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Source link: http://archive.mises.org/11452/healthcare-reform-and-a-new-producer-tax/

Healthcare Reform and a New Producer Tax

January 14, 2010 by

This tax will result in a smaller-than-efficient typical firm size and therefore smaller-than-efficient risk pools, which will create unnecessary and unwanted financial risks that must be mitigated by higher premiums. FULL ARTICLE by Eric M. Staib

{ 5 comments }

Timothy Brownawell January 14, 2010 at 11:38 am

Given that the insurer tax is tax / 6.7e9 = (firm’s premiums + 2 * firm’s TPA fees) / (total industry premiums + 2 * total industry TPA fees) (from the post)…

tax / 6.7e9 = (firm’s income from X) / (industry income from X)

tax = (firm’s income from X) / (industry income from X) * 6.7e9

tax = (firm’s income from X) / (some number that varies year-to-year, but is the same for all firms in a given year)

I do not believe this support the claims that “Simple mathematical understanding reveals that the structure of this ratio ensures that the tax will fall most heavily on those insurers whose total premiums constitute the largest share of the total market for health insurance.” and “This tax will result in a smaller-than-efficient typical firm size“; the tax is the same percentage of those income streams regardless of firm size, and one firm with $a of income would pay the same amount as two firms each with $a/2 of income.

That making the tax include TPA fees will lead to more poorly managed plans, does seem a reasonable claim.

* * * * * * * * * *

The implications of this tax [on producing/imported medical devices] are similar to those of the tax on insurers; it is an attack on the utilization of economies of scale in the production of medical capital goods“… This is inaccurate for the same reasons as the tax on premiums does not disincentivize scale.

In more concrete terms, this means that medical-goods companies will be less likely to produce medical devices that have complementary relationships with their main products, or to produce different devices that enable the treatment of similar afflictions.“… this relies on the same logic as the conclusion about disincentivizing scale, and so is also unsupported.

Hilary Oswald January 14, 2010 at 2:05 pm

Well done.

What our elected officials persistently–and with impressive (if scary) tenacity–forget is a simple truth about business: If a company incurs higher fees, taxes, expenses, etc., that company passes on those higher fees, taxes, expenses, etc., to the consumer. Or the company must reduce its products and services in such a way that reduces the impact of the fees, taxes, expenses, etc. Companies protect their profit margins (which, coincidentally, doesn’t make them evil. It makes them companies.) So we end up paying for more the same product or service or–as is likely with the health care–we end up paying more for a product or service of poorer quality.

MichaelF January 14, 2010 at 5:17 pm

I think Timothy is right, how is this tax progressive? The goverment wants 6.7 billion, it makes them all pay a percentage of the premiums. This is a consumption tax and it is not progressive. A company does not pay more per customer for the more customers it gets. It continues to pay the same amount per customer.

Eric M. Staib January 14, 2010 at 9:21 pm

Mr. Brownawell and MichaelF:

You are both correct that this tax is mathematically a flat tax. I fumbled early on in expressing my analysis of the effect on insurers. The error is a result of not fully rectifying my notes with the article I submitted.

The correct analysis is that this tax penalizes expansions along the margins for firms of every size.

That this is true is a result of the expectation that firms offer additional insurance goods until marginal cost equals marginal revenue. By adding an additional cost of a certain percentage of the price of each additional package, this tax necessarily decreases the amount of insurance packages which the firm will offer.

Consider: a firm offers a standard package they expect will “cost” them $400. On the free market, this will be sold to anyone willing to pay a price of $400 or over. With a tax such as this one, however, the spread between price and cost (profit, of course) of each marginal package must be great enough to cover the incremental increase in their tax burden. This works just as the labor tax I discussed in a previous article works.

Thus, this results in firms of every size charging more for their packages while slicing costs (by shrinking, because we can assume that any available budget cuts that could be taken to offer more and cheaper plans would have already been taken) and dropping marginally-profitable customers.

It is true that insurers will attempt to pass on this increased cost to those clients whose demand they believe is inelastic. Yet it is also easy to see that they will not always be able to, because there are always elastic consumers along any price; consider the young and healthy. Thus, the argument that this tax disincentivizes the beneficial growth of risk pools holds, though this is true for risk pools of every size.

The same concept applies to the capital goods producers, for whose case I did not make the mistake of claiming that the tax will fall DISproportionately on larger firms as a % of their earnings. Just as insurers will not offer marginally-valued packages, device producers will not offer marginally-valued devices.

The tax operates to dissuade additional production in the same way that a personal income tax will dissuade additional labor: by decreasing the marginal revenue to any additional action.

I thank you for your comments and hope that they will help other readers understand the exact mistake I made and how the arguments (other than my disproportion/antitrust point) still hold up. I only wish that I had been able to realize this mistake before submitting my article.

P.M.Lawrence January 15, 2010 at 5:16 am

I believe there is a conceptually smaller (because subtler) but still material error in “This tax will result in a smaller-than-efficient typical firm size and therefore smaller-than-efficient risk pools…”. Even if the tax provided incentives to reduce firm sizes and risk pools, it would not necessarily follow that it would encourage them to be smaller than efficient – because it is not necessarily the case that there are not other distortions around encouraging larger sizes than optimal; this could easily be an offsetting distortion, making things nearer optimal. And indeed, there are grounds for believing that there are open and hidden state subsidies for larger sizes, although there would still be a gap in the reasoning here even if there were no such subsidies.

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