Balancing the Budget is a Progressive Priority

I am publishing an e book entitled Balancing the Budget is a Progressive Priority via Kindle Direct Publishing August, 2011. I started working on this book a year ago, and had planned to seek publication via a traditional route, but given the current discussion of these issues in Washington, I decided I wanted to go ahead and get my ideas out there.

For readers of my blogging, many of the themes will be familiar, but the book is my attempt at a comprehensive though brief treatment of our nation's long term fiscal problems framed in the context of the next steps that we need to take after the passage and impending implementation of the Affordable Care Act (ACA). Slowing the rate at which health care costs are growing is a necessary, but not a sufficient condition to developing a long range balanced budget.

It is a premise of the book that we will deal with the deficit and rapidly accumulating debt at some point because we will reach a crisis point in the future; the only question is whether we will do so in a reasoned, thoughtful manner, or whether we will be forced to act in the midst of a debt-driven crisis that limits our options. It is a claim of this book that Progressives need a balanced budget more than Conservatives do because we believe that government has an important role to play in modern life to make the lives of our people better.

Lack of a long term plan to move toward a sustainable budget crowds out short term Progressive priorities: infrastructure, green technology, more efforts to support the economy in our continued period of slow growth and so on.

The current debate regarding the debt limit in Washington, DC is insane and definitely not reasoned--we are at great risk of a self inflicted harm to our economy due to hesitancy to enable the executive branch to pay the bills to implement the budgets that Congress already passed. Short term cuts in discretionary spending is the last thing that we need in a weak economy. And it is not necessarily conducive to the best policy to be discussing such important changes in the context of impending default of our debts. However, discussion of the long term fiscal problems of our nation has definitely been put front and center on the national agenda and progressives have got to engage. My book makes the case that developing such a long range plan should be a priority for progressives, both in policy as well as political terms.

I will be blogging a bit on the book here at my old blog instead of The Incidental Economist because we try and focus on research evidence at TIE. Though based on my reading of some research, this book is very much my personal version of the way the world should be. If you like the way I blog, you may be interested in knowing my thoughts.

I now blog at the Incidental Economist

As of Friday, March 18, 2011 I am blogging at the Incidental Economist. Please follow me over there, you can subscribe here.

I especially would like to encourage my hospice and palliative care colleagues to join the fray at the Incidental Economist as that area will remain one of my key topics and your perspective would be valuable at the blog.

You can also follow the Incidental Economist on twitter @IncidentalEcon
This twitter feed tweets nothing but the posts from the blog

I will continue to tweet from @donaldhtaylorjr and will tweet some, but not all of my posts from the Incidental Economist.

The blog Freeforall will stay live for the time being. Eventually, the posts will be migrated to the Incidental Economist, and the donaldhtaylorjr.blogspot.com domain is likely to become a blog I use for the courses I teach at Duke only.

High Cost Tax v. Cap Tax Exclusion

Steve Pizer has been writing this week on how health reform will change private and public insurance, based on a recent working paper he co-authored with colleagues Austin Frakt and Lisa Iezzioni. In particular, he has focused on the role of the excise tax on high cost insurance policies that is contained in the ACA (aka 'the Cadillac tax'), and its effects on low wage workers. Generally, high cost insurance policies are associated with high paying jobs, which is mostly true and documented in their paper and posts. However, firms with expensive health insurance plans do have low wage workers, and Steve has looked at the role the excise tax could play in crowding out low wage workers from private, to public insurance under the ACA. CBO estimates that around 3 Million (net) persons who would otherwise have employer based private insurance in 2019, would instead purchase subsidized coverage in the exchanges, or move into Medicaid under the ACA. It was never entirely clear to me who they would be.

The Cadillac tax contained in the ACA is one of the primary policy tools that should slow the rate of health care cost inflation. The tax was sold politically as one on insurance companies, but this tax will be passed on to employees, with the intent of the tax being for employers to provide lower cost policies to employees whose premium value is above the tax trigger point. This will mean less insurance and more out of pocket costs, which will slow health spending. This should also lead to wage increases over time as some premium dollars are converted to wages as employees decide they would rather have cash than premiums if the latter is taxable income. In short, it is a tax that is designed to be avoided, and in doing so will shift some compensation from a tax free form (employer paid premiums) to taxable wages while increasing out of pocket health care costs.

The current budget debate has been noisy but hasn't focused on the actual crux of the long term budget problem: health care costs. If the current budget debate is actually going to deal with the budget deficit problem, it either has to replace the ACA or add something in addition to the ACA that further addresses costs. Nearly two months after the House voted to repeal the ACA, the Republicans have not offered an alternative plan.

In looking for a bipartisan down payment on health reform for this Congress, the most (and maybe only) area I can think of that leaves the larger question about the direction of health reform to the 2012 election is to modify the tax treatment of employer paid health insurance. Since World War II, employer paid insurance premiums have not been taxable, giving those with good employer sponsored plans tax free income and resulting in more insurance than we would have if we bought policies with after tax dollars. Addressing this would be a consequential change.

The Cadillac tax that is part of the ACA could be started earlier, say in 2012 instead of its current start date of 2018. Even better would be to replace the Cadillac tax with a reform of the tax code that caps the amount of employer paid premiums that are excluded as taxable income. I would prefer capping the tax exclusion to the tax on high cost insurance for several reasons.

• It helps orient the country that the subsidy being reduced has been flowing to people like me with expensive employer-based health insurance.
• Virtually all Republican health proposals typically include ending the tax exclusion (Sen. McCain's Presidential campaign plan; The Patients' Choice Act; Michael Cannon's plan from CATO, etc.).
• Democrats have already voted for a back-door capping of the tax exclusion via the tax on high cost insurance contained in the ACA.

I believe there are two additional reasons to move toward directly capping the tax exclusion instead of using the excise tax on high cost plans, one that appeals to Democrats and one to Republicans.

• Capping the tax exclusion is more progressive in that it doesn't hurt low wage persons working for firms with high cost insurance as much as the excise tax would.
  
• Capping the tax exclusion should lessen the crowd out effect of low wage workers from private coverage into exchanges or Medicaid which Pizer and colleagues believe are at greatest risk of this; this issue is of great interest to Conservatives.

I tried to test my intuition with a simple example that builds off of Pizer and colleagues' work by using their estimates of what the 2018 high cost tax would be deflated into 2009 dollars (40% applied to total premiums including flexible spending accounts above $5,850 for individuals; $15,750 for family coverage in 2009$). I picked a simple example of two individuals working at the same firm with the same coverage with one having wages of $10,000 and no other income and the other having wages of $100,000 and no other income, and a personal exemption only. I then used a family of 4 with the same family coverage (4 income tax exemptions). The value of the total premium used (medical, dental and flexible spending account) was an assumption, used simply to demonstrate: $8,000 for individual coverage, $19,000 for family, in 2009$. I used a 2009 income tax calculator to do my estimations, estimating how income and payroll tax liability would change with an excise tax applied as compared to capping the tax exclusion.

For the family coverage with premium value of $19,000, the amount of excise tax owed would be $19,000-$15,750=$3,250 x 40% = $1,300 (green box in chart above). For single coverage the amount of excise tax owed would be $860. Note that the amount of tax owed for the excise tax is the same regardless of wages because it is based on the value of the policy.

If you instead use the excise tax trigger points as the amount at which to cap the tax exclusion of employer paid premiums ($5,850 for individual; $15,750 for family) you find that the total tax increase (income and payroll tax) with a capping of the tax exclusion is around $100 less for individuals with initial wages of $100,000 ($766 v. $860) but much less for individuals with $10,000 in initial wages ($379 v. $860) [gold box in chart]. Note that in the case of a single person with $10,000 income even with an increased income tax liability they would still receive a (smaller) income tax refund ($335 refund without capping tax exclusion, $120 if capped, hence +$215 in column labeled Change in Income Tax).

For family coverage (4 persons, 2 dependent children both eligible for child tax credit), the change from the excise tax to a capping of the tax exclusion of employer paid insurance would have an even larger impact on low income families, as total tax paid (income and payroll) by a family with $10,000 in initial wages and an expensive insurance plan would be -$419 with a cap v. +$1,300 with the excise tax. Note, income tax liability drops with increased income from $10,000 to $13,250 because of the EITC. The total tax owed will always be less under capping the tax exclusion as compared to the same dollar value as the excise tax trigger because the highest marginal income tax rate (35%) is lower than the excise tax rate (40% on the amount above the trigger value). The benefit is greater for lower income persons because they are in a lower marginal income tax bracket.

Keep in mind that the goal of both policies--tax on high cost insurance policies and the capping of the tax exclusion of employer paid insurance is for persons to avoid these taxes by having less generous coverage. This will slow health care cost inflation by exposing those with expensive private plans to more out of pocket costs. It will also shift compensation over time to taxable wages away from tax free income via insurance premiums, increasing both disposable income and tax receipts. The amounts estimated here are best thought of as relative signals to employees and employers to change their insurance offerings and choices, and I have admittedly used simple examples. Let me know if you think I have made errors, because there are lots of things going on even in this simple example.

In summary, moving in this Congress to reform the tax treatment of employer paid insurance by capping the amount of employer paid premiums excluded from income would:

• mean the budget debate actually addressed the biggest long term budget problem, health care costs.
  
• do so in a more progressive manner (more beneficial to low wage workers) that I believe would lessen the crowd out (into exchanges or Medicaid) incentive of low wage workers at firms offering high cost insurance.
• provide a bipartisan down payment on health reform that is flexible. Doing this would improve the cost saving potential of the ACA, and of any imaginable health reform strategy. The big picture of whether to move ahead with the ACA or to adopt the (forthcoming?) Republican alternative could then be reserved for the 2012 election.
  

If the budget debate in Congress really addressed the long term problem with our budget, the debate would be around issues like those above.

Update: I had an error in the original table for family of 4, $10,000 income; correct reduction in income tax if capping tax exclusion at premium of $15,750 is -$668 (I had -$488 in original) and the correct net effect of a cap is -$419 reduction in total tax liability (I had -$239 in original). Sorry about the error; it doesn't change the analysis.

Moving to the Incidental Economist Blog

Big news. I am joining the Incidental Economist blog as a regular blogger. This is a great move for me because I think TIE is the best health policy blog around, and I admire both Austin Frakt and Aaron Carroll as bloggers, and have enjoyed my recent interactions with them leading up to this announcement. The move to TIE is the first step in some exciting new plans that we hope to announce over the next few weeks.

Please subscribe to the Incidental Economist as that will be my primary blogging home by Friday, March 18, 2011. This site will remain available for links and searches....there may be a migration of posts at some point in the future, but not right away.

Freeforall was started on a whim as a way to aggregate some background information related to the columns that I wrote on health reform for the Raleigh (N.C.) News and Observer. It has become an important part of my professional life, and having to explain myself and take public responsibility for my words on a (near) daily basis has helped me refine what I think, learn to make the case, and realize that I am sometimes wrong (my wife and kids already knew this). The people that I have met because of the blog have convinced me that we academics must go beyond simply publishing a paper in a peer review journal if we truly want to have an impact, but paying attention to the research has been what I have tried to do. Beyond that, I have wanted to give others the benefit of the doubt because that is what I would like to receive in return as we debate and discuss our way toward a better health care system. The tag line of the Incidental Economist is "Contemplating health care with a focus on research, an eye on reform." Sounds perfect for me.

When Will The Actual Budget Debate Start?

Matt Yglesias noting that the focus on keeping the government running week to week is preventing a debate about next years budget, the medium term budget (next 5 years), and the long term budget. Further, domestic discretionary spending is a trivial part of our budget problem, and health care costs are the main source. Nearly two months after the House passed the repeal of the Affordable Care Act (ACA), there is no coherent 'replace' plan.

Limiting the tax preference of employer paid insurance starting in say 2012 is a simple, consequential and flexible policy that will work to slow health care costs regardless of the future direction of health reform. Doing so would improve the saving potential of the ACA and will work as intended under any imaginable health reform Republicans might someday pass. Anyone claiming to be interested in the deficit who is not advancing policies to address health care costs is only talking.

Update: Steve Pizer at Incidental Economist with fourth in a series on the tax on high cost health insurance that will begin in 2018 under the ACA. Democrats have already voted for limiting the tax preference of employer paid insurance via this provision, and most Republican plans talk about ending it all together. So, bring this tax, or a more direct limiting of the amount excluded from taxes in a tax reform context into 2012. It will actually work to slow health care costs!

Further, if I interepret Pizer's figure correctly, a shift from a tax on high cost insurance to a similar capping of the tax exclusion of employer paid insurance premiums should lessen the crowd out (from private to subsidized insurance, Medicaid) effect on low income workers who would be less likely to have their tax liability increased due to a capping of the exclusion. So capping the tax exclusion is more progressive than the tax on high cost insurance (I think). There is some cap of the tax exclusion that can raise the same amount as the tax on high cost insurance, but which might do so with less crowd out (I think). I need to noodle on that a bit.

Hospice/Palliative Medicine Blogs

Great list from Christian Sinclair. Update: Related post at Pallimed blog on a documentary looking at end of life issues.

Hospice Margin Projections

Memo from a consulting firm (Moran) to the National Hospice and Palliative Care Organization (NHPCO) projecting large reductions in hospice margin over the next decade. I pass it on with only brief comments at this point because I can't go into it in depth right now. The memo says the median Medicare margin now is 2%, and will drop to -14% by 2019 (worse in rural areas), a more gloomy picture than painted by MEDPAC in their March 2010 report (see pp. 156-57). The Medicare margin is even more important for a hospice than other types of health care providers since around 8 in 10 people who die each year are covered by Medicare. A couple of quick points about the general discrepancy, at least in tone between the MEDPAC report and this memo:

• The memo is more recent, so things could have changed, and do change with the ACA (on the revenue side).
• MEDPAC appears to have not considered volunteer costs in calculating margin, whereas I think the Moran memo did; so the two sources don't appear to have used the same costs in calculating margin.
• MEDPAC notes that cost structure of hospices was the key driver in differences in margin, which in one sense is a tautology given hospice has a straight per diem payment (MEDPAC report has gory details).
• Large cost differences give rise to questions about quality.
  
• As with most discussions of hospice and costs, quality is not addressed here (in the memo; is discussed a bit by MEDPAC). We really need to move toward discussing quality and cost together so that we can have some sense of value being provided to patients. This is generally true in health care, but is acutely true in hospice because it seems to be the only part of the Medicare program that is expected to improve quality of life and save money for Medicare overall.

Update: New MEDPAC report out today, here is fact sheet overview of recommendations. In hospice area, biggest item is their renewed call for a U shaped payment to replace the straight per diem (higher payment in first few days of hospice, and higher in last few). I think this is third year in a row they have called for this. Goal of this would be to incentivize short lengths of use to be longer [think 5 day to 15 day] while perhaps discouraging longer stays [over 180 days] depending on how/whether payment levels changed 'in the middle.' I think a U shaped payment approach should improve hospice margins. Here is an older, related post.

h/t @ctsinclair Christian Sinclair who blogs at PalliMed blog. Update: just got a grant from the HCFO Initiative of RWJ Foundation to study these issues (note the email they list for me in the link is wrong; don dot taylor at duke dot edu).