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But What Happens if People Actually Change Their Behavior?

January 13, 2010, 11:07 pm

The Senate health care bill relies for much of its funding on a tax on so-called "Cadillac" health care plans.  But what happens when employees and employers inevitably change their behavior in the face of different incentives?

History teaches us that tax policy has a huge effect on behavior.  Witness the fact in health care the non-nonsensical fact so many people rely on their employer for health care.  As we see today, this is a really bad idea, but it was hatched because tax law provided incentives for paying compensation in the form of health insurance premiums, since these are not subject to either income or payroll taxes.

Already, employers are offering employees what are effectively buy-outs of health care -- higher pay in return for reduced health care benefits.  For employers, the upside risk on health care costs now outweigh the tax advantages of health insurance as a compensation tool.  Given this trend, what do you think will happen when employees suddenly have the same incentive, to roll back health care coverage to get under whatever bar is set for an insurance package Congress thinks is too rich (hint:  wherever the bar is set, it will be below the health insurance Congress provides itself).  Employers and employees are now going to have a shared incentive to back off on health care benefits in exchange for more cash.  Think of the sharp minds on both sides of a UAW contract negotiation - does anyone really think that these guys won't figure out a win-win to avoid paying the surtax?

Three to five years from now, even before the system goes bankrupt from inevitably expanding costs  (you didn't really buy that stuff about the operator of Amtrak and the Post Office improving the industry's efficiency, did you?), we are going to be talking about the gross shortfall in tax revenues to support these programs, all because people change their behavior in the face of changing incentives.

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Category: Health Care, Taxes
  • http://evilredscandi.blogspot.com Evil Red Scandi

    Dude, once again you're bringing logic into politics. The best you can expect is to hurt your brain.

  • Sheila Pettigrew

    I have been saying this since the very first thought of taxing the "cadillac" plans came up. However, had I written the article, the title would have read, "What happens WHEN people change their behavior".

    There are only two motivators to human behavior, pleasure seeking, or pain avoidance. Taxes, are painful and people will change their behavior to avoid them if they see the cost:benefit ratio is out of whack.

    Where will the funding come from when their primary source is all dried up.... either they cut spending and eventually resort to similar tactics used by the New Zealand gov't where anyone that is overweight, can and most likely will be denied immigration because they would statistically be more of a drain on their healthcare system.

    So, would our gov't impose an outrageous tax on Big Macs? Personally, I think they are hideous and wouldn't care if I never saw another Mc'Ds in my life, but the idea of that kind of system is abhorrent. As much as the Dems want to avoid the issue, it always comes down to the money.

  • http://thelibertypapers.org/ Brad Warbiany

    Well, the unions found another option: make themselves exempt.

    (Note that these are only early reports of them reaching a deal, and thus I have significantly less than 100% confidence in the veracity of the linked story).

  • http://maxedoutmama.blogspot.com MaxedOutMama

    Yes, but the additional money shifted to salary and wages rather than benefits will be taxable for SS/Medicare and income taxes, so they'll make it up that way. See, this IS the plan. Increase taxes on the middle class - this is just a sneaky way to do it.

    Also, one major reason why people get their health care through employers is that it is one of the few ways to get non-individually rated health plans. The way to break the employment/health care linkage is to allow associations to contract on the same basis that corporations do - across state lines without state mandates.

  • Bill The Maniac

    My understanding from reading the blogs of supporters of the bill is that what MaxedOutMama said is, in fact, the point. There is currently a distortionary incentive in the tax code for employer-provided healthcare. The excise tax changes that.

    We disagree, though, on why group plans are so popular. You think it's because of a degulatory race-to-the-bottom spiral that enables corporations to do whatever they want. I think it's because of community rating.

  • http://mjb.biglaughs.org m

    One of the most frustrating aspects of the CBO is their forecasting rules make them assume no changes in behavior like this. Ridiculous.

  • Reformed Republican

    So the government wants us to have health insurance, just not too much (or too little)?

  • morganovich

    seem to me that this cadillac tax is easily avoided by splitting up health care plans in the way that may in the UK and elsewhere use the government plan, but then get a private plan to cover certain eventualities.

    have one plan for a GP and basic tests, another for specialists, maybe another for catastrophes or maybe sign up for - i don't know what the correct split is and the whole idea is fairly stupid, but it wouldn't be the first time the tax code gave rise to a stupid financial or contract structure...

  • Mark

    I don't know if the feds will go bankrupt on this, they will just offer fewer and fewer services. Force private insurance into untenable situations so they leave the industry, leaving the government to step in and save us. The Feds will also underpay for hospital services causing hospitals to go under, and when we all cry about our lost hospitals, the Feds will take them over for us, saving us again.

    Of course - I heard an add on the radio for one of the Local San Diego hospitals. They were advertising that all their rooms are private. This is the case with most modern hospitals today - even in Kaiser. Of course to save money while the system collapses, private rooms with nice nurses will disappear, for 8 person rooms maintained by 1/2 a nurse Kratchet.

    What will be even more fun is when the "death panels" are awarded carbon credits for refusing to providing services to extend our lives.

  • K

    There are rumors this morning that union members are to be exempted from the Cadillac Tax.

    That is the deal made to get it endorsed by union leaders. That would of course exempt nearly all government employees too. At every level, state, county, city, special districts, school teachers, etc.

    Gee, so many people will be getting a tax break. Who could be against that?

    We shall see and hear.

  • O Bloody Hell

    Since you obviously oppose Obamacare, it's now a self-evident fact that you must be a racist.

    Just so you realize.

    :o P

  • Mark ii

    Think of how the Democrats work. Advocate a plan that is unpopular, particularly with the Republican tax payers. Then, allow your political constituencies to be exempted by the very same plan that your side is advocating.

    Have you ever wondered how they can get away with such bull?

  • O Bloody Hell

    > Have you ever wondered how they can get away with such bull?

    Not really: Years and years and years of defective thinking techniques taught to generation after generation of kids in schools. The oldest bunch of incompetent thinkers are now in their sixties.

  • tomw

    I understand that politicians are willfully 'dumb' when it comes to mathematics, but can't we hold them to some sort of responsibility for the messes they make? At least make them subject to the same 'finely crafted legislation' they are going to press upon us.

    As an aside, why do they think we cannot read a calendar and see the shifted expenses and front-loaded revenues that make this abomination 'revenue neutral'? I guess it is a matter of respect by the 'upper class professional politicians from Ivy League institutions' that have no respect for the Land Grant graduates that actually RUN SOMEHTING!!!!
    I am so per-fuddled that I cannot express my exemption. Got that?

    tomw