Health-care reform bill's proposed tax on high-cost plans raises questions
Thursday, January 7, 2010
With Congress on the verge of imposing a new tax on high-cost health insurance plans, skeptics continue to raise questions about who would be hit hardest and whether health-care spending would be limited as much as proponents say.
The Senate health-care legislation includes a 40 percent excise tax on insurance plans worth more than $23,000 per year for a family of four. When the legislation would go into effect in 2014, only a small fraction of all plans would be taxed, but more would be captured over time: roughly a quarter by 2019, collecting about $150 billion over 10 years.
The House legislation instead relies on an income tax surcharge on families earning more than $1 million. But centrist Senate Democrats are opposed to the surcharge, and the excise tax has been endorsed by the White House and many health-care economists, who tout its cost-containment potential.
Supporters of the Senate provision say it would restore some equity in the tax system, which exempts employer-provided health benefits while forcing people who buy insurance on their own to use after-tax dollars. To avoid the tax, supporters predict, employers and employees would shift to less-generous plans that would make patients more sensitive to costs, slowing the growth in health-care spending. Employers, the theory goes, would put the savings into higher wages.
Who would be taxed?
But as the tax proposal takes on an aura of inevitability, pockets of skepticism remain, even beyond labor unions, which are often cast as the main opposition because many union plans would be taxed.
Health analysts recently questioned the assumption that the tax would target only the most lavish insurance packages, nicknamed "Cadillac plans." The analysts, writing in the journal Health Affairs, found that some less-generous plans could be taxed because they are costly for other reasons. The location of an employer and the type of industry, for example, have as much to do with the cost of plans as the generosity of the benefits and the kind of plan. Smaller businesses, especially those with a preponderance of older workers, tend to have higher premiums, as do certain industries, including the health-care sector.
The Senate bill would phase in the tax more slowly in some higher-cost states and exempt a few industries that tend to have expensive plans, such as mining. But opponents say it is impossible to find a workable way of targeting the tax so it would spare people whose plans are not particularly generous.
"It's a very blunt instrument," said former labor secretary Robert Reich. "It makes far more sense on policy and political grounds to tax the top 1 percent rather than sweep in so many people that are paying more for health care, not because they are getting more health care but because they're older or working for small businesses."
Rep. Joe Courtney (D-Conn.) notes that Obama pledged not to raise taxes on anyone earning under $250,000 and that he attacked Sen. John McCain (R-Ariz.) on the campaign trail in 2008 over his plan to do away with the tax-free treatment of employer-provided benefits. Pro-Republican groups are already turning the tables by running ads accusing Democrats of wanting to tax benefits.
"It's a plan that has great political risk for the Democrats," Courtney said.
Would it lower costs?
Separately, several health-care experts question whether shifting people into lower-cost plans is the best way to slow spending. It is possible, they concede, that the tax could move more employees into HMOs known for more efficient spending. But many markets lack such options.
It is more likely that employers would lower the cost of plans by increasing deductibles and co-pays, which skeptics say would not necessarily bring down health-care costs. Most costs are incurred by a minority of chronically ill patients. And health care is not like other markets, where consumers can make their own judgments based on quality and price; instead, patients make most major health-care decisions based on what their doctors tell them, skeptics point out.