Taxing the Sick?

Yesterday’s online version of the New York Times includes an article by Robert Pear, “Health Care Fixes Backed By Harvard’s Experts Now Roil Its Faculty” (January 5, 2015), http://www.nytimes.com/2015/01/06/us/health-care-fixes-backed-by-harvards-experts-now-roil-its-faculty.html?_r=0 . It seems that Harvard faculty are miffed that the Affordable Care Act is starting to adversely affect them.  Like other employers, Harvard is passing costs on to its employees in the form of additional cost-sharing requirements for medical treatment.  Some of those employees think those extra costs are tantamount to a pay cut.  Indeed!  (And how do employers feel if they don't pass those costs along?  A profit cut!?!  I think they are starting to get it.) 

Jerry Green, a professor of economics and former provost, is quoted as saying that the higher out-of-pocket costs “[Are] equivalent to taxing the sick[.]”  Further, he opined, “I don’t think there’s any government in the world that would tax the sick.”  This takes me back to my law school days with the late Professor Francis Allen.  One of my really smart classmates said something like this once.  I cannot remember the content, but I remember the response.  Professor Allen smiled and said, “Oh, really, Mr. Fishman?  Now you don’t mean that.”  (I have lost track of Mr. Fishman, but he is probably an investment banker or ruling a small island somewhere.) 

One expects students, who are unlearned and inexperienced, to make rookie mistakes.  But an economics professor at Harvard?  I don’t think Professor Green has been paying attention to the content of the ACA.  Among other things, it includes an excise tax imposed on medical devices, which became effective in 2013.  If you make and sell a medical device (like a hip implant used to treat degenerative disease), you must pay 2.3 percent of the selling price to the federal government.  (If you don’t believe me, see  http://www.irs.gov/uac/Newsroom/Medical-Device-Excise-Tax ). Given the inelastic demand for such devices, it is highly likely that at least some of those taxes are passed on through higher costs to the sick people (perhaps indirectly through their insurers) who need those devices. Taxing the sick is indeed part of the ACA in other ways, too.  It makes it more difficult to deduct health care costs you incur (arguably another form of taxing the sick).  And try not buying insurance -- you will likely pay a penalty tax for not doing this, and this tax applies whether or not you are sick.

The excise tax on medical devices could be among the provisions targeted by the new Congress.  Even Democrats like Al Franken are not so sure about this tax, perhaps because some of the medical device manufacturers affected by the tax are located in Minnesota.  (For a mainstream editorial pointing out that ironic opposition, but persisting in supporting this tax purely for revenue reasons, see http://www.usatoday.com/story/opinion/2015/01/04/obamacare-medical-device-tax-repeal-congress-editorials-debates/21261737/ .)  Apparently, the industry may not be able to pass on all of those costs to the sick, but must bear some of them on its own.  (Innovation may be an unintended casualty of this kind of incremental cost burden - but that is a subject for another discussion.)

William F. Buckley once famously stated that he “would sooner be governed by the first two thousand names in the Boston telephone directory than by the two thousand members of the faculty of Harvard.”  And that probably goes for other faculties, too, including my own.  Idealism can cloud one’s judgment, though we should expect more from the learned souls entrusted to educating our young people.  It is puzzling why that expectation is so often unrealized from the academic world.  And sadly, even our elected officials are prone to make similar mistakes.  Only an informed citizenry can bring them back to reality.

Grand statements that healthcare is a human right or a free good sound utopian and so affirming, but the rest of us understand the harsh reality that it is another service for which payment is necessary.  Despite its many flaws, the Affordable Care Act was also not entirely wrong when it incentivized insurance products in which personal responsibility for costs bears an increasingly greater role.  For those who take that responsibility seriously and can afford to bear those costs, financial tools like HSAs can help.  I explore this (and other tax dimensions of the ACA) in my recent article, “Health Accounts/Arrangements:  An Expanding Role Under the Affordable Care Act?” (available at  http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2519268).  

Remember, if there is a cost incurred, someone will pay it, and it might even be you.  Bear that in mind as our new Congress and state legislatures get underway in 2015.  Happy 2015.

EAM