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Working In These Times

Wednesday, Jan 6, 2010, 2:53 pm

‘Cadillac’ Health Insurance Tax’s Flawed Defense

BY David Moberg

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Proponents of the excise tax on “Cadillac” health insurance policies argue that the tax will encourage employers to provide expansive insurance, which in turn will lead to less consumption of health services and will slow the rise of health costs.

It’s a deeply flawed argument: doctors, more than patients, decide what services are needed, and patients rarely feel the same burning desire for a stay in the hospital as they do for a stay on the beach.

In any case, many of the high-cost plans are not especially generous in coverage. They cost more because of the age, gender, geographic region, industry or other distinctions about the insured person that insurance underwriters use. 

And if employers cut back on insurance coverage for these workers, they will either go without care they need–hardly an accomplishment Democrats want to claim–or pay out of their own pockets–an example of cost-shifting, not money saving.

But–excise tax advocates say–if employers don’t have to pay as much for insurance, they will pay higher wages, so workers won’t lose out and could gain. They argue that workers’ wages in recent decades have been squeezed by the growing cost of insurance to employers, and they point in particular to the late 1990s as a time when insurance costs moderated and wages increased more rapidly.

Economic Policy Institute president Lawrence Mishel takes apart that argument in a short, new issue brief.

First, even though unions often lament that in negotiations they face uncomfortable choices between protecting insurance and raising wages, Mishel argues that health insurance cost increases haven’t been big enough to greatly suppress wage growth:

The share of health care in total wages (in nominal, non-inflation adjusted terms) grew from 7.2% in 1989 to 9.4% in 2007, suggesting that the expanded role of health costs could have reduced wage growth by 2.2% over this entire 18-year period, or 0.12% each year....Further, overall benefits’ (health care plus all other fringe benefits) share of total compensation has actually been stable for the last 20 years or so....Hence, the story of stagnant wages in the U.S. economy is not one of growing non-wage competition.

Second, wages grew in the late ‘90s because productivity was increasing rapidly, and tight labor markets combined with a higher minimum wage pushed up wages. In any case, health care expenditures grew about the same rate throughout the ‘90s. Virtually no job creation and weak union or other institutional elevations of wages, not much higher healthcare costs, accounted for low wage growth in the 2000s.

Third, over several decades, low-paid workers have lost the most ground–but they’re also least likely to have employer paid health insurance. And in the late 1990s, when low-paid workers made their biggest gains, it wasn’t a result of health cost containment. Most still didn’t have employer-provided insurance. Finally, Mishel writes, “the worst wage growth in the 2000s was for low- and middle-wage workers, the groups with the least health care coverage.”

Once again, the excise tax on insurance–especially in contrast to a surtax on the rich–proves to be just as bad as policy as it is politically. It’s intellectually bankrupt and widely despised. It’s hard to see how it could be approved.

But maybe the Democrats just like losing elections.

David Moberg, a senior editor of In These Times, has been on the staff of the magazine since it began publishing in 1976. Before joining In These Times, he completed his work for a Ph.D. in anthropology at the University of Chicago and worked for Newsweek. He has received fellowships from the John D. and Catherine T. MacArthur Foundation and the Nation Institute for research on the new global economy. He can be reached at

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