Dude, Where's My Healthcare Cadillac Tax?

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Yesterday, the White House released Health Care Reform Version 4.0, or the White House's opening bid for a compromise between the House and Senate health care bills. The press is generally describing the plan as a tweak of the Senate bill, mostly because it lacks the public option that many House Democrats want.

But the President's revenue proposals -- which further expand taxes on rich people's income and neuter the curve bending "Cadillac Tax" -- are much more reminiscent of the House bill than the Senate one. And the proposal reflects an ongoing shift away from controlling health care costs to a pure focus on expanding coverage.

As introduced in the Senate Finance Committee, the Cadillac Tax would have applied to family health plans costing more than $21,000 starting in 2014, and raised $201 billion over 10 years. In each successive iteration, the tax has had its impact narrowed, with the revenue estimate falling to $149 billion, and then $90 billion. Under the President's proposal, it would raise only about $60 billion.

How did the Cadillac Tax shrink to a 30% shell of its former self? First, the Senate revised the tax to increase the taxable threshold for plan premiums, and offered special treatment to favored "high-risk" groups including police and firefighters.

Then in January, the White House and congressional Democrats cut a deal with unions, offering them a four-year reprieve from the tax in exchange for not trying to kill health reform. Political reaction to this special-interest giveaway was negative. So, the White House came up with a creative solution: offer the sweetheart deal to everyone, unionized or not.

A weakening of the Cadillac Tax is regrettable for two reasons. First, it's a "curve-bending" reform that encourages people to buy lower-cost plans with higher deductibles and co-payments. This would make health "insurance" more like actual insurance, instead of a pre-payment mechanism for routine care. Under such plans, patients consume care more thoughtfully, and health care costs fall.

The other problem is that the foregone revenues will be replaced with another tax that is much more economically damaging. The President proposes to more than make up for the lost Cadillac Tax revenue by extending Medicare Tax to high-income people's unearned income. (Currently, Medicare Tax is a flat 2.9% tax on earned income only.) He'll use the extra revenue to make insurance premium subsidies more generous.

The President would expand the Medicare Tax to unearned income, including capital gains and dividends, for filers making over $250,000. (The Senate Bill already imposed a surtax of 0.9% on these taxpayers' earned income, which Obama would maintain.) Combined with other tax proposals from the administration, this would raise the top tax rate on capital gains to 22.9% from 15% today.

The White House did not issue revenue estimates for the individual components of its proposal, but it's likely that their proposed Medicare Tax increases constitute nearly as large a high-income tax hike as the House bill's $460 billion income surtax, with similarly negative economic impacts.

There are some silver linings in the proposal. One is that it modestly raises the penalty for failing to carry insurance -- the individual mandate is the other key cost control provision in the bill, and without a strong penalty the mandate won't be effective. But the revised penalty is probably still too low.

Another positive aspect is that the Cadillac Tax is maintained at all. As The New Republic's Jonathan Cohn notes, this compromise "doesn't mean sacrificing the tax's projected ability to control costs" because the most important effects were to come after 2018 anyway.

That's true -- assuming the tax ever becomes effective. The tax will probably still be unpopular in eight years, and I fear that Congress will postpone it indefinitely, especially if revenues from high-income taxes beat expectations. But health reform needs components like the Cadillac Tax to be sustainable over the long term.

Reducing health care demand is a valuable project in its own right -- America spent 16% of GDP on health care in 2007, far ahead of any other OECD country (France was second at 11%). We do better at cancer survival, but in general we are not getting significantly better health outcomes for our vastly higher expenditures, partly because low-deductible insurance encourages doctors to recommend and patients to accept unnecessary care.

But controlling health care demand becomes especially important in the context of expanding coverage. When more people have health insurance, more people will be lining up to get doctor's appointments and medical procedures. As we've seen in Massachusetts (where insurance reforms have expanded coverage to 97% of the population) expanded insurance coverage can mean higher costs and longer wait times.

A health bill that gives cost control short-shrift will take these problems national. And it will make controlling entitlement costs especially hard -- how enthusiastic will doctors be to accept rock-bottom Medicaid reimbursement rates when more patients than ever are beating down their doors, seeking treatment?

Unfortunately, the public remains in a state of denial about health care costs. Provisions aimed at cost control -- including the Cadillac Tax and the individual mandate -- are among the health bill's least popular provisions, according to a recent poll from the Kaiser Family Foundation. In this context, it's not surprising the White House is shying away from cost control

But America's health care problems are in two parts: too many of us don't have insurance, and those of us who do, eat too much care at too high a price. Attempting to fix the first problem without attacking the second will only make health care more intolerably expensive in the long run.


Josh Barro is the Walter B. Wriston Fellow at the Manhattan Institute.

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