Taxing high-cost health plans: Not a bad idea

The Wall Street Journal (Tax on High-End Health Plans Threatens Wider Group) describes a proposal to tax health plans that cost more than about $25,000 for a family plan. Setting the threshold that high would mean only a few people would be affected. However, as the Journal points out:

[I]f lawmakers don’t allow the threshold to be adjusted annually to reflect annual price increases, the proposed tax would eventually hit a much larger number of people.

Health-care costs are likely to climb at several times the rate of inflation between now and 2013 [emphasis mine], when much of the proposed legislation would go into effect.

Employer benefits consulting firm Towers Perrin calculated that the tax would today affect about 6% of Fortune 1000 companies, based on an analysis of 560 employers whose annual health-care costs the firm tracks. By 2011, though, 18% of those employers would cross the $25,000 threshold, Towers Perrin estimated.

“It’s startling to see how rapidly that number would go up,” said Michael Langan, a principal at Towers Perrin.

The plan is such a good idea because it takes aim at the notion that premiums will increase faster than inflation forever.  Overall spending might be expected to rise due to an aging population, but why should premiums rise faster than overall inflation? In any case we shouldn’t let people bake that assumption in to their thinking. Sooner or later premium increases have to decline to the overall level of inflation or below. Anything that makes it sooner is better in my book.

When reviewing John McCain’s health plan proposal during the election campaign, I predicted we might end up with this situation. I’m glad it may come to pass.

The candidates’ positions on these topics present quite a contrast. McCain’s positions are bold, radical and sweeping. Obama’s are modest and targeted. Overall I think Obama’s positions are better because they build on rather than undermine the employer-sponsored model in place today, but a modified version of McCain’s plan –along the lines of something that would actually be passed by Congress– might be superior.

A centerpiece of McCain’s program is to eliminate the tax deduction for employer-paid health insurance and replace it with a tax credit to individuals and families…

What I’d like to see instead is a cap on deductibility, preferably not indexed to inflation at all or indexed at a low rate. That would correct the unfairness over time without causing employers to dump health insurance. It would also provide an incentive for health plans to come up with insurance products that stay below the cap –perhaps containing costs as they do so.

August 10, 2009

3 thoughts on “Taxing high-cost health plans: Not a bad idea”

  1. I don’t understand why health care premiums cannot or should not exceed the inflation rate.

    health care premiums, or costs, are a combination of prices (something that is measured in the inflation rate) and utiization (which is not).

    Infation is measured by a combination of prices and an artificia marketbasket of goods determined by the Bureau of Labot statistics.

    You are really comparing apples and oranges.

    Also, how is taxing insurance company premiums going to impact employers that have self-funded plans. You cannot hold the insurance company that may be doing nothing more than administration responsible for the decisions of the employer.

    What if the employer outsources drug plans to a PBM and wellness programs to a third party and mental heath to a fourth. Doesn’t that become a way to tax evasion?

    Sounds like a good idea in a world that doesn’t exist except in the mind of an academic who can assume away the facts that don’t fit the theory.

  2. Why shouldn’t health premiums exceed the inflation rate?

    Most people don’t hardly use their health plans in a given year. But we all have our money sucked off to pay for the rising costs.

    Some people would rather have a new truck, or put the money away for retirement – or just have it in their pocket instead of someone else sucking it all up!

  3. Actually, taxing health insurance company premiums wasn’t an idea from academics, but an idea from politicians who are too chicken to propose taxing the health benefits of individuals and employers.

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