Health-care reform bill's proposed tax on high-cost plans raises questions

By Alec MacGillis
Washington Post Staff Writer
Thursday, January 7, 2010; A03

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.

A Rand study from the 1970s found that higher co-pays and deductibles led patients to limit medically necessary care as much as wasteful care, possibly leading to more costly health-care needs later.

"The consumer-directed-health-care crowd argues that with high cost-sharing, patients will do the only legitimate . . . cost-benefit calculus -- but that surely is nonsense," said Princeton economist Uwe Reinhardt. "None of these proponents has ever shown that patients are even capable of evaluating the clinical merits" of treatment options.

Opponents of the tax say the case for it assumes that the country's high health-care costs are the result of patients' overuse of care. But, they note, the country's usage of medical care is by many measures lower than in other developed countries; it is the price that is so much higher here.

"The biggest problem we have isn't that we're demanding so many services, but it's that the type of services we're providing are so expensive," said Thomas Rice, a UCLA health-care expert.

Some economists also doubt that employers would shift savings from health care into wages, given how slack the labor market is likely to be for the foreseeable future.

Jonathan Gruber, an MIT economist and a leading proponent of the new tax, dismisses these concerns. Even if the tax hit some high-cost plans that are not particularly lavish, it would still goad employers generally to seek lower-cost plans, he contends. "The argument that because it won't cause efficiency in every case, we should therefore not do it, is a dumb argument," he said.

Bringing the plans below the tax threshold would require only slightly higher deductibles, he said, enough to make people more cost-sensitive but not enough to make them skip necessary care. "If you take people at the level where they're spending $23,000, that's not skimpy insurance, and . . . if you raise their co-pays or deductibles, that's not going to adversely affect their health," he said. "There's literally no evidence out there that people are going to suffer."

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