Beginning in 2018 the Affordable Care Act will implement an excise tax on “high cost” job-based health insurance—single plans with yearly premiums exceeding $10,200 and family plans with premiums exceeding $27,500. Congress is currently considering several bills, authored by Democrats and Republicans alike, that would repeal the tax. This blog post is the second in a series in which I discuss the likely consequences of the excise tax policy. (See first post: The ACA Excise Tax Targets Where You Live and Other Factors More than Benefit Levels.)
The excise tax is likely to lead many employers to increase workers’ health insurance cost sharing in order to keep plans’ premiums below the “high cost” threshold, building on a trend that was growing even before the excise tax was enacted. Covered workers have experienced a two-thirds increase in deductibles since 2010, rising much faster than health care premium growth, wage growth, and inflation, according to a national survey by Kaiser Family Foundation/Health Research & Educational Trust (HRET).
Jason Furman, Chairman of the Council of Economic Advisors, has expressed doubt that increasing cost sharing will be the primary response to the tax, stating that there is no evidence that the impending tax is speeding up this trend. However, 13% of large employers reported increasing cost sharing in 2015 specifically in anticipation of the tax.
Furman argues that the tax will serve more as a stimulus for employers to focus on “strategies that directly reduce the prices paid for health care goods and service and that reduce the use of low-value services.” While adoption of those strategies may occur around the margins, it is not likely to be widespread, as Josh Bivens of the Economic Policy Institute describes. Employers and workers have been struggling for years to pay high job-based coverage costs, already facing a tremendous incentive to demand increased cost efficiencies today. Instead the primary response by employers has been cost shifting. Bivens explains, “What is lacking here is not will or incentive on the part of workers and firms, it’s a mechanism that links employees’ and firms’ desire for cheaper, more efficient health care to insurers’ and providers’ ability or motivation to provide it. The excise tax doesn’t change any of this.”
The shift towards high deductibles could grow even more rapidly if Congress adopts proposals to exclude the value of Health Savings Accounts (HSAs) from the calculations of whether or not a plan exceeds the high-cost threshold. Under the existing excise tax provisions, employee and employer contributions to HSAs count toward the value of a plan. If HSA contributions are exempted, many employers will be likely to shift health care dollars to HSAs and introduce a high-deductible plan (if they do not already offer one) because the IRS only permits individuals with a high-deductible plan to receive or make contributions to a HSA.
If the excise tax leads to higher deductibles and other increased cost sharing, economic theory suggests that patients will reduce unnecessary or inappropriate use of medical services and products and choose providers who deliver higher quality care at lower prices, as argued by a recent letter by economists and policy experts urging Congress to not weaken, delay, or reduce the excise tax argued.
But a recent study by UC Berkeley and Harvard economists casts significant doubt on the theory that higher cost sharing means more cost-effective care or more price shopping. The study examined a natural experiment in which a large self-insured employer switched from offering a PPO in which nearly all employees enrolled to solely offering a high-deductible plan. The economists found that in the first year in which the workers faced the higher deductible:
- Enrollees spent between 11% and 15% less on care, cutting all types of care, from valuable preventive care such as colonoscopies and diabetes-related care, to “potentially wasteful” care such as imaging.
- The sickest workers were the most likely to reduce care, even though they are the ones who need the care the most and are likely to hit their deductible regardless of how much they cut.
- The higher deductible did not result in greater comparison shopping on the basis of price, even though these workers were high income, had high education levels, and were provided a comprehensive price shopping tool.
- Little substitution of one type of procedure for a different (and potentially less expensive) procedure occurred.
While enrollees reduced spending, they did it simply by reducing the quantity of care they received, rather than shifting towards more cost-effective care or more price shopping. It is not yet known how these cuts in spending in the short term will affect workers’ health outcomes and costs in the longer term.
The theory that patients will seek out more cost-effective services as a result of increased cost sharing does not play out in practice because patients do not and cannot behave like typical consumers at the shopping mall or grocery store for a number of reasons.
- Patients often lack sufficient comparative cost and quality information, and few consumers see or use the information available.
- Patients typically lack the medical knowledge necessary to determine when care is necessary, and they often do not have the authority to make care decisions.
- Even seemingly comparable services like imaging can have subtle but important differences in quality and convenience, as health care journalist Sarah Kliff of Vox describes in a blog post about her own challenges as a patient shopping for an MRI.
- The health care market is far from perfectly competitive because many providers have achieved sufficient control of local markets to set prices, and research has consistently shown that the distribution of health care resources drives demand for services.
- Even if deductibles created an incentive for consumers to make more cost-effective decisions, the effect is likely to be limited because 86% of costs are incurred by the top one-quarter of patients. Many of these high-cost patients will blow through their deductible or out-of-pocket limit, making only a fraction of the most expensive care subject to incentives to reduce utilization. The recent study on high-deductible plans found that virtually all of the spending reduction occurred below the deductible.
Not only will increasing deductibles fail to achieve the intended purpose of improved cost-effectiveness and improved price shopping, but it also has the potential to harm patients, especially low-income and sick workers and their families. The Commonwealth Fund has found that people with high deductibles and other out-of-pocket costs, including those with chronic conditions, are more likely to skip needed care and prescriptions. Families with lower income are even more likely to delay or avoid needed care due to cost sharing. Given that non-poor U.S. households have median net financial assets of approximately $2,500, it’s no wonder that families cut care when faced with a high deductible. Being “underinsured” also makes one more likely to suffer financial consequences like inability to pay medical bills, accruing medical debt, or even bankruptcy.
The most probable consequence of the excise tax—higher patient cost sharing in job-based coverage—will not result in the optimal amount of health care consumption or significant improvements in the price or quality of care. Rather, it threatens to reduce access to care and financial protection for workers and their families, especially low-income individuals and those with significant health needs.
View the first post in this blog series:
The ACA Excise Tax Targets Where You Live and Other Factors More than Benefit Levels
View the third post in this blog series:
The ACA Excise Tax is not a Progressive Tax Policy