Excise Tax Remains Fairly Strong

Update Friday, 1/15: My column in the News and Observer is back today, discussing the 'ping pong' conference approach....the discussion below gives my latest thoughts about the tax on high cost health insurance. The column was done Wednesday night.

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Ezra Klein has the most detailed discussion I have seen on the deal between Labor, the White House, the Senate and the House, and seems confirmed by the NY Times.

First, let me say I am pleasantly surprised by the deal that seems to have been made on this tax; it is much better than what I thought would take place. At one point it seemed as if it would go away, and it is clearly only the pushing of President Obama that allowed it to remain. And he was going up against among the most loyal Democratic voter groups in organized labor, and bucking the House of Representatives that was/is mad that the Senate bill has been the starting point since mid-Autumn on the final bill.

While I would prefer a straight cap of the tax exclusion of employer paid insurance premiums because it would focus more on the individual's role in health care use, I have been a strong supporter of the excise tax on high cost insurance plans. That is because it is a de facto capping of the tax exclusion. There is a certain amount of 'hold your nose' over the demogoguery necessary to sell this tax--on the insurance companies, when of course it will be passed on--but it is the best that can be gotten at this time, and it has the best hope of beginning to slow cost inflation of almost anything in the bill. Of course the tax will be passed on, incentivizing employees to have less generous plans if they must pay taxes on the marginal premiums. That is the point. It is a tax that is designed to be avoided by people seeking lower premiums.

I suspect many will say the President and Democratic party caved to the Labor Unions, but in fact, the tax remains similar to before (and again, better than what I thought would happen). I thought the unions would get much more. Here are the outlines:

*Tax of 40% on value above $24,000 families (was $23k) and $8,900 individuals (was $8.5k). Dental and vision linked premiums are now excluded from the determination of the value to determine whether a plan would be taxed.

*Key is that the tax inducing amount will be indexed to Consumer Price Index (general inflation) + 1% point, just as before. This means the taxable rate will grow much slower than health care has over time, meaning that unless cost inflation in the system slows alot, more and more policies will be subject to the tax, bringing about downward pressures on health costs and people shift into less costly plans. There had been word that this indexing rate would be changed greatly, rendering the tax not effective. That hasn't happened and that is good news if you are worried about cost inflation in health care.

*Union plans are exempt from the tax until 2018, ostensibly so that Unions that have explicitly bargained for richer benefits because of the favorable tax treatment can renegotiate. Folks will howl about this, and I get that. But, if there is a wave of renegotiation, that should result in downshifting of insurance premiums which is the point of the tax in the first place. In fact the President of AFL/CIO is quoted as saying the goal is that no union member will pay the tax. That is only possible if they have less generous insurance benefits, which is the goal of the tax in the first place. I would suspect it would be hard to score this per CBO--meaning how to score planned lessening of insurance plans in favor of higher wages-- so I suspect the CBO will credit no downshifting/savings in order to be conservative, but there is a reasonable chance this will work better than projected (with better defined as less generous premiums), reducing the deficit by more than scored.

*According to what written by Klein and in a few other places, the health insurance exchanges will be opened up by 2017. Under earlier versions, it wasn't until 2019 or later and then in some versions only with state discretion that employers could go into the exchanges (marketplaces for insurance to be set up) or employees who had employer-based health insurance. This twist of 'if you like your benefits you can keep them' has always been, 'and by the way, you don't have any choice' because those with employer based cover couldn't purchase plans in the exchanges.

The Wyden amendment that was defeated in the Senate finance committee would have opened up the exchanges to anyone who wanted to shop in them, and the Senate bill passed includes a scaled down version of this. It seems as if the exchanges are going to be opened up, and earlier, perhaps to everyone, or in one place I read, only to collectively bargained plans, which would not be as good. This is good if you conceive of the uninsured problem (as this bill does) as one of market failure and you are trying to set up a market that will bring about choice and competition for consumers. Keep in mind only 14 Million out of 307 Million Americans buy their own health insurance; that number will already by over doubled if this becomes law, but this may mean many more people will be able to leave one size fits all employer plans and seek a better deal in the market place.

The insurance industry has generally been opposed to opening up the exchanges, presumably because it would allow folks to shift out of employer based plans and into privately bought ones. Perhaps the thinking is that healthier, younger folks will be those most likely to leave for the exchange, harming the employer based risk pool? Or it could be the other way, sicker older people in smallish employer based pools may want more comprehensive cover than what is offered by their plan? I am not sure on this, and I am not sure if they (insurance) will fire away at this compromise, but I suspect it is too late to do so with effect.

*It seems as though they believe these changes will cost about $60 Billion in scored savings per CBO, so they will have to make that up....and there have been words of expanding the Medicare payroll tax to dividends and investment income. That is not as good a financing source as it won't slow cost inflation. However, on the whole, the developments of today are good for keeping some plausible baby steps on cost control in the bill.