What Do Powdered Wigs and the ACA's Cadillac Tax Have In Common?

At 18% (and growing) of GDP, healthcare remains one of the biggest targets for reform.  The word “unsustainable” is regularly bandied about, and I wouldn’t disagree.

I have been in this field long enough to have seen numerous restructuring initiatives promising to tame the healthcare beast come and go with only limited impact.  DRGs, HMOs, PPOs, Provider-Sponsored Organizations, ACOs, and a host of other concepts were all designed to create new incentives to increase efficiencies and lower costs.  Although each has had some impact, few people would argue that the industry has been significantly transformed.  

As the Affordable Care Act was being debated in 2010, a phrase often heard was “bending the cost curve.”  Despite some positive aspects of the ACA, there is little evidence that the cost curve has significantly changed. 

Why is achieving meaningful improvement so difficult?  There are many, many reasons, and I wouldn’t even begin to try to rank-order them or even identify them all.  Having said that, though, I do believe one factor is that policy makers often – either intentionally or through obliviousness – neglect to factor in changed behavior when incentives shift.

One simple example is the nosedive in revenue from the ACA’s so-called Cadillac tax.  The ACA tax bakes in a 40% tax on every dollar above a predetermined premium level.  This concept has been unpopular with payers and employers from the start, so many found a way around it.

Modern Healthcare reported in March 2015 that the Congressional Budget Office had lowered its estimate of the total revenue generated by the Cadillac tax by a full 41% between January and March 2015.  Plus the January 2015 number was already down significantly from the original pre-passage 2010 numbers.  

Why this dramatic decline?  Here’s Modern Healthcare’s take:  “Many employers have started to scale back benefits in anticipation of the excise tax.”  So a big portion of the ACA’s original revenue will never materialize.

At the risk of being rude, let me say, “Well, Duh!”  People are smart.  When you change the rules, people recalibrate their behavior to optimize their personal outcomes.

This is not a new phenomenon.  The January/February issue of Mental Floss magazine cites an amusing anecdote from the late 1700s:

Powdered Wig.jpg

Britain Wigs Out:  With ever more foreign wars to wage, British Prime Minister William Pitt hit upon a heady idea to raise funds – place a tax on wig powder.  Rather than generating cash, the tax unintentionally changed men’s fashion, and by the 1820s, powdered wigs were considered so 1790s.

You would think politicians would learn.