“There Is Regulatory Capture, But It Is By No Means Complete”

Interview of Kenneth J. Arrow
Pro-Market: the blog of the Stigler Center at the University of Chicago Booth School of Business, March 15, 2016

Kenneth J. Arrow, one of the most influential economists of the 20th century, reflects on the benefits of a single payer health care system, the role of government and regulatory capture.

Kenneth J. Arrow requires very little introduction. Very few people, if any, can say they have influenced the development of economic theory in the 20th century as deeply as Arrow, who revolutionized the field of economics with groundbreaking contributions to general equilibrium theory, welfare theory, social choice theory and risk. In 1972, at the age of 51, Arrow won the Nobel Prize in Economics (sharing the prize with John R. Hicks). Arrow was the youngest economist ever to win the prize, a title he still holds to this day.

Born in New York in 1921, the son of Romanian-Jewish immigrants, Arrow’s life and work were profoundly influenced by the experience of growing up during the Great Depression. Over the years, his published papers on a wide variety of subjects, from innovation and monopolies to racial discrimination, information and climate change. In 1963, he published his classic paper on health care, Uncertainty and the Welfare Economics of Health Care, which was the first to show that existing competitive market models cannot be applied to the health care industry. The article effectively created the field of health economics, and is still frequently cited in debates regarding the role of non-market forces and institutions (like government) in the health system.

Q: looking back on your seminal 1963 paper about healthcare industry – it seems that the American health care system has only gotten worse since. Some people claim that it is the worst among developed nations in terms of cost, waste and wrong incentives to physicians, hospitals and research, and influence of special interest groups – producing very high rents, and little value.

Certainly in terms of inefficiency, I don’t think it has improved at all. The system is about as inefficient, and it was pretty inefficient then too. If we look at measurements like cost per capita, compared to comparable countries like Canada or the UK, it got worse. The rather reasonable attempts to improve the delivery, that is to extend health care to more people, have led to a bigger system, and therefore more complexity and more chance for exploitation. We talk about a price system, but that is not what we have. What we have is a system in which one buyer will pay ten times what other buyers will pay for similar medical devices, or services. So the idea of a price system as the source of efficiency fails at the most elementary level.

These things are never simple. You do want incentives for pharmaceutical companies to generate new drugs. Developing drugs is a pretty expensive proposition, and the failure rate is pretty high, so we have to create incentives for companies to innovate. The problem with what’s happening now is that to some extent, because the American market is not uncontrolled and other markets are, we are subsidizing new drugs to other countries.

Q: Is there a way to mitigate this problem?

This is not a problem that’s just confined to the pharmaceutical industry, but I think it’s most intense there. The question of intellectual property goes back several hundred years. Since the 17th century, the basic deal is that in return for the innovation, you give [innovators] monopoly power. That’s the way you pay for the upfront costs and provide incentive. This of course gives rise to monopolies, which is an inevitable conflict. Even Hayek was disturbed about whether intellectual property is really property in the same sense that a house is property.

The truth is it’s very easy to rail against it, but it’s not easy to find a substitute. People have proposed substitutes from time to time, like paying the innovator the social value of the innovation, and insist on free competition after that. But since no one knows how to evaluate the social value, it’s not a very practical answer.

There is no easy way out of this conflict, though a better-regulated system could help. A better bargaining position will improve matters, but you have to be a little careful, because you don’t want to hurt innovation. What you have under the present situation is a great incentive for health providers, hospitals and HMO, to get bigger, because that improves their bargaining position vis-à-vis the insurance companies.

A single payer will have control that will allow it to prevent things like differential pricing from happening. If the government was allowed to use its bargaining power, it would dominate. There will be monopolies, but they would be facing a single payer. A monopoly usually has power because it is the only one facing a large market of diverse individuals.

I’m afraid you’re talking to someone who’s an “on the one hand, on the other hand” type of person, which makes me a poor advocate.

Q: It does sound like you are strongly in favor a single-payer system, though.  Last year you signed, along with 266 other economists, a declaration that called on policymakers around the world to work toward universal health coverage.

I wouldn’t say I’m strongly in favor of a single payer system. I can find objections to it. But I still think it’s better than any other system. However, the idea of permitting private practice must not be ruled out. Similar to the UK, there can be a single payer system which everybody can go to, and private medical practices for those who want. In the UK, private medicine is about 20 percent of the total, so there is this escape valve for those who want it, but also a single payer system that anybody can join.

Q: Perhaps the way to fix the American health care system is simply to adopt the UK model?

I would say the Canadian model, rather than the UK model. But it’s so politically out of the question I don’t even think about it.

Q: So you’re saying that one answer to the influence of special interest groups in the health care system is to have the government intervene in a major way, whether it is through a single payer system or something more akin to the UK model?

That’s right. Of course, George Stigler would say that there could be regulatory capture, but so far it doesn’t seem to have happened really.

Q: Doesn’t the rather-muted regulatory response to phenomena like pharmaceutical price hikes and “evergreening” – making minor tweaks to existing formulations in order to artificially extend patents – suggest at least a possibility of a capture?

There’s no question that every time you have interaction between government and private interests, especially concentrated ones, they’re always going to have power. In this case, I think there’s no alternative.

Medicare particularly has succeeded in imposing price regulations of a pretty detailed nature without too much trouble. Recent regulations regarding readmission rates for Medicare have gone through a surprising lack of opposition. We know that other countries have also succeeded in doing this without too many scandals, even countries that are not thought of as models of good government.

Q: In that 1963 paper you wrote that “the laissez-faire solution for medicine is  intolerable.” 50 years later, do you still believe that to be true?

We don’t have a laissez-faire system. The intervention of the federal government, as measured by expenditures, is growing. It is not a private system at all. Roughly 50 percent of health costs are paid for by the government, and state governments are spending more and more on health. It’s crowding out education. State budget-support for education, especially higher education, is crowded out by two things: health and prisons. Nobody is prepared for the idea of a laissez-faire system, and we never really had one.

https://promarket.org/there-is-regulatory-capture-but-it-is-by-no-means-complete/

Arrow, Kenneth J., “Uncertainty and the Welfare Economics of Medical Care, The American Economic Review, December 1963:
https://www.aeaweb.org/aer/top20/53.5.941-973.pdf

Nobody understands markets and health care better than Nobel laureate Kenneth Arrow who wrote the classic treatise on the topic over half a century ago. Based on his work, it is clear that the government must be involved if we are to improve efficiency in the system as we attempt to expand it to include everyone. So what does Kenneth Arrow think about single payer as a model for health care?

Although he understands that there are some deficiencies in the single payer model, he states, “it’s better than any other system.” He does say that he believes that private practice should be permitted as an option, like they have in the United Kingdom. But when asked if the United States should adopt the UK system, he says, “I would say the Canadian model, rather than the UK model.” That’s interesting in that Canada does not permit health care to be paid for privately if it is covered by their single payer Medicare program (although that continues to be challenged by the Canadian privatizers).

Kenneth Arrow is not an ideologue. He is a gifted, two-handed economist (i.e., looks at the options). He has stated that single payer is better than any other system, and we should listen to him.

CNN TV One Democratic Presidential Town Hall

CNN, March 13, 2016

QUESTION (from Teresa O’Donnell, an office coordinator from Powell, Ohio): I have voted for Obama, and then my health insurance skyrocketed from $409 a month to $1,090 a month for a family of four. I know Obama told us that we would be paying a little more, but doubling – over doubling my health insurance cost has not been a little more. It has been difficult to come up with that kind of payment every month. I would like to vote Democratic, but it’s cost me a lot of money, and I’m just wondering if Democrats really realize how difficult it’s been on working class Americans to finance Obama care.

(APPLAUSE)

HILLARY CLINTON:  Wow, Thank you for asking me that, because. May I ask you, before you were buying your family health insurance in the individual family market? Were you getting it through the employer? How were you insured before?

QUESTION:  I was purchasing it privately, because we both had bouts of unemployment.

CLINTON:  So you were going to a broker and buying a health insurance policy.

QUESTION:  Yes.

CLINTON:  And in effect, it nearly tripled after you went on to the exchange and bought a policy under the Affordable Care Act, is that right?

QUESTION:  We could not do that.  It was much more expensive than just purchasing private insurance from the insurance company.

CLINTON:  So you are still buying private insurance directly?

QUESTION:  Yes.

CLINTON:  OK.  Well, first of all, let me say I want very much to get the costs down, and that is going to be my mission, because I do think that for many, many people, but there are exceptions like what you are telling me, having the Affordable Care Act has reduced costs, has created a real guarantee of insurance, because if you’d had a pre-existing condition under the old system, you wouldn’t have gotten affordable insurance.

So it has done a lot of really good things, but, it has become increasingly clear that we are going to have to get the costs down.  And what I would like to see happen for you and your family is that if we can get the co-pays down, the deductibles down, get the prescription drug costs under control, that you would find an affordable plan on your exchange.

And one thing that I would like you to do, and I’m not saying it’s going to make a difference, but I would like you to just go shopping on that exchange.  As I understand it, Ohio has the federal exchange, is that right, Joyce?  Because they did not set up a state exchange.

So you have the federal exchange.  And to go on and keep looking to see what the prices are, because we have to get more competition back into the insurance market.  One thing that I want to work on with my friends from Congress who are here is we’ve got to get more non-profits that are capable of selling insurance back into the insurance market.

You know, Blue Cross and Blue Shield used to be non-profits.  And then they transferred themselves into for-profit companies.  And there was some effort made under the Affordable Care Act to get some competition from non-profit institutions, some of them worked and a lot of them didn’t.

I want to know what we can do, because if you could get a range of insurers, some of who were not-for-profit companies, that would lower costs.

So there is a number of things I am looking at.  And what I want to assure you and your family of is I will do everything I can as president, working with members of Congress where necessary, to try to get the costs down.

But I do want you to keep shopping, because what you are telling me is much higher than what I hear from other families, and so I want to be sure that if there is a better option out there for you, you’re going to be able to take advantage of it. 

And then I’ll work as hard as I can to get the costs down for everybody, and that includes prescription drug costs, which are skyrocketing and increasing costs for everything else.

(APPLAUSE)

http://cnnpressroom.blogs.cnn.com/2016/03/13/full-rush-transcript-hillary-clinton-partcnn-tv-one-democratic-presidential-town-hall/

***

Comment:

By Don McCanne, M.D.

Hillary Clinton says that one of her proposals is to bring health care costs down. This town hall exchange is significant because it reveals the depth, or lack thereof, as to how she might accomplish this.

She says that she would lower co-pays and deductibles. But the question was about high premiums, and the market is using higher deductibles and other cost sharing to lower premiums. Lowering deductibles will cause higher premiums, not lower.

She says that we need more non-profit insurers like Blue Cross and Blue Shield used to be. But if you compare premiums in California for for-profit Anthem Blue Cross and non-profit Blue Shield, they are the same. The non-profit insurers share the same inefficiencies and administrative excesses as the for-profits.

She says that she wants more competition in the exchanges so that less expensive plans will be available for diligent shoppers, but, again, lower premiums are possible only by reducing coverage – higher deductibles, less accessible narrower networks, etc.

Private plans competing in the marketplace is what we already had before the Affordable Care Act was passed. We merely continued the same system. Adding exchanges did very little except to enable the administration of subsidies and credits for lower-income individuals. For those not eligible for government subsidies and credits, nothing was done to control the very high costs of health care and the insurance products that pay for that care.

Unfortunately, Hillary’s proposal is more of the same. Perpetuate the fiction of lower prices through competition while manipulating the insurance products to have either lower premiums or poorer coverage. In fact, included in ACA is the excise tax (Cadillac tax) which is designed to prevent the marketing of full benefit plans. Making health care less affordable through greater out-of-pocket cost exposure is the exact opposite of where Clinton says she wants to take us. The problem is that the current financing infrastructure will not allow us to go there.

If we want affordable care for everyone, we need a single payer improved Medicare-for-all which will control costs and make the financing more equitable.

Physicians for a National Health Program (PNHP) is a nonpartisan educational organization. It neither supports nor opposes any candidates for public office.

CNN TV One Democratic Presidential Town Hall

CNN, March 13, 2016

QUESTION (from Teresa O’Donnell, an office coordinator from Powell, Ohio): I have voted for Obama, and then my health insurance skyrocketed from $409 a month to $1,090 a month for a family of four. I know Obama told us that we would be paying a little more, but doubling – over doubling my health insurance cost has not been a little more. It has been difficult to come up with that kind of payment every month. I would like to vote Democratic, but it’s cost me a lot of money, and I’m just wondering if Democrats really realize how difficult it’s been on working class Americans to finance Obama care.

(APPLAUSE)

HILLARY CLINTON:  Wow, Thank you for asking me that, because. May I ask you, before you were buying your family health insurance in the individual family market? Were you getting it through the employer? How were you insured before?

QUESTION:  I was purchasing it privately, because we both had bouts of unemployment.

CLINTON:  So you were going to a broker and buying a health insurance policy.

QUESTION:  Yes.

CLINTON:  And in effect, it nearly tripled after you went on to the exchange and bought a policy under the Affordable Care Act, is that right?

QUESTION:  We could not do that.  It was much more expensive than just purchasing private insurance from the insurance company.

CLINTON:  So you are still buying private insurance directly?

QUESTION:  Yes.

CLINTON:  OK.  Well, first of all, let me say I want very much to get the costs down, and that is going to be my mission, because I do think that for many, many people, but there are exceptions like what you are telling me, having the Affordable Care Act has reduced costs, has created a real guarantee of insurance, because if you’d had a pre-existing condition under the old system, you wouldn’t have gotten affordable insurance.

So it has done a lot of really good things, but, it has become increasingly clear that we are going to have to get the costs down.  And what I would like to see happen for you and your family is that if we can get the co-pays down, the deductibles down, get the prescription drug costs under control, that you would find an affordable plan on your exchange.

And one thing that I would like you to do, and I’m not saying it’s going to make a difference, but I would like you to just go shopping on that exchange.  As I understand it, Ohio has the federal exchange, is that right, Joyce?  Because they did not set up a state exchange.

So you have the federal exchange.  And to go on and keep looking to see what the prices are, because we have to get more competition back into the insurance market.  One thing that I want to work on with my friends from Congress who are here is we’ve got to get more non-profits that are capable of selling insurance back into the insurance market.

You know, Blue Cross and Blue Shield used to be non-profits.  And then they transferred themselves into for-profit companies.  And there was some effort made under the Affordable Care Act to get some competition from non-profit institutions, some of them worked and a lot of them didn’t.

I want to know what we can do, because if you could get a range of insurers, some of who were not-for-profit companies, that would lower costs.

So there is a number of things I am looking at.  And what I want to assure you and your family of is I will do everything I can as president, working with members of Congress where necessary, to try to get the costs down.

But I do want you to keep shopping, because what you are telling me is much higher than what I hear from other families, and so I want to be sure that if there is a better option out there for you, you’re going to be able to take advantage of it.

And then I’ll work as hard as I can to get the costs down for everybody, and that includes prescription drug costs, which are skyrocketing and increasing costs for everything else.

(APPLAUSE)

http://cnnpressroom.blogs.cnn.com/2016/03/13/full-rush-transcript-hillary-clinton-partcnn-tv-one-democratic-presidential-town-hall/

Hillary Clinton says that one of her proposals is to bring health care costs down. This town hall exchange is significant because it reveals the depth, or lack thereof, as to how she might accomplish this.

She says that she would lower co-pays and deductibles. But the question was about high premiums, and the market is using higher deductibles and other cost sharing to lower premiums. Lowering deductibles will cause higher premiums, not lower.

She says that we need more non-profit insurers like Blue Cross and Blue Shield used to be. But if you compare premiums in California for for-profit Anthem Blue Cross and non-profit Blue Shield, they are the same. The non-profit insurers share the same inefficiencies and administrative excesses as the for-profits.

She says that she wants more competition in the exchanges so that less expensive plans will be available for diligent shoppers, but, again, lower premiums are possible only by reducing coverage – higher deductibles, less accessible narrower networks, etc.

Private plans competing in the marketplace is what we already had before the Affordable Care Act was passed. We merely continued the same system. Adding exchanges did very little except to enable the administration of subsidies and credits for lower-income individuals. For those not eligible for government subsidies and credits, nothing was done to control the very high costs of health care and the insurance products that pay for that care.

Unfortunately, Hillary’s proposal is more of the same. Perpetuate the fiction of lower prices through competition while manipulating the insurance products to have either lower premiums or poorer coverage. In fact, included in ACA is the excise tax (Cadillac tax) which is designed to prevent the marketing of full benefit plans. Making health care less affordable through greater out-of-pocket cost exposure is the exact opposite of where Clinton says she wants to take us. The problem is that the current financing infrastructure will not allow us to go there.

If we want affordable care for everyone, we need a single payer improved Medicare-for-all which will control costs and make the financing more equitable.

Physicians for a National Health Program (PNHP) is a nonpartisan educational organization. It neither supports nor opposes any candidates for public office.

US Physician Practices Spend More Than $15.4 Billion Annually To Report Quality Measures

By Lawrence P. Casalino, David Gans, Rachel Weber, Meagan Cea, Amber Tuchovsky, Tara F. Bishop, Yesenia Miranda, Brittany A. Frankel, Kristina B. Ziehler, Meghan M. Wong and Todd B. Evensong
Health Affairs, March 2016

Abstract

Each year US physician practices in four common specialties spend, on average, 785 hours per physician and more than $15.4 billion dealing with the reporting of quality measures. While much is to be gained from quality measurement, the current system is unnecessarily costly, and greater effort is needed to standardize measures and make them easier to report.

**

The number of quality measures directed at US health care providers by external entities such as Medicare, Medicaid, and private health insurance plans has increased rapidly during the past decade. These measures, such as rates of mammography screening for women or of testing for cholesterol or hemoglobin A1c levels for diabetes, are used to provide publicly reported information for patients and as a basis for financial “pay-for-performance” incentives to physicians. At least 159 measures of outpatient physician care are now publicly available. The movement toward accountable care organizations, the federal Sustainable Growth Rate “fix” legislation, and the private-sector Catalyst for Payment Reform coalition will further emphasize measurement of physician performance.

Anecdotally, dealing with these measures imposes a considerable burden on physician practices in terms of understanding the measures, providing performance data, and understanding performance reports from payers, but the extent of that burden has not been quantified. We present results from a national survey of practices representing three common physician specialty and multispecialty practices.

From the Study Results

On average, physicians and staff spent a total of 15.1 hours per physician per week dealing with quality measures, with the average physician spending 2.6 hours per week and other staff spending 12.5 hours.

By far the most time — 12.5 hours of physician and staff time per physician per week — was spent on “entering information into the medical record ONLY for the purpose of reporting for quality measures from external entities.”

The time spent by physicians and staff translates to an average cost to a practice of $40,069 per physician per year.

From the Discussion

There is much to gain from quality measurement, but the current system is far from being efficient and contributes to negative physician attitudes toward quality measures. Improving the system rapidly will be difficult. Obstacles include the fragmented US health care system, lack of interoperability across EHRs, lack of EHR functionalities to facilitate retrieval of data for quality measures, the cost of change to external entities and to providers, and opposition from vested interests. Increasing efforts to reduce the number of measures and to standardize their use across external entities are being made by the National Quality Forum, the Institute of Medicine, and America’s Health Insurance Plans, as well as by federal agencies such as the Centers for Medicare and Medicaid Services and the Agency for Healthcare Research and Quality. Our data suggest that US health care leaders should make these efforts a priority.

http://content.healthaffairs.org/content/35/3/401.abstract

***

Comment:

By Don McCanne, M.D.

Quality measures in health care have proven to be burdensome, consuming excess resources in both time and money. This study quantifies those costs.

Not only do these quality games waste resources, they have become a significant contributor to physician burnout.

Wouldn’t it be far better to devote these extra resources to improving access to actual health care for the uninsured and underinsured who are now being all too often left out? It would be automatic under a single payer Medicare for all program.

US Physician Practices Spend More Than $15.4 Billion Annually To Report Quality Measures

By Lawrence P. Casalino, David Gans, Rachel Weber, Meagan Cea, Amber Tuchovsky, Tara F. Bishop, Yesenia Miranda, Brittany A. Frankel, Kristina B. Ziehler, Meghan M. Wong and Todd B. Evensong
Health Affairs, March 2016

Abstract

Each year US physician practices in four common specialties spend, on average, 785 hours per physician and more than $15.4 billion dealing with the reporting of quality measures. While much is to be gained from quality measurement, the current system is unnecessarily costly, and greater effort is needed to standardize measures and make them easier to report.

**

The number of quality measures directed at US health care providers by external entities such as Medicare, Medicaid, and private health insurance plans has increased rapidly during the past decade. These measures, such as rates of mammography screening for women or of testing for cholesterol or hemoglobin A1c levels for diabetes, are used to provide publicly reported information for patients and as a basis for financial “pay-for-performance” incentives to physicians. At least 159 measures of outpatient physician care are now publicly available. The movement toward accountable care organizations, the federal Sustainable Growth Rate “fix” legislation, and the private-sector Catalyst for Payment Reform coalition will further emphasize measurement of physician performance.

Anecdotally, dealing with these measures imposes a considerable burden on physician practices in terms of understanding the measures, providing performance data, and understanding performance reports from payers, but the extent of that burden has not been quantified. We present results from a national survey of practices representing three common physician specialty and multispecialty practices.

From the Study Results

On average, physicians and staff spent a total of 15.1 hours per physician per week dealing with quality measures, with the average physician spending 2.6 hours per week and other staff spending 12.5 hours.

By far the most time — 12.5 hours of physician and staff time per physician per week — was spent on “entering information into the medical record ONLY for the purpose of reporting for quality measures from external entities.”

The time spent by physicians and staff translates to an average cost to a practice of $40,069 per physician per year.

From the Discussion

There is much to gain from quality measurement, but the current system is far from being efficient and contributes to negative physician attitudes toward quality measures. Improving the system rapidly will be difficult. Obstacles include the fragmented US health care system, lack of interoperability across EHRs, lack of EHR functionalities to facilitate retrieval of data for quality measures, the cost of change to external entities and to providers, and opposition from vested interests. Increasing efforts to reduce the number of measures and to standardize their use across external entities are being made by the National Quality Forum, the Institute of Medicine, and America’s Health Insurance Plans, as well as by federal agencies such as the Centers for Medicare and Medicaid Services and the Agency for Healthcare Research and Quality. Our data suggest that US health care leaders should make these efforts a priority.

http://content.healthaffairs.org/content/35/3/401.abstract

Quality measures in health care have proven to be burdensome, consuming excess resources in both time and money. This study quantifies those costs.Not only do these quality games waste resources, they have become a significant contributor to physician burnout.

Wouldn’t it be far better to devote these extra resources to improving access to actual health care for the uninsured and underinsured who are now being all too often left out? It would be automatic under a single payer Medicare for all program.

The “Cadillac Tax” on Health Benefits in the United States Will Hit the Middle Class Hardest

Refuting the Myth That Health Benefit Tax Subsidies Are Regressive

By Steffie Woolhandler, David U. Himmelstein
International Journal of Health Services, Online March 9, 2016

Abstract

U.S. employment-based health benefits are exempt from income and payroll taxes, an exemption that provided tax subsidies of $326.2 billion in 2015. Both liberal and conservative economists have denounced these subsidies as “regressive” and lauded a provision of the Affordable Care Act — the Cadillac Tax — that would curtail them. The claim that the subsidies are regressive rests on estimates showing that the affluent receive the largest subsidies in absolute dollars. But this claim ignores the standard definition of regressivity, which is based on the share of income paid by the wealthy versus the poor, rather than on dollar amounts. In this study, we calculate the value of tax subsidies in 2009 as a share of income for each income quintile and for the wealthiest Americans. In absolute dollars, tax subsidies were highest for families between the 80th and 95th percentiles of family income and lowest for the poorest 20%. However, as shares of income, subsidies were largest for the middle and fourth income quintiles and smallest for the wealthiest 0.5% of Americans. We conclude that the tax subsidy to employment-based insurance is neither markedly regressive, nor progressive. The Cadillac Tax will disproportionately harm families with (2009) incomes between $38,550 and $100,000, while sparing the wealthy.

http://joh.sagepub.com/content/early/2016/03/08/0020731416637163.abstract

PNHP press release:
https://www.pnhp.org/news/2016/march/‘cadillac-tax’-on-health-benefits-will-hit-middle-class-hardest-study

***

Comment:

By Don McCanne, M.D.

The “Cadillac tax” is an excise tax on premiums of more expensive employer-sponsored health plans. It was included in the Affordable Care Act partly as a revenue source to help pay for ACA, partly to offset the tax subsidies for employer-sponsored insurance that were more generous for higher income individuals, and partly to reduce the incentive to purchase more insurance than necessary under the theory that making patients more sensitive to health care costs will prevent spending on supposedly excessive health care services (certainly a contentious point).

Because of the high costs of health care, we do need funding mechanisms that result in a transfer to those less able to pay. The Cadillac tax is a problem because, instead of disproportionately assessing the very wealthy, it impacts primarily working families. Not only is the tax unfair, the health plans will likely have their benefits reduced in an effort to escape the taxes.

In a PNHP press release (link above), Steffie Woolhandler, one of the co-authors of the report, stated, “Taxpayers should be paying directly for health care through Medicare-for-All, not indirectly through tax subsidies to private insurance. However, removing the tax subsidies – as Obamacare will do – without setting Medicare-for-All in place is a step backwards. It’s shameful that economists have provided cover for this tax that will hit middle-class families and largely spare the wealthy.”

The Cadillac tax is just one more example of the flawed policy patches required simply because the architects of reform decided to build on our current dysfunctional, fragmented financing system instead of replacing it with a more efficient, effective and equitable single payer Medicare-for-all program. That doesn’t mean that we have to live with our highly flawed system. We can still change it.

The “Cadillac Tax” on Health Benefits in the United States Will Hit the Middle Class Hardest

Refuting the Myth That Health Benefit Tax Subsidies Are Regressive

By Steffie Woolhandler, David U. Himmelstein
International Journal of Health Services, Online March 9, 2016

Abstract

U.S. employment-based health benefits are exempt from income and payroll taxes, an exemption that provided tax subsidies of $326.2 billion in 2015. Both liberal and conservative economists have denounced these subsidies as “regressive” and lauded a provision of the Affordable Care Act — the Cadillac Tax — that would curtail them. The claim that the subsidies are regressive rests on estimates showing that the affluent receive the largest subsidies in absolute dollars. But this claim ignores the standard definition of regressivity, which is based on the share of income paid by the wealthy versus the poor, rather than on dollar amounts. In this study, we calculate the value of tax subsidies in 2009 as a share of income for each income quintile and for the wealthiest Americans. In absolute dollars, tax subsidies were highest for families between the 80th and 95th percentiles of family income and lowest for the poorest 20%. However, as shares of income, subsidies were largest for the middle and fourth income quintiles and smallest for the wealthiest 0.5% of Americans. We conclude that the tax subsidy to employment-based insurance is neither markedly regressive, nor progressive. The Cadillac Tax will disproportionately harm families with (2009) incomes between $38,550 and $100,000, while sparing the wealthy.

http://joh.sagepub.com/content/early/2016/03/08/0020731416637163.abstract

PNHP press release:
https://pnhp.org/news/2016/march/‘cadillac-tax’-on-health-benefits-will-hit-middle-class-hardest-study

The “Cadillac tax” is an excise tax on premiums of more expensive employer-sponsored health plans. It was included in the Affordable Care Act partly as a revenue source to help pay for ACA, partly to offset the tax subsidies for employer-sponsored insurance that were more generous for higher income individuals, and partly to reduce the incentive to purchase more insurance than necessary under the theory that making patients more sensitive to health care costs will prevent spending on supposedly excessive health care services (certainly a contentious point).

Because of the high costs of health care, we do need funding mechanisms that result in a transfer to those less able to pay. The Cadillac tax is a problem because, instead of disproportionately assessing the very wealthy, it impacts primarily working families. Not only is the tax unfair, the health plans will likely have their benefits reduced in an effort to escape the taxes.

In a PNHP press release (link above), Steffie Woolhandler, one of the co-authors of the report, stated, “Taxpayers should be paying directly for health care through Medicare-for-All, not indirectly through tax subsidies to private insurance. However, removing the tax subsidies – as Obamacare will do – without setting Medicare-for-All in place is a step backwards. It’s shameful that economists have provided cover for this tax that will hit middle-class families and largely spare the wealthy.”

The Cadillac tax is just one more example of the flawed policy patches required simply because the architects of reform decided to build on our current dysfunctional, fragmented financing system instead of replacing it with a more efficient, effective and equitable single payer Medicare-for-all program. That doesn’t mean that we have to live with our highly flawed system. We can still change it.

Transcript of the Democratic Presidential Debate in Miami

The New York Times, March 10, 2016

Excerpt:

HILLARY CLINTON: But let me say this. Senator Sanders has talked about free college for everybody. He’s talked about universal, single payer health care for everybody. And yet, when you ask questions, as many of us have and more importantly, independent experts, it’s very hard to get answers.

And a lot of the answers say that this is going to be much more expensive than anything Senator Sanders is admitting to. This is going to increase the federal government dramatically. And, you know, my dad used to say, if it sounds too good to be true, it probably is.

BERNIE SANDERS: All right. Let me respond to this.

(APPLAUSE)

CLINTON: And we deserve answers about how these programs will actually work and how they would be paid for.

SANDERS: I want you all to think. What Secretary Clinton is saying is that the United States should continue to be the only major country on earth that doesn’t guarantee health care to all of our people.

(APPLAUSE)

SANDERS: I think if the rest of the world can do it, we can. And by the way, not only are we being ripped off by the drug companies, we are spending far, far more per capita on health care than any other major country on earth.

You may not think the American people are prepared to stand up to the insurance companies or the drug companies. I think they are. And I think we can pass…

RAMOS: Thank you senator. (CROSSTALK)

(APPLAUSE)

CLINTON: This is a very important point in this debate, because I do believe in universal coverage. Remember, I fought for it 25 years ago. I believe in it. And I know that thanks the Affordable Care Act, we are now 90 percent of universal coverage. I will build on the Affordable Care Act. I will take it further. I will reduce the cost.

But I just respectfully disagree. Between the Republicans trying to repeal the first chance we’ve ever had to get to universal health care, and Senator Sanders wanting to throw us into a contentious debate over single-payer, I think the smart approach is build on and protect the Affordable Care Act. Make it work. Reduce the cost.

(APPLAUSE)

SANDERS: I’m on the committee, I know a little bit about this, I’m on the committee, Health, Education, Labor Committee that helped write the Affordable Care Act. And it has done a number of good things. But when Secretary Clinton says, well, 90 percent of the people have insurance, yes, not really.

Many of you may have insurance, but you have outrageously high deductibles and co-payments. One out of five Americans cannot afford the prescription drugs their doctors prescribe. Elderly people are cutting their pills in half.

I do believe that we should do what every other major country on earth does, and I think when the American people stand up and fight back, yes, we can have it, a Medicare for all health care system.

(APPLAUSE)

http://www.nytimes.com/2016/03/10/us/politics/transcript-democratic-presidential-debate.html

***

Hillary Clinton’s health care proposals:
https://www.hillaryclinton.com/issues/health-care/

Bernie Sanders’ health care proposals:
https://berniesanders.com/issues/medicare-for-all/

Donald Trump’s health care proposals:
https://www.donaldjtrump.com/positions/healthcare-reform

***

Comment:

By Don McCanne, M.D.

Although today’s message does not seem appropriate for this forum since it is political and our agenda is on policy, actually it is apropos since it represents a disagreement over single payer policy, even though framed as a political debate.

Of the three candidates for the presidential nomination who have mentioned single payer, Donald Trump has recently clarified his stance by releasing a health reform proposal that made no mention of single payer. So the debate over single payer is really between the two remaining Democratic candidates – Hillary Clinton and Bernie Sanders.

In this election season, single payer is a political issue. Bernie Sanders is the first leading presidential candidate to support a bona fide single payer Medicare for all. Hillary Clinton continues to support private health plans in a multi-payer system, originally as her managed competition model 25 years ago, and now as incremental expansion of the Affordable Care Act. She opposes single payer since it would eliminate the private insurers.

The politics have been somewhat bizarre. The Republicans have not had to take a high profile position against single payer since many in the progressive community have done their work for them. Although often presented as policy arguments, the substance of the opposing arguments by these progressives has been political. We can only speculate that their reasons have more to do with their support of a particular political candidate than they do with their position on single payer. In fact, the leading analysis being used to oppose single payer was written by an academic who has authored other single payer proposals. Fortunately, many others in the progressive community have stood up to insist that single payer be accurately portrayed.

Instead of trying to wade through the proxy arguments of these outside experts, it would be better to listen to the words of the two candidates themselves. What did they have to say in last night’s debate?

Sanders reiterated his views on a truly universal Medicare for all, whereas Clinton reiterated her views on rejecting single payer and building on the Affordable Care Act which she mentions has us at 90 percent coverage. These are policy issues.

When you look at their respective plans (links above), you can see that, from a policy perspective, Sanders’ proposal automatically covers everyone, whereas Clinton’s proposals barely nudge us in that direction but cannot come close to universal coverage. In addition, Sanders points out that the current private insurance products frequently do not meet the needs of those insured because of the exposure to high out-of-pocket costs. Again, regardless of the politics, these are fundamental policy issues that often determine whether or not people will receive the health care that they need.

We’ll continue to speak out on policy and leave it to others to get the politics right.

Physicians for a National Health Program (PNHP) is a nonpartisan educational organization. It neither supports nor opposes any candidates for public office.