Responding to Cadillac Tax Report Concerns

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Pioneer’s recent report on the Cadillac tax has garnered a good deal of media attention and some political push back.

Political pushback comes in the form of objections that fail to engage on the issue of the Cadillac tax itself; rather they focus on two assumptions made in the Pioneer study: 1) Healthcare growth rates in the future will look similar to the recent past, and 2) Income growth rates in the future will look similar to the recent past. Of course, we have no more of a crystal ball than anyone else does, however…

As is our practice, we made our assumptions very clear, right up front. And second, we based our assumptions on data. Pioneer is an empirical organization, and therefore in any modeling exercise we often use historical data in order to base our assumptions on something other than political expedience or uninformed assumptions.

We hope, as do I hope everyone involved in this debate, that healthcare insurance premiums decrease significantly. In fact we published, and nationally released, an entire book on how to achieve that important goal (greatexperiment.org). We also hope the economic picture brightens dramatically over the next 10 years and that median incomes grow significantly.

That’s hope. But information, experience and judgment also play a role in policy formation, if such policies are to be anything more than press releases. Hope without a plan based on experience is, at best, imprudent – at worst, folly. So, let’s look at the objections in order:

1) The healthcare growth rates in the report are too high

How Low Does Growth Have to Be: In order to figure out when the average person paying the median premium in Massachusetts could avoid triggering the Cadillac Tax we ran multiple scenarios. An employee on a commercial family plan, along with 50% of the workers in Massachusetts, will still trigger the tax if average growth is 4.88%. Keep in mind, even with a much slower growth than 4.88%, many of the folks above the median currently will still trigger the tax.

For a generic local public employee, not in a high-risk profession, the growth rate to trigger the tax is even lower,3.92%. Object all you want to our choice to use historical data to estimate future growth, however one has to be confident that median insurance premiums will not grow faster than 4.88% or 3.92% in order to allow roughly 50% of workers to avoid paying any tax.

Why the 2006-2011 Time Period?: Pioneer utilized historical data for the median insurance growth rate from 2006-2011. If we had used a longer historical window the growth rate would have been even higher, closer to 12-13% average annual growth. Since the healthcare system has changed appreciably since 2000, we thought looking at the time period following the 2006 healthcare law made sense.

National Data Versus Massachusetts Data: While some have objected to our use of Massachusetts specific data, they instead suggest we should have used CBO national estimates for future growth. This method has two problems. First, just like our estimates, these reports make assumptions and, therefore, are not inherently better. They deserve the same level of scrutiny as our report, since we are talking about the unknowable future. Second, CBO and other national data sources utilize a completely different methodology for their data collection, and in order to obtain an apples-to-apples comparison, we stuck with local data whenever possible.

2) Wage growth in the report of 2.1% is no representative of “normal” wage growth

Slow Wage Growth: Further objections to our report point to our assumed 2.1% wage growth rate. Some have said this number “would barely keep pace with inflation and is based on projections from the years of the financial crash (2006-2011) when wages experienced an unprecedented collapse.” We don’t disagree, however the historical data doesn’t lie no matter how much we want growth to be higher in the future.

Once again, Pioneer pulled historical median income data from 2006-2011 to guide our growth assumption and matched the time window with our insurance premiums numbers. Even under the most positive framing of median income growth from 2000-2011 in Massachusetts, growth has only been 2.88%. If you look at growth in terms of 2011 dollars, the rate has been even more anemic. While Massachusetts has a higher median income and growth rate than the US as a whole, the fact remains that growth has been below inflation, and no reasonable economist expects a radical departure in the near to mid-term.

2011

Median income

Current Dollars

United States

$50,054

2000-2011 Average Annual Growth in Median Wages in US

1.63%

2006-2011 Average Annual Growth in Median Wages in US

1.32%

Massachusetts

$63,313

2000-2011 Average Annual Growth in Median Wages in MA

2.88%

2006-2011 Average Annual Growth in Median Wages in MA

2.10%

2011 Dollars

United States

$50,054

2000-2011 Average Annual Growth in Median Wages in US

-0.82%

2006-2011 Average Annual Growth in Median Wages in US

-1.05%

Massachusetts

$63,313

2000-2011 Average Annual Growth in Median Wages in MA

0.40%

2006-2011 Average Annual Growth in Median Wages in MA

-0.29%

A final consideration: the ACA Tax Credits

A final criticism of the report has been that we did not account for the tax credit that the ACA contains for individuals and small businesses; the implicit argument being that the tax credit will make health insurance more affordable. The truth is that its impact depends on who you are and how you define affordable.

The credits for individuals are not universal: They apply to those receiving sliding scale premium support subsidies in a public exchange, and that earn 138-400% of FPL. (Roughly $15,000 to $45,000 for an individual) For anyone making close to 400%FPL or more, insurance will be expensive. It is now in Massachusetts, and most experts don’t believe that will change drastically in the near to mid-term. This leaves any person making above $45,000 to pay the full cost of insurance. So, it is an open question if individuals near the cut off and those above it, will deem their insurance affordable.

The small business tax credit is only for companies paying on average $50,000 or less in salary. Further research is needed to estimate how many employers in Massachusetts will qualify for this credit. However, many policy experts expect the take up to be low since the median income in Massachusetts is over $13,000 more when compared to the national average, and well above the $50,000 threshold. So far, experience nationally with the tax credit would seem to lend respectability to this claim. According to The New York Times, while 1.4 million to 4 million small businesses nationally are eligible, only 170,300 had taken advantage of the program as reported in a May 2011 GAO report.

So, let the Debate Begin

We believe that most reasonable people will agree that our assumptions are entirely in line with past reality and what is likely to continue to be the reality on healthcare premiums well into the future. Pioneer hopes that our brief on one small tax provision in the federal health care law will lead to a more robust conversation about the benefits and costs of the entire new law on Massachusetts. For too long, political leaders have glossed over the changes that are coming for the Bay State, and as future patients and taxpayers, we deserve to know what could lay ahead for us.

Find me on twitter: @josharchambault

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