The Reagan administration, looking for a way to slow the skyrocketing cost of health care, is studying a plan to make workers pay income tax on part of the medical insurance premiums paid for by their employers.
The proposal is under consideration in the Health and Human Services Department as a way to discourage excess use of medical facilities, introduce more competition and drive down the inflation rate in health care.
Health insurance premiums paid by employers aren't counted as income, and are not subject to income tax.The tax plan, if adopted, likely would exempt premiums up to a maximum amount, say $150 a month. Everything over that would be counted as income to the worker, subject to income tax.
The plan would face labor and liberal opposition on grounds that it taxes fringe benefits and also could result in skimpier medical protection. "We are very much opposed to it," an AFL-CIO spokesman said.
It also could raise several billion dollars a year for the hard-pressed Treasury, but advocates say that's only a side benefit.
Because employer-paid medical premiums are now tax-free, they say, workers are encouraged to demand, in personal or union negotiations, overly rich plans that pay virtually every claim. Such policies encourage workers to go to the doctor or seek other health care for almost every tiny pain because "it doesn't cost anything," advocates of the tax plan say.
Counting part of the employer-paid premium as taxable income to the worker, according to their theory, would make the worker much more cost-conscious and much less likely to demand extremely comprehensive -- but expensive -- policies.
Dr. Robert Rubin, assistant health and human services secretary, confirmed in an interview that the tax plan is one major proposal being considered to restructure the health financing system in order to reduce inflationary pressures. A second proposal, elements of which also are contained in the tax proposal, would involve a "freedom of choice" plan compelling employers to offer workers a range of health-care options at different prices to foster price competition. a
But Rubin stressed that no details have been worked out and that Schweiker has made no decisions yet.
The theory behind the tax plan was outlined last year by Rep. Richard A Gephardt (D-Mo.) and then-Rep. David A. Stockman (R-Mich.), who is now director of the Office of Management and Budget.
In a paper, the two congressmen, who introduced a bill similar to the tax plan under consideration, said that the tax system encourages workers and unions to demand "ever more comprehensive coverage with lower deductibles paid for by the employer. . . . Because the employer is making the payment and because the payment is tax-free [to the worker], the individual employe has little incentive to consider the cost of the insurance or whether it is more insurance than he actually needs.
Group health insurance provided by employers, often as a result of collective bargaining, is the main form of health insurance in America. Although estimates differ, the National Center for Health Services Research recently reported that about 80 million people -- more than 82 percent of all workers -- are eligible for health insurance through their jobs. Others estimate that these employes, plus covered dependants, number as high as 180 million people. Although experts say the benefits differ vastly and many policies are barebones, the policies usually cover at least the costs of a normal hospital stay.
According to the NCHSR study (which was based on 1977 data), about 80 percent of the premiums are paid by employers.
The employer premiums totaled about $55 billion in 1981, the Treasury estimates (others put the figure at $65 billion). If this entire amount were taxed as worker income, it would bring in nearly $15 billion to the Treasury. The Congressional Budget Office, using somewhat higher premium estimates, recently reported that if all employer-paid premiums were counted as income, the government would collect about $20 billion in extra income taxes in 1982 and $7.9 billion in extra Social Security payroll taxes. It is unlikely, however, that Schweiker would suggest taxing the entire employer-paid premium. Major fringe benefits such as employer contributions for pensions and health insurance always have been tax-free to the worker, and the reaction to such a large change would be fierce.
More likely, such a proposal would involve taxing only some portion of the premium, such as amounts in excess of $120 or $150 a month. In that case, only employes with the most expensive plans (probably no more than a thrid) would be affected, and the Treasury revenue gain would be a few billion a year.
Under the tax proposal being worked on, the changes could take a variety of forms. For example, if the maximum tax-free premium were set at $150 a month and a company's health insurance plan cost $180 a month per employe, the workers would be taxed on $30 a month. But an employe might opt for a less-comprehensive plan cost $150 a month, and pocket the extra $30 as regular income, or ask the employer to put into a pension or other fringe benefit.
According to the theory, the tax policy change would lead exmployers to offer their employes a range of different health plans, some costing more and providing a big range of benefits, others costing less and providing a leaner mix of benefits. The employer contribution would be the same regardless of which plan was chosen, so the worker could choose a cheaper plan and pocket the excess, pick a plan costing exactly what the exmployer would contribute or pick a more expensive plan and pay the extra cost himself.
The proliferation of options, advocates of the plan say, would pit different insurance and health groups against each other in competition to sell their policies. In turn, the insurers would exert pressure on doctors, hospitals and other providers of medical services to hold their costs down. That theory also provides the basis for the second major HHS proposal, the "freedom of choice" alternative.