Tag Archives: CVS

Trump’s Payroll Tax Ploy

15 Tuesday Sep 2020

Posted by in Fiscal policy, Taxes

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President Trump’s memorandum to Treasury Secretary Steve Mnuchin on payroll tax deferral is bad economic policy, but it might ultimately prove useful as a political weapon. The memo, released in August, instructed the Treasury to allow employers to suspend withholding of the employee’s share of FICA taxes (6.2%) until the end of the year, but it does not forgive the taxes. Only Congress (with the President’s signature) can eliminate the tax obligation. There are several reasons I don’t like it:

  1. Assuming the tax obligation is forgiven, it would provide some relief to those who are already employed (and earning less than $4,000 every two weeks), but not to the unemployed. Thus, as relief from coronavirus-induced job losses, this doesn’t cut it.
  2. It does not reduce the cost of hiring, as would a permanent reduction in the employer’s share, so it does not improve hiring incentives.
  3. The deferral creates uncertainty: will the tax bill be forgiven? If not, will the employee be on the hook? Or the employer? What if an employee leaves the company having received a deferral?
  4. The measure will not be an effective stimulus to spending. It is not an addition to workers’ permanent income since it is a temporary “holiday”. Income perceived as temporary adds little to consumer spending. And it doesn’t constitute a temporary tax break unless employers participate (see below), and even then only if Trump is re-elected and if Congress agrees to forgive the tax.
  5. Trump suggested that the tax will be forgiven if he is re-elected. It’s a rather unsavory proposition: create an immediate tax benefit paired with a matching future obligation with forgiveness contingent upon re-election!
  6. Long-term funding of Social Security is already problematic. Adding a payroll tax holiday on top of that, assuming the taxes are forgiven, only aggravates the situation. Yes, I can imagine various “long-game” reform proposals that might attempt to leverage such a break, but I consider that highly unlikely.

It’s no surprise that a number of large employers are not participating in the tax deferral. such as CVS, JP Morgan Chase, UPS, Home Depot, and Wells Fargo.

Small employers have an even bigger problem to the extent that they lack sophisticated accounting systems to handle such deferrals. Here’s Warren Meyers’ take on the payroll tax suspension:

“We have 400 employees today, but since we are a summer seasonal business we will have fewer than 100 in January. If there is a catch-up repayment in January (meaning Congress chooses not to forgive the taxes altogether), most of my employees who would need to repay the tax will be gone. Do you think the government is just going to say, ‘oh well, I guess we lost that money’? Hah! You don’t know how the government works with tax liens. My guess is that for every employee no longer on the payroll for whom back employment taxes need to be collected, the government is going to say our company is responsible for those payments instead. We could be out hundreds of thousands of extra dollars. President Biden will just say, ‘well I guess you should not have participated in a Trump program.’

So this is the vise we are in: Either we participate in the program, and risk paying a fortune in extra taxes at some future date, or we don’t participate, and have every employee screaming at us for deducting payroll taxes when President Trump told them they did not have to pay it anymore. And what happens if Congress does come along later and forgive the taxes, what kind of jerk am I for not allowing my employees to benefit from the tax break?

A payroll tax rollback was considered for the Republican stimulus packages that failed in Congress this summer, but that provision was said to be “negotiable”. In any case, nothing passed. Surely Trump’s economic advisors know that the economics of the payroll tax memo are lousy, even if Trump doesn’t get it.

I can’t decide whether the whole thing is Machiavellian or just a goof. Perhaps Trump is so eager to be seen as a tax cutter that he is willing to gloss over the distinction between a tax cut and a deferral. If the taxes owed are not forgiven, it won’t be on his watch. And Trump might believe he can weaponize the payroll tax deferral against obstinate Democrats in Congress as well as Joe Biden. Maybe he can.

Injecting Competition Into Health Care

12 Friday Oct 2018

Posted by in competition, Health Care, Uncategorized

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Competitive pressures in U.S. health care delivery are weak to nonexistent, and their absence is among the most important drivers of our country’s high medical costs. Effective competition requires multiple providers and/or substitutes, transparent prices, and budget-conscious buyers, but all three are missing or badly compromised in most markets for health care services. This was exacerbated by Obamacare, but even now there are developments in “retail” health care that show promise for the future of competition in health care markets. The situation is not irreversible, but some basic policy issues must be addressed.

John Cochrane maintains that the question of “who will pay” for health care, while important, has distracted us from the matter of fostering more competition among providers:

“The discussion over health policy rages over who will pay — private insurance, companies, “single payer,” Obamacare, VA, Medicare, Medicaid, and so on — as if once that’s decided everything is all right — as if once we figure out who is paying the check, the provision of health care is as straightforward a service as the provision of restaurant food, tax advice, contracting services, airline travel, car repair, or any other reasonably functional market for complex services.”

We face a severe tradeoff in health care: how to provide for the needs of more patients (e.g., the uninsured, or a growing elderly population) without driving up the cost of care? As a policy matter, provider resources should not be viewed as fixed; their quantity and the efficiency with which those resources are utilized are responsive to forces that can be harnessed. Fixing the supply side of the health care market by improving the competitive environment is the one sure way to deliver more care at lower cost.

Fishy Hospital Contracts

Cochrane discusses some anti-competitive arrangements in health care delivery, quoting liberally from an article by Anna Wilde Mathews in The Wall Street Journal, “Behind Your Rising Health-Care Bills: Secret Hospital Deals That Squelch Competition“:

“Dominant hospital systems use an array of secret contract terms to protect their turf and block efforts to curb health-care costs. As part of these deals, hospitals can demand insurers include them in every plan and discourage use of less-expensive rivals. Other terms allow hospitals to mask prices from consumers, limit audits of claims, add extra fees and block efforts to exclude health-care providers based on quality or cost.”

Mathews’ article is gated, but Cochrane quotes enough of its content to convey the dysfunction described there. Also of interest is Cochrane’s speculation that the hospital contract arrangements are driven largely by cross subsidies mandated by government:

“The government mandates that hospitals cover indigent care, and medicare and medicaid below cost. The government doesn’t want to raise taxes to pay for it. So the government allows hospitals to overcharge insurance (i.e. you and me, eventually). But overcharges can’t withstand competition, so the government allows, encourages, and even requires strong limits on competition.”

The Role of Cross Subsidies

In this connection, Cochrane notes the perverse ways in which Medicare and Medicaid compensate providers, allowing large provider organizations to charge more than small  ones for the same services. Again, that helps the hospitals cover the costs of mandated care, regulatory costs, and the high administrative and physical costs of running large facilities. It also creates an obvious incentive to consolidate, reaping higher charges on an expanded flow of services and squelching potential competition. And of course the cross subsidies create incentives for large providers to lock-in business from insurers under restrictive contract agreements. Such acts restrain trade, pure and simple.

Cross subsidies, or building subsidies into the prices that buyers must pay, are thus an impediment to competition in health care, beyond the poor incentives they create for subsidized and non-subsidized buyers. So the “who pays” question rears it’s head after all. When subsidies are necessary to provide for those truly unable to pay for care, it is far better to compensate those individuals directly without distorting prices. That represents a huge policy change, but it would also help restore competition.

Competitive Sprouts

John C. Goodman provides a number of examples of how well competition in health care delivery can work. Most of them are about “retail medicine”, as it’s been called. This includes providers like MinuteClinic (CVS), LASIK and cosmetic surgery, concierge doctors, and “retail” surgical services. Goodman also mentions MediBid, a platform on which doctors bid to provide services for patients, and Ameriflex, which matches employers with concierge doctors. These services, which either bypass third-party payers or connect employer-payers with competitive providers, are having a real impact on the ability of patients to obtain care at a lower cost. Goodman says:

“I am often asked if the free market can work in health care. My quick reply is: That is the only thing that works. At least, it is the only thing that works well.”

Conclusion

Some of the most pernicious Obamacare cross subsidies have been dismantled via elimination of the individual mandate and allowing individuals to purchase short-term insurance. Nonetheless, U.S. health care delivery is still riddled with cross subsidies and excessive regulation of providers, including all the distortions caused by third-party payments and the tax code. Many buyers lack an incentive for price sensitivity. They face restrictions on their choice of providers, they don’t know the prices being charged, and they often don’t care because at the margin, someone else is paying. Fostering competition in health care delivery does not necessarily require an end to third-party payments, but the cross subsidies must go, employers should actively seek competitive solutions to controlling health care costs, price transparency must improve, and consumers must face incentives that encourage economies.