'm not sure I can take Krugman seriously anymore.

[levander]

13. There are other ways than single payer...

Look, single payer does not have the support it needs in this country to pass. They couldn't even get a public option through, despite a year of trying to garner votes for it in Congress.

The system with the highest customer satisfaction rating in Europe is the Netherlands' system. All insurance is provided by private companies, but they are heavily regulated.

Ron Wyden wrote a bill to reform America's health care system that was based on the Netherlands system. It was called the Healthy Americans Act, HAA. The Reid bill gets 94% of the country covered. The HAA gets 99% of the country covered. The Reid bill makes the cost curve of health care go up even faster than it is now. The HAA makes us spend less money on health care than we do now. The Reid bill is going to fuck with Medicare and has outlandish claims that it will cut half a trillion dollars out of Medicare. The HAA doesn't touch Medicare. The whole Obama, "save money on this deficit in the 1st decade, and the 2nd!" is based on these unrealistic cuts in Medicare asserted in the Reid bill. The HAA saves money on the deficit without these ridiculous claims. The Reid bill has an enormous expansion of Medicaid in it. Medicaid is a plan that underpays doctors and so it's enrollees have a harder time finding providers. The HAA eliminates Medicaid and replaces it with subsidies so lower incomes can just go buy insurance. And, not a single Republican in the Senate voted for the Reid bill. But, despite being a bill neither house in Congress has considered seriously by it's leadership, has good bipartisan support.

It's so painfully fucking obvious they should have gone with the HAA. Democratic leadership in the Senate really fucked this one up.

To read about the Healthy Americans Act:

http://www.huffingtonpost.com/lanny-davis/the-healthy-americans-act_b_301962.html
http://www.huffingtonpost.com/lanny-davis/the-wyden---bennett-healt_b_293117.html
http://www.huffingtonpost.com/lanny-davis/a-plan-for-universal-cove_b_309513.html

[ProSense]

4. More info

Do Premiums Affect Wages?

January 7, 2010 • by Austin Frakt

<...>

In a 2006 article in the Journal of Labor Economics titled The Labor Market Effects of Rising Health Insurance Premiums, Katherine Baicker and Amitabh Chandra

estimate that a 10% increase in health insurance premiums reduces the aggregate probability of being employed by 1.2 percentage points, reduces hours worked by 2.4%, and increases the likelihood that a worker is employed only part time by 1.9 percentage points. For workers covered by employer provided health insurance, this increase in premiums results in an offsetting decrease in wages of 2.3%.

Since health insurance premiums are plausibly a factor of five or so less than wages (annualized), the 10% increase in the former leading to a 2.3% decrease of the latter is close to a one-to-one trade-off.

But we don’t have to take just Baicker’s and Chandra’s word for it. Others cite similar findings. In a 2008 article in JAMA (link to a full access, low resolution version) Ezekiel Emanuel (yes that one) and Victor Fuchs write that “the health care cost–wage trade-off is confirmed by many economic studies.” In support of this claim they cite the following (extracted from their references):

• Eberts R, Stone J. Wages, fringe benefits, and working conditions: an analysis of compensating differentials. South Econ J. 1985;52:274-280.
  
  
• Sheiner L. Health Care Costs, Wages, and Aging. Washington, DC: Federal Reserve Board of Governors; April 1999. http://www.federalreserve.gov/pubs/feds/1999/199919/199... . Accessed February 6, 2008.
  
  
• Royalty AB. A Discrete Choice Approach to Estimating Workers’ Marginal Valuation of Fringe Benefits. Indianapolis: Indiana University–Purdue University; June 2003. http://liberalarts.iupui.edu/~anroyalt/wfdiscch_j03.pdf . Accessed February 6, 2008.
  
  
• Madrian BC. The US Health Care System and Labor Markets. Cambridge, MA: National Bureau of Economic Research; January 2006. NBER Working Paper No. 11980. http://www.nber.org/papers/w11980 . Accessed February 6, 2008.
  
  
• Gruber J. The incidence of mandated maternity benefits. Am Econ Rev. 1994; 84(3):622-641.
  
  
• Miller RD. Estimating the compensating differential for employer-provided health insurance. Int J Health Care Finance Econ. 2004;4(1):27-41.
  
  
• Gruber J. Health insurance and the labor market. In: Culyer AJ, Newhouse JP, eds. Handbook of Health Economics. Vol 1. New York, NY: Elsevier Science; 2000.

more

[HousePainter]

5. Economics as an exact science ?

Should we now take the manipulation of pure math to justify ideological predilection (i.e. economic theory and forecasting) to be a science ? Who is the one true god ? Krugman, Keynes, Friedman,Marx, Ricardo ?
Let's leave the statistical legerdemain to academics and those in the halls of power who use it to justify their positions and policies.

Let's talk about working people and the real consequences of this proposal.

Shifting some of the cost of health insurance from organized labor plans to individuals ( by putting pressure on unions' collective bargaining to trade weaker benefits for higher wages) will be accomplished with insurance plans that carry higher deductibles and more co-pays. Union members and their families who are lucky enough to remain healthy will see a net increase in income, those who are not will see a decrease. This will set up a divide within the rank and file, opening yet another front in the "I've got mine, too bad for you" American method of social control . Divide and Conquer, by appealing to isolated self interest.

Masquerading as progress- brought to you by your "friends" in Washington- the one ruling Party- The Corporatist Party.

[janx]

12. Krugman doesn't claim that here.

In fact, he'd probably be the last one to claim that economics is even close to an exact science. And for what it's worth, I share your sentiments about those who do make such a claim.

[SpartanDem]

19. It's not an exact science

but is an science none the less and it's quite telling that most economist think if properly designed this is a good idea.

[backscatter712]

6. Between this and the advocacy of mandates...

I'm sure he's gonna got flamed here plenty.

It's as if you're not allowed to make sense or use economics here...

[Capn Sunshine]

7. Needs a zippier title- more hysterical sells better at DU

Here's a guy who is perhaps the leading economic light in America today, who sees why the so-called "Cadillac tax" might just work to supress rising costs.

That's the intention. But this seems to escape many on DU. They prefer ranting about things that do not exist in reality.

Like the betrayal because they didn't get their magic pony yet.

[frazzled]

9. Note how few responses there are to this thread

It makes me laugh to see how people hide when facts are presented that override their hysterical, unicorn-inspired beliefs.

[SpartanDem]

10. It is awfully quiet in here

[levander]

14. Because this assertion has already been debated ad nauseum...

And, Krugman doesn't address the idea that the cost curve doesn't bend down in an important way. All that happens is union member will have less benefits, which does equal "less cost". But, it's not really making the services and drugs we are paying way too much for any cheaper.

Krugman has become a shill. He doesn't address the obvious counter-argument to his stance at all.

[frazzled]

18. Oh, wow, your Nobel Prize in Economics is on the way

You've outsmarted the Princeton professor! Not.

[SpartanDem]

8. Hopefully Congress puts in the fixes he mentions

becuase he's right on balance it is a good idea.

[johnaries]

11. Agreed. It is a good idea because it does a lot more than just

add revenue. But it could be a lot better and Krugman pretty much hit the nail on the head about what improvements can and should be made.

[Hello_Kitty]

15. I'm sorry but, "I'm enough of a card carrying economist" is not a sufficient explanation

For his certainty that lower health care premiums will lead to higher wages. This is eerily similar to the "Free trade is good! Because shut up that's why!" canard economists like him propagate. The only basis I've seen for it is extrapolating the reductions in premiums and wage increases of the late 90s (when we were also in the midst of the tech bubble and low unemployment) into an assumption that the same thing would happen again in a vastly different economic climate.

Economists are smart people but they can be, and often are, wrong. Especially when they've got their ideological blinders firmly in place.

[levander]

17. Krugman has said he supports the bill for ideological purposes...

He's said his support is contingent upon the fact that he believes we'll spend years fixing the bill and that doesn't think we'll get another bill out of Washington for years.

He's doing exactly what you say kitty. He's throwing aside his concerns over the fiscal implications based on his political opinions. And, as it so happens. He's in no way a trained political scientist. He should be focusing on fiscal issues, because that's what he knows.

Krugman doesn't know any more about political science than I. And, my opinion, if they pass this bill it's an excuse not to do anything for several years. Obama won while basing his campaign heavily on health care reform. There's so much political pressure now, that if you alleviate it via some piece of shit bill, all it is is an excuse not to do anything later. It's kicking the can down the street. If they don't do something, can you not imagine candidates all over the spectrum picking up the issue and running with it? It puts more pressure on them to fix it if you kill this monstrosity.

And note, Obama's campaign was against mandates but for cost controls. This bill is the exact opposite of what people were voting for Obama for.

[Hello_Kitty]

16. Crossposting this from another OP. An aspect that is being missed:

Many union members either work directly for the government (teachers, police, firefighters) or for companies that have substantial government contracts. In many states, such as my state of Arizona, the government is constitutionally obligated to balance the budget. If the excise tax affects a lot of teachers and other gov't employees here, any savings from it on health insurance will NOT be put back in wages. It will be used to fill the budget gap because we are currently in a deep deficit. Many other states are in the same position. The unionized companies with government contracts will simply get less money in their future contracts, hence, no wage increases for them either. Federal employees and contractors could be in a similar situation because all of a sudden we have to be deficit hawks now. I'm pretty sure Jon Gruber and Paul Krugman haven't figured that into their projections.

[boppers]

20. Nobel prize winner vs. DU?

:popcorn:

[Nicholas D Wolfwood]

21. Though I agree with him on this point, having a Nobel Prize does not always make you right. (nt)

[mkultra]

22. he is about half right

There is much evidence to show that the decrease in costs will NOT migrate to higher wages. Historical evidence has shown that vcost cutting by companies is not the driver for increasing wages.

TI think the Unions stand against this not because it effects union members with high cost healthcare but because healthcare is something that they bargain for and this bill will take that bargaining out of their hands.