Tuesday, September 15, 2009

A significant detail, as yet unironed out

As President Obama said in his speech last week, "there remain some significant details to be ironed out." Let's focus on one:

And this reform will charge insurance companies a fee for their most expensive policies, which will encourage them to provide greater value for the money -- an idea which has the support of Democratic and Republican experts.

The manner in which this idea is implemented matters a lot. The first question is whether jurisdictional boundaries will be taken into account in this calculation. Let's say that Aetna or some other national insurer provides coverage in many states. We know that premiums vary significantly from state to state for lots of reasons, one of which is the degree to which each state requires certain types of medical services to be included. Beyond these underwriting rules, there are differences in health care costs, demographics, and consumer benefit preferences.

Given these differences, how do we decide what are "the most expensive policies?" There is a danger that the states that are the most progressive with regard to coverage requirements and other plan design features would find themselves in the "most expensive" category if the chosen jurisdictional boundary is a national one. By taxing insurance plans more in those states, we would create a regional imbalance in states' contributions to the national pool that will subsidize insurance access for the poor. Indeed, we might find that a high-premium state like Massachusetts, which already offers insurance to the vast majority of its population, would find itself subsidizing insurance access in low-premium states that have a high percentage of uninsured.

Along those same lines, will premiums be indexed by cost of living in the various states? Again, one reason Massachusetts premiums are high is because wage rates are higher here, and hospitals have to pay higher salaries to nurses and other health care professionals.

Or, will the tax be defined within each state, or within each insurance company? You can immediately see other types of problems of implementation if that happens.

Whatever method is used, the addition of a tax on higher premiums will make those premiums higher. The idea that businesses and others will then discontinue or redesign those plans ignores the significant friction in the employment market (not to mention the rules and regulations of state insurance commissioners). Will school teachers and other unionized public employees agree to a change in their collective bargaining agreements that lowers their health care benefits, or increases the monthly amount they must pay? Likewise, will auto, steel, petrochemical workers and other private sector unions be amenable to similar changes?

I'm sure there is more to be said on this topic, but thus far I have not seen a cogent explanation of how this portion of the plan would be implemented that does not create large flows of money from one region to another, or from one group of employees to another.

By the way, my proposal to remove the tax exemption for employer sponsored health insurance also has inter-regional impacts, essentially shifting money from those states with greater benefit packages and higher priced insurance to those with lower priced insurance. My only defense of this proposal is that it takes place within a progressive income tax system that at least deals with the issue of lower-income versus higher-income workers. But, it would clearly have a higher net cost to workers in states and industries with more generous health benefits.


Anonymous said...

See also this post on the subject:


This proposal seems DOA for the same reason the judge just killed the settlement between the SEC and BOFA:
that the settlement " 'does not comport with the most elementary notions of justice and morality' b/c the shareholders, the victims of the alleged misconduct - are the same people being asked to pay the fine." (WSJ, today).


76 Degrees in San Diego said...

So, to follow the reasoning, the federal government should tax the state legislatures each time they pass an additional mandate for health insurance benefits....I guess our state would then issue an "IOU"...