Health care tax could hit home: Proposal for high-cost plans may adversely affect region

Missing from the sweeping health care reform bill unveiled last week by House Democrats was the Senate Finance Committee's proposal to tax high-cost insurance plans.

That proposal is widely seen as a small step toward ending one of the inequities in the tax code -- that people who get health coverage through an employer don't pay taxes on that benefit.

Economists across the political spectrum say that taxing the most expensive health insurance plans would begin to address that discrepancy -- and help slow the rise in health care spending.

Yet the proposal also faces fierce opposition -- and that is an example of the challenge Congress faces as its tries to overhaul the health care system.

It has been billed as a tax on "Cadillac" health plans. But make no mistake: It would affect a lot of people who drive Chevys.

The tax could have a bigger effect on areas with higher health care costs, such as southeastern Wisconsin, than other parts of the state or country. And more people could be subject to the tax with each passing year.

At the same time, the proposal could make people more conscious of the real cost of health benefits. And that could put more pressure on doctors and hospitals to become more efficient.

While omitted from the House version, the proposed tax was included in the Senate Finance Committee bill. The House and Senate bills eventually must be combined before being sent to the president for his signature.

The Senate proposal would limit the tax break on employer health plans that cost more than $21,000 for family coverage and $8,000 for single coverage starting in 2013.

The threshold would be higher for high-risk occupations, such as law enforcement, and for health plans that include early retirees. For the first three years, it also would be higher for 17 states with high health care costs.

The proposed 40% tax would apply only to the amount above the threshold. It technically is an excise tax on health insurers and administrators, but ultimately the cost would be passed on to employees.

The proposal is projected to generate $201 billion in revenue over 10 years -- almost one-fourth of the total cost of the Senate Finance Committee's proposed bill.

It also would be a tax on a benefit that now is tax free, and more than half of the Democrats in the House have made clear their opposition to the proposal.

"The hardest thing for a politician in American society is to take something away from people," said Mordecai Lee, a professor of governmental affairs at the University of Wisconsin-Milwaukee.

Unfair tax break

Yet economists have backed the idea of limiting or even eliminating the tax break for health benefits provided by employers.

It is now the single largest tax break in the tax code, worth more than $225 billion a year. Merton Finkler, an economics professor at Lawrence University in Appleton, said the consensus among economists is the tax break is "stupid policy."

Economists also generally consider the tax break to be inherently unfair.

Here's why:

To economists, there is no difference between wages and health benefits. They are both part of total compensation. Yet people who receive health benefits through their employers don't pay a penny in taxes on that portion of their compensation. They also get to pay their share of the premium with pre-tax dollars.

Other people don't get that tax break.

The inequity goes a step further: The tax break is worth more to people with the highest incomes because they are in higher tax brackets -- say, 38% instead of 15%. They also are more likely to have jobs that provide health benefits.

At the same time, the tax break does nothing to help low-wage workers who are more likely to have jobs that don't provide health benefits.

Nationally, the average cost of health insurance provided by employers is $4,824 for single coverage and $13,375 for family coverage. That's well below the threshold. But some health plans in Wisconsin would be affected immediately

"There are a lot of middle class people with good health plans," said David Newby, the president of the Wisconsin State AFL-CIO.

Further, more people could be affected with each passing year. That's because the threshold would increase by the rate of inflation plus 1 percentage point each year -- less than half the average increase in the cost of health benefits.

"It's really going to end up being a tax on the middle class," said Mark Moody, president of WEA Trust, a nonprofit corporation that provides health insurance to public school employees.

Moody and others contend the result will be less generous health benefits. Workers will simply end up with higher deductibles, co-pays and other costs to keep the cost below the threshold.

"It's effectively a cap on benefits," Moody said.

True cost of benefits

Economists don't dispute that.

The Joint Tax Committee, a nonpartisan congressional committee, estimates that only 20% of the additional revenue generated by the proposal would come from the excise tax itself. It projects that 80% will come from income and payroll taxes.

The reasoning is that employers will redesign their health plans, raising deductibles and co-pays, when they near the threshold, and use the savings to raise wages.

That would make workers more conscious of the true cost of health benefits, one of the indirect goals of the proposal.

"It's part of what's called the hidden paycheck -- people are not aware of what their employer pays for health care," said Scott Schultz, a senior client relations manager at Burkwald & Associates, an insurance broker and benefits consultant in Pewaukee.

The proposal could spur the adoption of health savings accounts and other changes in health plans, said Schultz, who has several clients with health plans above the threshold.

That could help slow the rise in health care spending. The idea is that if more people bore a larger share of the cost of health care, they would be more likely to ask for lower-priced prescription drugs or balk when duplicative or unneeded tests are ordered.

They also might be more open to efforts to slow the rise in health care costs, such as questioning the assumption that more expensive treatments are better than less costly alternatives.

"That is definitely part of this," said Paul Van de Water, a senior fellow at the Center on Budget and Policy Priorities, which focuses on fiscal policy and public programs that affect people with low and moderate incomes.

To Van de Water, taxing high-cost health plans and using the money to help offset the cost of subsidizing coverage for people who are without health insurance is a matter of priorities.

The proposal is not without problems. Small businesses with older workers, for example, could have health plans that are above the threshold yet provide the same or fewer benefits than other employers.

But it also could draw at least a modicum of support from the other side of the political spectrum.

"If designed right, it has the potential of being good public policy," said J.P. Wieske, director of state affairs for the Council for Affordable Health Insurance, an industry group that supports so-called market-oriented solutions to health care reform.

Opponents contend that Congress can find better ways to offset the cost of expanding coverage.

For certain, the proposal to tax high-cost health plans holds little political appeal. It may have broad support among economists. But Lee of UWM said people remember when they've had something taken away -- and they remember it intensely.