PYears ago, when I first started writing about health care, I came across a press release thatnbsp;said three new cardiac centers had opened in a Midwestern city and that, as a result, the costs of heart care in that town were expected to rise. This seemed contrary to all I had ever learned about supply and demand. But it was a powerful lesson. Health care economics, it turns out, is an oxymoron. The normal rules don’t apply./P
PThat explains in part why it is so hard to model the costs of the massive health bills Congress is debating. And why those estimates from CBO and JCT that will drive the legislation in the coming months will almost surely miss the mark. This is no criticism of the congressional estimators—or of those in the private sector who are trying to do similarnbsp;work. They are doing as well as anyone can. But accurately measuring the ten year effects of huge changes in the medical system is simply not possible.nbsp;nbsp; /P
PIt should be no surprise. Health care is a $2.5 trillion industry—nearly 18 percent of the economy. It includes many providers whose relationships to one another are not well understood. At the same time, consumers of health care are often not the payers. This changes their behavior in a big way. On top of all that, patients are often driven by non-economic incentives. How does one model fear, for instance? /P
PMedicare Part D drug insurance may be the best recent example of how health care budget estimates can go wrong. That debate, like this one, eventually came down to dollars. But as complex as it was, creating Part D was simple compared to broad health reform. Instead of remaking the entire insurance system, Part D changed the way seniors paid for just one product—pharmaceuticals. Thus, forecasters needed to project only three big things: How many people would buy the insurance, what premiums they’d be charged, and how much they’d spend on drugs./P
PThe debate itself included a highly-chargednbsp;argument over cost estimates. But even after the law passed innbsp;latenbsp;2003, government expertsnbsp;struggled to project its ten-year price tag. The official estimates came from the Medicare actuaries—a highly respected and professional operation that knows the programnbsp;as well as anyone. They hedged their forecasts as much as possible, even showing low-, intermediate-, and high-cost projections. They warned that estimates of a brand-new program were highly uncertain. Despite all the caveats, theirnbsp;forecasts were far off course. /P
PThe March, 2004 Medicare trustees A href=http://www.cms.hhs.gov/ReportsTrustFunds/downloads/tr2004.pdfreportnbsp;/Apredictednbsp;2008 premiums would range from $12.7 billion to $19.7 billion. Actual 2008 premiums: $5 billion. The trustees figured 2008 spending would range from $77 billion to $131.4 billion, with a mid-range of $101.9 billion. In reality, the program paid just A href=http://www.cms.hhs.gov/reportstrustfunds/downloads/tr2009.pdf$49 billion/A in benefits last year—half the intermediate projection and far below even the low-cost estimate. For context, the $53 billion difference between projected and actual spending is equal tonbsp;half of the total estimated annual cost of all of health reform.nbsp;nbsp; /P
PKeep this story in mind when, a few months from now, President Obama and congressional leaders find themselves haggling over some last-minute idea that is intended to keep the cost of the bill below what has become the target of $1 trillion over 10 years. In truth, nobody will actually have a clue about what these changes will cost—or save. If we are lucky, they’ll get the direction right.nbsp;nbsp;nbsp;nbsp; /P
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P dir=ltr style=MARGIN-RIGHT: 0pxOne of our readers, Kevin, wrote to say he was confused by my description yesterday of the premium subsidy in Senate Finance Committee Chairman Max Baucus’ health reform plan as a tax credit. “It sounds like a voucher to me,” he wrote. /P
P dir=ltr style=MARGIN-RIGHT: 0pxSounds like a voucher to me too. Except it isn’t. The proposal would work like this: Everyone would be required to buy insurance, and low- and moderate-income people would get a government subsidy to help out with the premiums. The subsidy, however, is designed as a refundable tax credit paid directly to insurers. The size of the credit is based on an immensely complicated sliding scale. I can’t describe it any better than the Finance A href=http://finance.senate.gov/sitepages/leg/LEG%202009/091609%20Americas_Healthy_Future_Act.pdfstaff:/Anbsp;/P
BLOCKQUOTE dir=ltr style=MARGIN-RIGHT: 0px
P dir=ltr style=MARGIN-RIGHT: 0pxFONT color=#000000SPAN style=FONT-SIZE: 12pt; FONT-FAMILY: ‘Times New Roman’; mso-fareast-font-family: ‘Times New Roman’; mso-ansi-language: EN-US; mso-fareast-language: EN-US; mso-bidi-language: AR-SABeginning in 2013, tax credits would be available on a sliding scale basis for individuals and families between 134-300 percent of FPL to help offset the cost of private health insurance premiums. Beginning in 2014, the credits are also available to individuals and families between 100-133 percent of FPL. However, individuals subject to a five-year waiting period under Medicaid or CHIP are eligible for the tax credit beginning in 2013. The credits would be based on the percentage of income the cost of premiums represents, rising from three percent of income for those at 100 percent of poverty to 13 percent of income for those at 300 percent of poverty. Individuals between 300-400 percent of FPL would be eligible for a premium credit based on capping an individual‘s share of the premium at a flat 13 percent of income. For purposes of calculating household size, illegal immigrants will not be included in FPL. Liability for premiums would be capped at 13 percent of income for the purchase of a silver plan./SPAN/FONT/P/BLOCKQUOTE
P dir=ltr style=MARGIN-RIGHT: 0pxnbsp;Just to make it more complicated, you must use your prior year tax return to determine whether you are eligible for the credit.nbsp;But if your income rises for the current year, you may have to repay some of the credit–long after you bought the insurance.nbsp;/P
PBtw, the proposal defines income in an unusual way. It is not gross income or even adjusted gross income–the two concepts most of us are familiar with from our 1040s. Instead, it uses a rather flexible concept known as modified adjusted gross income (MAGI). This pops up here and there in tax law, but is defined differently from statute to statute. This version excludes foreign income, but includes both tax-exempt bond income and the income of any dependents. You will find it nowhere on your tax return./P
PSo why would Baucus design this subsidy as a tax credit instead of a simple voucher? There are a couple of possible reasons. The first is because tax credits are what the Finance Committee does. The second is that these days tax subsidies are farnbsp;more popular than spending (see Eric Toder’snbsp;nice A href=http://taxvox.taxpolicycenter.org/blog/_archives/2009/9/15/4322494.htmlpost/A on this the other day). Never mind that they are spending, as our reader Kevin accurately notes./P
PWhatever you call them—tax credits, vouchers, or bananas—these subsidies are expensive. CBO projects the 10-year cost as $60 billion, but that is misleading since the credit doesn’t really begin to kick in until 2014. By the end of the budget window, in 2019, the annual revenue loss would be nearly $100 billion.nbsp;nbsp; /P
PStill, these subsidies are the key to health reform.nbsp;The government can’t makenbsp;insurance companiesnbsp;sell to all comers unless everybody is required to buy. Otherwise, healthy people won’t purchase coverage until they need it, and this adverse selection will drive premiums through the roof. However, if government is going to force people to buy insurance, it must provide enough of a subsidy so they can afford coverage. Hence, the banana./P
PIs running all this through the Internal Revenue Service the most efficient solution? Somehow I doubt it. The Service is understaffed and overwhelmed as it is. Baucusnbsp;would require the agency to verify income, citizenship, and changes in marital status; and share some individual tax information with insurance exchanges. It would also have to imposenbsp;excise tax penalties on those people who refuse to buy coverage. It isn’t a job I’d be anxious to take on.nbsp;nbsp;nbsp; /P
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PLots for tax wonks to chew over in Senate Finance Committee Chairman Max Baucus’ health bill. The measure, which has yet to garner any Republican support, is already being called an opening gambit and is likely to be revised as it heads to committee markup next week. Still, it is an indication of how intertwined tax and health policy have become in recent years. Here are some of the key provisions:/P
PSTRONGPremium Subsidy/STRONG: The proposal would require everyone to have insurance, but recognizes that many low- and moderate-income people will need subsidies to afford the premiums. The proposal’s mechanism for providing that assistance is a Health Care Affordability Tax Credit. It would work like this: People who buy insurance through a state exchange would report their modified adjusted gross income for the prior tax year. If they are eligible for the credit—which is based on an income-related sliding scale—they’d pay their premium minus the credit to the insurance company and Treasury would pay the difference directly to the insurer.nbsp;nbsp;nbsp; /P
PTwo quick thoughts on this: I can’t understand why this was designed as a tax credit rather than a straightforward voucher, and the design of this is immensely complicated like so many other low-income provisions of the tax code. I’ll have more to say on both of these problems tomorrow./P
PSTRONGSmall business tax credit:/STRONG A separate credit of up to 35 percent would be available to small businesses that offer insurance to employees in 2011 and 2012, and of up to 50 percent for those small firms that buy insurance through the exchanges starting in 2013. But entrepeneuers shouldn’t getnbsp;too excited: The full benefitnbsp;would be limited to firms with 10 or fewer workers who make an average of $20,000 or less, and the credit phases out completely for businessesnbsp;withnbsp;more than 25 employees or with average taxable wages of $40,000 or more. /P
PSTRONGPre-tax health benefits:/STRONG The proposal would create a new Simple Cafeteria Plan that is intended to make it easier for workers to purchase pre-tax benefits. It would make the plan available to the self-employed and also add private long-term care insurance as a cafeteria plan option. At the same time, however, the proposal would limit annual contributions to Health Flexible Savings Accounts to $2,000 starting in 2013. This year, the FSA cap is $3,000 for singles. /P
PSTRONGTaxing High-Cost Insurance Plans/STRONG: Starting in 2013, Baucus would impose a 35 percent excise tax on insurance companies for plans valued at more than $8,000 for individuals and $21,000 for couples. While the tax would be imposed on insurers, it is likely that much of the levy would be passed on to insured workers./P
PThe threshold would be raised for the 17 highest cost states for the first 3 years. However, as TaxVox A href=http://taxvox.taxpolicycenter.org/blog/_archives/2009/6/11/4218996.htmlpredicted/A months ago, the cap would be tied tonbsp;overall consumer prices not increases in medical costs, which rise much faster. Thus, while it would apply to very few policies at first, it would bite harder as the years went on. UPDATE: The Joint Committee on Taxation A href=http://www.finance.senate.gov/sitepages/leg/LEG%202009/091609%20JCT_Analysis.pdfestimates/A this provision would raise almost $215 billion over just 7 years (2013-2019). By 2019,nbsp;it would raise more than $50 billion annuallynbsp;nbsp;/P
PSTRONGInsurance and Provider Fees:/STRONG Baucus would raise about $13 billion by imposing separate taxes–he calls them fees–nbsp;on health insurance companies, large pharmaceutical and medical device manufacturers, and clinical labs.nbsp; /P
PThere are plenty of other tax provisions, but these are the big ones. Whatever else you think of health reform, it is increasingly clear that the IRS and Treasury Department will be taking a huge role in managing the nation’s medical care—whether we, or they, like it or not.nbsp;nbsp;nbsp;nbsp;nbsp;nbsp;nbsp;nbsp;nbsp; BRnbsp;/P
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