Cost control might actually control costs

The New York Times reports today that Max Baucus’ plan to tax high-end “Cadillac” health care plans might end up hitting middle income families, too. The idea here is that some middle-class folks are in higher risk jobs (firefighters, coal miners) so their health insurance costs more and would cross the premium threshold for the tax. It also notes that regional differences in cost could put some middle-class families over the line, too.

These both seem like easy fixes. The federal government already takes account of the variance in cost of living by region in its GS pay scale. I don’t see any reason why it couldn’t set the base premium threshold and then index it to the GS scale. It would probably also make sense to consider weighting the premium threshold to account for income to keep us from punishing people who are already risking a lot for the sake of everyone else.

The bigger problem the Times proposes, however, is the possibility that the tax may wind up like the Alternative Minimum Tax, swallowing up more and more middle-class people every year. This would ostensibly result from the fact that health care costs are rising faster than inflation, meaning that insurance policies will slowly grow in cost relative to income. At the averege annual rate of health care inflation between 1990 and 2009 (8.7%), the average policy would be taxed by 2015 even if the tax level were indexed for inflation. If health care continues to rise at the slower 2004 to 2009 average annual rate (6.1%), the average policy would be taxed by 2019.

Neither of those scenarios sounds very appealing, but nor do they seem very accurate predictions of health care costs over the next 10 years. The very point of taxing overly generous health care plans is to control costs by reducing overconsumption of health care in th form of unnecessary, wasteful tests that would otherwise be cheap to the consumer but costly to the insurance pool. Combine that with other cost controlling measures like an individual mandate which eliminates the adverse selection problem and it seems likely that Baucuscare has a good chance of significantly “bending the curve” of increasing health care costs.

Now there are some other problems with the Baucus bill (including the lack of a public option that could reduce costs even further and insufficient subsidy levels to help middle-class families cope with the individual mandate), but those are solvable in committee and in conference. The bottom line is that it seems bizzare to assess the long term effects of a cost control measure without entertaining the possibility that it could actually control costs.

*Update

It now appears as though Baucus is revising his bill to increase subsidy levels for middle-income families and is planning to increase the base premium level for the insurance policy tax.  He hasn’t provided any details on either change yet, however.

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