Why Taxing Insurers to Pay for Health Care Is Lame

Published September 14, 2009 @ 05:22PM PT

When I listed out my 9 surprises in President Obama’s health care speech from last week, I noted that the President now seemed to support Sen. Max Baucus’ method of raising new money for health care reform: putting a tax or set of fees on insurance companies. I also gave my verdict on the idea: “lame.” Some of you understandably wanted more than a monosyllabic analysis, so here goes. Taking the money to pay for health care reform out of the insurance industry in taxes and fees will be no different than taking it out of the American taxpayer. The rest is smoke and mirrors.

Baucus’ proposal would impose a $6 billion fee upon the health insurance industry at large, similar to other industry fees in his plan (pharma, medical device companies, etc.) He would then also add a 35% excise tax on insurance plans above $8,000 for an individual and $21,000 for a family plan. Superficially, it seems like an ideal compromise. Combine the ideas of liberals like Kerry and Rockefeller, who wanted to raise income off insurance companies, with conservatives like Grassley and Snowe, who wanted to create a disincentive towards gold-plated insurance plans, and you have some common ground.

But problem one is this idea isn’t as populist-friendly as the liberals would like. What happens now when states increase taxes and fees on health insurance? That’s right, they get passed on to the consumer. As Bob Laszewski writes today, “I have run a health insurance business… Do you know what the insurance companies do with these taxes? Since they are tied to premiums they pass them through directly to the policyholder who pays these premiums.” Keep in mind that because most insurance plans are chosen by the employer, not the individual, there’s not actually a guarantee you’d be hitting only wealthy Americans with this new tax. For example, unions for most industries typically consist of middle-class workers (teachers, garment workers, police officers, fire fighters, nurses, hotel workers, etc.) but they negotiate for generous health insurance policies likely to be affected by this tax. Is it a progressive tax if you’re as likely to hit a member of the NYPD as you are an analyst at Goldman Sachs?

You’ll recall that Baucus’ original idea for revenue also targeted the so-called “Cadillac” insurance policies. The Senate Finance Committee had toyed with removing the employer tax exemption on health benefits so they’d be taxed like regular compensation, or at least putting a cap on it so insurance plans above a certain threshold would be taxed. The idea again was to make it more obviously costly to get expensive insurance. The hope was that transparency would lead to workers putting pressure on their employer for less generous plans. This was a favorite idea of the Congressional Budget Office, as it would create economic pressure to keep costs down. But that’s where we hit problem two -- it's not as effective at doing this as the conservatives would like. This new tax accomplishes the goal of making “Cadillac” plans more expensive, all right, but it completely loses that transparency. A tax on the insurance company which is passed on to you as a higher premium is not obviously different than a higher premium just because –- which is the system we have now. The cause and effect connection is obscured, making it less likely consumers will learn the lesson.

To be clear, I don’t think it’s the worst idea for raising revenue. If this winds up being the only expedient way of paying for health reform, the benefits would still outweigh the costs. I don’t think it’s harmful; just lame.

(Photo credit: http://www.flickr.com/photos/greaterfalls/ / CC BY-ND 2.0)

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Comments (4)

Yup, pretty lame. Why drive up costs to pay for something else? You might as well raise taxes. Good article Tim.

Posted by M Arnest on 09/15/2009 @ 03:35AM PT
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"The hope was that transparency would lead to workers putting pressure on their employer for less generous plans.

(...)

If this winds up being the only expedient way of paying for health reform, the benefits would still outweigh the costs. "

I don't know. I think you're underestimating the problems with making the mandated coverage skimpy and more expensive. I don't know of any worker who is clamouring for less generous plans. I'm not even happy with the subsidy structure in the House bill --http://www.kaiserhealthnews.org/Stories/2009/September/04/House-Bill-Premiums.aspx) -

I'm also not sure I understand it completely. But I called my insurance company today to be sure I knew what I had so I could compare and it looks to me that what my customer service rep said is a "Chevy plan" is being considered a "Cadillac plan" on the Hill. That's a huge problem b/c if I end up in the Exchange, I'll be much worse off than before. This looks to me like a big ol' poison pill.

This is what Wendell Potter thinks about the toxic Baucus bill: (from Politico) http://www.politico.com/livepulse/0909/Former_Cigna_exec_Baucus_plan_absolute_gift_to_industry.html?showall

September 14, 2009
Categories: Senate

Former Cigna exec: Baucus plan "absolute gift" to industry

Wendell Potter, the former Cigna executive-turned-whistleblower, told a small group of reporters Monday that the Baucus health care plan is an “absolute gift” to the industry.

“The Baucus framework is just an absolute joke,” said Potter, Cigna’s former head of corporate communications who has been speaking out against insurance industry practices. “It is an absolute gift to the industry. And if that is what we see in the legislation, (America’s Health Insurance Plans chief) Karen Ignagni will surely get a huge bonus.”

Potter said the proposal would not provide affordable coverage. It gives the industry too much latitude to charge higher premiums based on age and geographic location, fails to mandate employer coverage, and pushes consumers into plans with limited benefits, Potter said.

Private insurers “want to have ‘benefit design flexibility.’ Those are three very worrisome words,” Potter said at a briefing arranged by the Center for American Progress, a liberal think tank. “By being able to have benefit design flexibility, they will be able to design plans that are so limited that more and more people will be in the ranks of the uninsured.”

Several Senate Finance Committee Democrats have raised similar concerns, saying the health care overhaul could mandate Americans to buy coverage that isn’t affordable and doesn’t offer adequate coverage.

This issue has dominated behind-the-scenes discussions, and several members pledged Monday night to address it with amendments in the Finance Committee markup next week.

"It's very clear, at this point in the debate, the flashpoint is all about affordability,” said Sen. Ron Wyden (D-Ore.). “I personally think there’s a lot of heavy lifting left to do on the affordability issue.”

Finance Chairman Max Baucus said the bipartisan group was "doing our very best to make an insurance requirement as affordable as we possibly can, recognizing that we’re trying to get this bill under $900 billion total.”

Posted by robin stelly on 09/15/2009 @ 10:30AM PT
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I thought the Bills being drafted, or at least the House Bill, included formulas dictating a consistent application of analysis to premiums? I would have to look at it, but I am no Actuarial. My question would be: Does it limit the ability of a carrier to pass on costs like taxes to the customer?

Posted by James Dunham on 09/15/2009 @ 11:19AM PT
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Agree with the analysis. The fees on insurers without imposing strict cap on their premiums and strict regulation of...(uhhhh can be done this way at all) is a typical dishonest politician way to "solve" the problem, the problem in this case being how to sell the bogus plan optimized to the interest of insurance industry to the population which Baucus obviously considers stupid. What is very frightening and shows an alarming degree of cynicism and corruption among the legislators, is that he dares propose this nonsense without fear of being called for what it is by his fellow legislators, in particular democrats and the administration.

Posted by Petar Simic on 09/16/2009 @ 07:58PM PT
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Tim has been an online organizer and blogger on health care policy for the Obama for America campaign (during the primaries) and currently for the Committee of Interns and Residents/SEIU Healthcare, a labor union for intern and resident doctors. Views expressed here are Tim's, and don't represent the positions of CIR or SEIU.