The Corner

Another Testable Hypothesis

Igor Volsky makes a valid point in response to my piece, “’Corporate Welfare!’ They Cried“:

[Spruiell] rightly points to this study from the Employee Benefit Research Institute, which finds that “it is cheaper for the government to subsidize a private plan than to pay for a retiree’s prescription drugs through Medicare Part D — even with the tax deduction factored in” …  But the report does not argue that eliminating the deductibility will force employers to drop their coverage.

True, it does not: Add this to the list of Obamacare’s testable hypotheses. But Megan McArdle makes a good point on this subject:

Congress decided it wanted to give companies a subsidy to keep their retirees off of Medicaid Part D.  That subsidy seems to have been at most roughly equal to the average cost of a Part D beneficiary, and may have saved money.  About 80% of the subsidy seems to have been in the form of a direct payment, and about 20% in the form of a tax subsidy.

Now Congress wants to cut out the 20% of the subsidy that came through the tax code.  There’s nothing wrong with that; maybe they should cut it, and they’re certainly entitled to do so.  But not because companies were nefariously “double dipping”, and not because we need to “end corporate welfare”.  We were paying companies to do something we wanted done, and now we want to cut the payment by 20%.  Presumably, once we have reduced the payment, we will get less of the activity we wanted paid for. 

I think that’s true. And that certainly seems to be what employers are telegraphing to their employees in private memos. But perhaps that’s why Henry Waxman is hauling the CEOs of these employers before his committee to testify. It’s not as if he doesn’t understand the accounting rule behind the write-downs — it’s actually pretty simple. It’s more a flexing of his muscles — a signal that if these companies dump their employees into Medicare Part D, as they have implied that they might, then there will be more hearings, and perhaps more regulation, in the offing.

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