The growing furor over the tax on high-cost healthplans is welcome indeed, as it is exposing the tax for what it is – an unfair burden on some based on a superficial understanding of cost drivers.
First, lets clear up a common misconception about the tax. It only affects the value of your health plan above a specific level – the benefit value below that level is not taxable income. Here’s how it works in dollars.
The tax, which is in the Senate bill but not the one passed by the House, taxes the value of health benefits above $8500 for individuals and $23,000 for families. If you have an individual policy valued at $10,100, the amount subject to tax is the difference between $8500 and $10,100 – $1600. The Senate plan taxes that $1600 at 40%, so you would have to pay $640 in taxes.
I have no problem with instituting a tax on health benefits, but it should either be on all plans, or on those plans that fail to keep costs under control.
The Cadillac tax does neither, instead taxing benefits on two groups:
– bargaining units that have substituted benefits for wages in negotiated agreements with management; and/or
– individuals and families that live in high cost areas.
The ‘benefits’ themselves have little to do with whether or not you’ll hit the tax threshold; much more important is where you live.
For example – the interstate variation in health care costs – not insurance premiums, but per-capita costs – ranged from $3972 in Utah to $8295 in Washington, D.C. in 2004.
So a company in Utah could cover cosmetic surgery, private hospital rooms, laser eye surgery, $10 copays for office visits and $5 copays for all drugs, all without coming anywhere close to the ‘Cadillac tax threshold’. But an employer in the District with a high-deductible plan, $50/$100 drug copays, limits on PT and outpatient therapy, and high copays for out of network services would already be over the threshold.
The idea behind the Cadillac tax is a good one – make consumers more cost conscious of the value of their benefits, and hopefully more careful consumers. And there’s no question the additional tax revenue will help offset the costs of the reform bill. (I’ll not comment on whether that’s good or bad).
Instead of this blunt instrument, that forces people in DC to help fund health reform for no other reason than they live in the District, while doing nothing to encourage Utahans to control costs, Congress should institute a tax on health plans that fail to keep costs under a threshold – thereby motivating all health plans, employers, and individuals to work to keep costs down.
Such an idea was proposed last summer but didn’t make it into the Senate bill. It makes much more sense than the current proposal, would give President Obama and Democratic legislators political cover, and would not give the opposition any ammunition.
What does this mean for you?
Watch what happens in the reconciliation process; it looks like the C-tax is on shaky ground, and the Dems will have to find an alternative funding source.
Jan
14
One of the biggest problems in the reform approach used by the Democrats is their approach to rating. The whole concept is based on community rating. This changes everything. The problem is is that wiuth true reform there are no Halfways. You must go all the way. It has to be either. Government controlled or run. Every time you give an option you encourage selection , everytime you encourage selection you raise rates.
Also please not with regards to Cadilac taxes with this limited approach some states such as Texas have wide swings in rates. Literally the difference in price might be what side of the street you live on. It could be as much as a 20% difference.
Enough Tax already. When will it end.
Can you explain how the overall value is calculated?
You’re always going to run into these Rub Goldberg regualtions when you try to implement arbitrary segregations/limits on virtually anything.
Take the bargaining unit exemption. Hey, I’m a bargaining unit; of one! When I took this job, the benefits were lumped in with salary when I made my decision to sign on. Where’s my exemption!? If this exemption makes it in, is this really going to stand up to judicial challenge?
High cost areas? Who’s going to definitively define that to everyone’s satisfation? Or, is it, like everything else, going to be a political tool? I can hear it now, “I will work tirelessly to get Paducah on the list of ‘high cost’ areas, making you EXEMPT from the tax. Vote for me!” “Everything’s worth what the consumer is willing to pay for it.”
And as for judging the adequate control of cost; who in Washington is going to take that on!?
If Congress is going to entertain taxing health insurance benefits, then all health insurance benefits should be taxed and then let the American public “vote” on their approval, by re-electing COngressional members or turning them out in favor or a set of Senators/Representatives that will repeal the measure.
As always, love your column and, while I may not agree with all of your summations/findings/recommendations, I always respect them.
Thanks!
TTUEagle
I’m late to the party but it seems to me that this is another argument for transferring health insurance tax exemption from the employer to the individual: premiums up to a set actuarial value would be exempt and anyone who chooses to buy more would pay with after-tax dollars. How to implement it?
1. Congress sets a limit for tax exempt coverage with decreasing percentages over the limit.
2. The total employer-paid benefit is included in compensation and broken out on the W2…with a designation of the actuarial value of for the plan.
3. Individual subscribers get a statement from their insurers that includes the amount of premium they paid and the actuarial value of the plan.
For all taxpayers, if the plan is equal to or below the limit set by Congress, all premiums paid are tax exempt. If the plan has a higher value, only a percentage of the premium is exempt (e.g. 90% if it exceeds the limit by 5, 80% for plans that cover more, etc.).
This arrangement has several advantages over anything else that has been proposed:
1. It automatically adjusts for all the demographic variables that drive up premiums
2. It’s not subject to bracket creep — if premiums rise, individual taxpayers still get a full exemption as long as the plan’s coverage stays within the limit.
3. It affects all taxpayers equally — those with employer-paid coverage and those who pay their own way get exactly the same tax benefit for coverage.