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Will there be an ‘exodus’ to the exchanges?

Will Americans abandon employer plans for the exchanges, will health spending shrink, and did the GOP blow its chance to help?

eWill there be an 'exodus' to the exchanges?

EDITOR’S NOTE: Healthinsurance.org’s Curbside Consult is a periodic informal dialogue with medical and health policy experts about pressing issues of the day.

For this edition, I Skyped last week with Dr. Jonathan Gruber, the Ford Professor of Economics at the Massachusetts Institute of Technology and director of the health care program at the National Bureau of Economic Research. He is also the most famous health economist in the United States. He has won numerous awards, and written countless papers and academic articles. He has even written a graphic novel about health reform.

curbside consultGruber was a key designer and analyst of the Massachusetts’ health reform that came to be known as Romneycare. He later performed some of the same analyses for the Affordable Care Act.

In Part 1 of our interview Gruber told us why he was “feeling pretty good” about the Affordable Care Act. In Part 2, we got under the hood with some of the political mechanics of ACA.

In Part 3 – our final installment – we talk about what happens next: Will exchange enrollment swell, and would that growth have to do with an exodus from employer-sponsored plans? And Jonathan answers the question, “Would you be happy or sad if there was an exodus to the exchanges?”

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Transcript of this interview:

Blue-sky projections

Harold: I’m thinking about where else to go with this. I interviewed Zeke Emanuel recently in WonkBlog, and in his new book, which is, he gives some blue-sky projections. I want to ask you about that. By the way, to say blue sky, it’s the bluest sky projections in American history. These are so blue.

So one of the things that Zeke says is that the health insurance exchanges are actually going to have many, many millions more than CBO predicts, and that there will be a movement into the exchanges by employers. Once a few companies do that and are successful, that there will be this exodus into the exchanges. Do you think that’s a likely outcome?

Jon: I think it depends on the timeframe we’re talking about. I think over 50 years, I could see a large share of employers migrating over. Over the near future, I don’t see that. I think medium and large firms will continue to offer health insurance over the next five-ish years. I think over time I could see small businesses getting on to this activity. I could see over the next decade a large exodus of small businesses from the business of offering health insurance, sending the people to exchanges.

But I think partly, Harold, it’s going to come down a lot to what happens with the Cadillac tax. Because basically, if you think about employers incentive to offer insurance, on the one hand it is getting undercut because there are these subsidies to the exchanges. But as long as there is still the tax break to employer-sponsored insurance for their high-wage employees, they are not going to want to drop insurance. But as the Cadillac tax comes and squeezes that down, then all of a sudden, there’s no reason to offer any more at all.

So the question is what’s going to happen to the Cadillac tax. Is that going to … It’s only going to start by hitting the top 10 percent of the plans; is that going to crank down over time or not?

The Cadillac Tax

Harold: By the way, can you just explain what the Cadillac tax actually is for some of the viewers who may not know it in detail?

Jon: Sure. I give my little spiel here because this is very important for the viewers to understand this. In America, we have what we call the tax subsidization employer-sponsored health insurance. So if MIT comes to me and says, “Jon, would you like to be paid $1,000 in wages,” I would take home about $600. If MIT says, “We’ll give you a $1000 in orthodontia benefits for your daughter,” that’s a $1000 in orthodontia benefits for my daughter. So she has these cool braces that spin and change colors, and they change every week, because why not, because they are free.

This system has three fundamental flaws, as Harold knows, but the viewers, it’s important you know. One is, it’s incredibly expensive, so this year we taxed health insurance like wages as we should. We raised about $250 billion more a year in revenue, which is about twice what it would have cost to cover every uninsured American with health insurance.

The second flaw is that it’s regressive. The richer you are, the bigger tax break you get.

The third and most important flaw from this discussion, is that it’s inefficient in that people, as my daughter’s braces example, points out, people buy excessive health insurance because it’s tax-subsidized, leading them to use excessive health care.

For years, economists have said uniformly, we should get rid of this. It turns out, it’s hard to get rid of it, so the compromise in the Affordable Care Act is this thing called the Cadillac tax, where for the most expensive plans – plans that are in about the top 10 percent of plans – starting 2018, that tax break will effectively go away. It’s sort of done in an indirect way, there’s sort of an excise tax on insurers that essentially offsets the tax break. But basically, think of it as a tax break going away on the most expensive plans.

What that means is, once you take the tax break away, then firms could go en masse to the exchange, because then, right now … Think about a firm right now. You’ve got a lawyer and a secretary. Okay? Right now, under the ACA, your secretary’s much better off if you dropped her health insurance and paid her higher wages, because she could go to the exchange and get subsidies, but your lawyer would be worse off, because he would lose the tax break on his insurance and he couldn’t get subsidies in the exchange. But then the lawyer is the one who decides whether to offer health insurance or not, right?

Harold: This, by the way, your example, was in the, was before the legal market crashed. Now, the secretary is actually supporting the lawyer [crosstalk] …

Jon: Basically, the firm is not going to drop the insurance, but if the Cadillac tax – it comes in – now, suddenly, the lawyer’s not getting as big a tax break on their insurance. Now, it’s not going to be a big deal right away, but the key thing about the Cadillac tax is that amount is indexed to overall price inflation, not health price inflation, which means effectively, over time, the Cadillac tax will affect more and more and more plans.

So over time, that could start to cause firms to not want to offer health insurance anymore. And that’s why I say, we could imagine when we’re over 20, 30, 40, 50 years, you do see a massive exodus, but not in the near term.

Ready for an exodus to the exchanges?

Harold: Now, would you be happy or sad if there was this exodus to the exchanges?

Jon: I think I’d probably be, depends if the exchanges don’t function as well, I hope though they’ll function within the next three to five years, I think it’ll be a good thing. I think if you view it, sort of … I guess I view it a little bit like the move from defined-benefit to defined-contribution pension plans, which if done in a fair basis to workers, is actually a better thing for a worker because then, if they leave the job, they don’t leave their pension behind.

They get to keep their pension as they move jobs, the same thing, you can keep your health insurance if you move jobs. Basically, it gets rid of a lot of distortions to the labor market from employer-sponsored health insurance.

Harold: By the way, one of the short-term things is, my stepsister Liza, who has a pretty modest income, is actually very upset that she’s being offered health insurance where she works, because she’s being offered pretty crappy insurance, which she doesn’t want to take. She would much rather that her employer does not offer it. Then, she could go into the exchange and get it. She, by the way, she believes that ACA has made her worse off because of this. One of the political things that’s amazing is, we now own everybody’s complicated insurance situation.

Jon: Yeah. Very important, because it hasn’t made her worse off. It just hasn’t made her better off, but somehow, there’s this perception of people, everyone expected – and it wouldn’t be fair to the advocates, they are a bit to blame for this – but everyone expected that life would get better with ObamaCare. So if you’re life doesn’t get better, suddenly, it’s ObamaCare’s fault that it’s not what you want it to be.

Harold: Yeah. One of the things, it seems to me if there’s lots of people like her, that over time, of course, she’ll drift into a job that doesn’t offer health insurance and go to the exchange.

Jon: That’s right.

Will growth in medical costs decline?

Harold: There’s lots of ways that the exchange can grow. Now, one thing that you mentioned that the Cadillac tax is indexed to regular inflation, rather than medical inflation, and implicit in your comment was the idea that we think medical inflation is probably higher than regular inflation. One of Zeke’s other predictions – which is not insane, when you look at what’s happened over the past couple of years – is that we will see a dramatic decline in the excessive growth of medical costs. That medical cost will stabilize as a share of the economy over time. He’s very optimistic about that. Are you similarly optimistic about that?

Jon: I’m not really that optimistic. I think they will stabilize as the share of the economy over time because they have to, but I don’t think they’re going to stabilize at 18 percent. I think we should be delighted if they stabilized at something less than 25 percent. I think it’s a problem if it gets to 40 percent. I think if we end up 50 years now, spending 25 percent of the economy on healthcare, that’s not the end of the world. We can afford that as a society.

But I think that it’s optimistic to predict, it’s gonna happen and we know where it is. Yes, it’s had a great past few years, but we had a great few years in the middle of 90s too. That ended and healthcare inflation took all off again. I think we are a long way away from knowing that we sort of solved this problem.

Harold: This is Harold Pollack talking to Jon Gruber in healthinsurance.org. By the way, if we went to 25 percent, we could certainly afford as a society to pay that much more for healthcare – my body is my major consumer durable; I am happy to spend a lot of money on it – but we probably would have to change our tax system around some, so that we don’t destroy the government in doing that.

One of the things that scares me is that we’re … Right now, Medicare is just eating up chunks of the federal budget, not because it’s inherently so expensive, but because of the way we finance it is, the combination of that and our allergy to taxes is squeezing out many, many other things in the federal budget that are equally important.

Jon: That’s right. I think that the real constraint is not the share of the economy, it’s the federal budget. Now, we can get to 25 percent without the government. If we grow the share of the economy that’s healthcare by a quarter, it doesn’t mean the government – you know more of that could come out of people than the government; you could do it through taxes or you could do it through increasing the role of consumers in purchasing healthcare.

Right now, there is a successive subsidization of healthcare for many through Medicare – many rich people don’t need the excessive benefits of getting Medicare – and for many through the employer system. So I think we can get there in a different sharing route, but the bottom line is right. The constraint is going to be the financing.

Harold: By the way, you have now permanently prevented yourself from winning a high elective office in the United States despite your charisma, they be playing this tape back in an endless loop with a guy with a deep voice in the background.

Jon: I’ll guarantee it further by highlighting that guns are a public health issue.

Harold: Yes. Your friend and mine Vivek Murthy has made the mistake of making that observation.

Jon: Just tragic.

Harold: Actually, he helped take care of my dad who just got over a scary cancer, and my dad is now really mad.

Jon: It’s unbelievably sad. I mean, not just because he’s a great guy, but that the NRA held the surgeon general hostage is just crazy.


Harold: We’ll see how that goes. One final thing and then I’ll let you go. I appreciate your time. Malpractice. One of the things that Zeke talked about was how there was an opportunity to do something in ACA, but basically the medical profession and the Republicans didn’t value that enough to actually make it a high priority to sit down at the table and negotiate about it. Are there some things that we might do about tort reform and malpractice to improve that system, which obviously has many shortcomings in its current configuration?

Jon: Let me make two points. First, coming back to your first point about the politics. Some people who really were super-disappointing was the sort of middle-of-the-road Republicans, the extent of middle-of-the-road Republicans like Olympia Snowe of Maine, who if they were willing to support the ACA could’ve made fundamentally important changes to the law. For example, malpractice reforms. The fact they put their party before good policy is really disappointing.

That said, we don’t know so much what to do on malpractice. The ACA does promote state experimentation, but the truth is, I think, we have a lot more learning to do before we know what to do. Whenever anybody points to malpractice, every time we speak to doctors, they say it’s the whole problem. But we don’t honestly know how much of a problem it is, and we don’t really know what to do. I think we need to just really promote more experimentation in that area and try to understand what we can do and see what effects it has.

What’s next?

Harold: Great. What’s next for you? Are you still going to be … How involved are you in ACA at this point? Do you see yourself continuing to be as central to it over the next several years as you’ve been over the past five?

Jon: You know, the truth is, I haven’t been central to it for a while. It was really, I’m just sort of a defender, just an observer and part-time defender, but really I’m just kinda watching it play out and trying to do my research around the interesting questions that affect how we think about it.

Harold: Great. Well, thanks very much for a great conversation. It’s been great to talk to you as always. I’ll let you go on with your life, but I think this has been a very terrific discussion.

Jon: Thank you so much, Harold. Thanks for including me.

Watch Part 1: Reports of ACA demise: greatly exaggerated

Watch Part 2: Can Obamacare work even better?

Harold Pollack is the Helen Ross Professor at the School of Social Service Administration. He is also Co-Director of The University of Chicago Crime Lab. He has published widely at the interface between poverty policy and public health. Pollack serves as a Fellow at the MacLean Center for Clinical Ethics at the University of Chicago, and as an Adjunct Fellow at the Century Foundation.


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