Tuesday, October 13, 2009

What AHIP's Critics Are Missing

AHIP, the lobbyist for the biggest private health insurers in the United States, has received withering criticism from many sources, including MIT economist Jonathan Gruber, one of the architects of the Massachusetts health reform, and Harvard's David Cutler, among many other economists who've worked closely with the Obama administration and congressional Democrats. Keith Hennessey, a staunch critic of the Democrats' mandate-driven approach, has also criticized AHIP's methodology, and for good reason.

I have no interest in defending the AHIP report. I do think, however, that some of the critics of the report are overlooking something very important. For example, Ezra Klein writes,

In a long defense of the PWC/AHIP report, Megan McArdle goes to bat for the most indefensible element of the analysis: the decision to avoid estimating the response to the tax on high-cost insurance plans (which is, in fact, the whole point of the tax), and simply pretend that everything will remain unchanged except that a lot of people will pay a large new tax that they don't have to pay. Moreover, she conscripts the Congressional Budget Office to help with the argument: "You might think that everyone is going to structure their benefits to get around this tax," McArdle writes. "But the CBO expects us to collect quite a bit of money from this tax."

Not quite. The Congressional Budget Office projections (which are, in this case, the Joint Committee on Taxation's projections, as the CBO doesn't estimate tax revenues) actually suggest that the bulk of the tax's revenues will come from the response to the tax, not the payment of the tax. As the New York Times reports, the JCT believes that "about $142 billion of the 10-year total of $201 billion to be raised by the [excise tax] would come from increased income and payroll taxes." In other words, the vast majority of the revenues would come because employers would "structure their benefits to get around this tax." Workers would receive more of their compensation in wages and less in health-care benefits, and because wages are taxable and health benefits aren't, tax revenues would go up.

That is an excellent point. Let's pay attention to the dynamic effects of the legislation. The trouble is that the CBO didn't adequately account for the response to the implicit marginal tax created by the sliding scale of subsidies, as Greg Mankiw has noted.

I should note that CBO does not fully incorporate the effects of these higher marginal tax rates in their cost estimates. If taxpayers respond to these new incentives by, say, working less, GDP and tax revenue from income and payroll taxes will decline. By the conventions of budget scoring, CBO ignores these macroeconomic changes. By contrast, households facing increases in marginal tax rates of 20 percentage points will not ignore them. This means that the healthcare reform bill will likely have a more adverse budgetary impact than CBO estimates.

This strikes me as a pretty big oversight. The limitations of the AHIP report reflects very poorly on AHIP. The fact that so many analysts have ignored the oversights of the CBO estimates will prove far more consequential.

10/13 04:15 PMShare