Monday, March 1, 2010

Excise tax and process

I understand the only way to pass a comprehensive reform this year to be for the House to pass the bill passed by the Senate on Christmas Eve. It will take 1 roll call vote to enact this into law (assuming the President signs it). This does not involve reconciliation.

Reconciliation would come into play to enact modifications to the Senate bill, essentially along the lines of the agreement that was emerging between the House and the Senate when Scott Brown's election took place in mid-January. For example, ending the Nebrasksa Medicaid deal had been agreed to by House and Senate leaders back in early January, and a deal to allow the tax on high cost insurance start later for labor Union health plans leaked out. This was basically undoing one deal that people hated, but creating another.

The Senate bill has been preferred by the President for some time, and it was functioning as the de facto starting point for House/Senate negotiations in early January. And the President clearly preferenced the Senate bill last week in the brief document he put out that listed a variety of tweaks to the Senate bill. Among them, ending the Nebraska Medicaid deal, adding some Republican ideas in the area of fraud and abuse, but also undoing the deal the preferenced labor Union insurance policies. But, in doing so, he proposed delaying the imposition of the tax on high cost health insurance for all plans until 2018 and raising the value at which the tax applies. This did away with the political problem of favoring unions, but also delayed one of the key aspects of the bill with promise to slow the rate of cost inflation.

In short, the tax on high cost plans has been delayed and the level at which it will be imposed has been raised (meaning fewer policies will be subject to the tax n 2018). This is not good from a cost saving standpoint, but I think that some are overstating the proof that this means such provisions will never come about. This is my take of how it would go.

First, the House passes the Senate bill and it is law. There is no reconciliation and therefore no sunsetting (provisions end after 10 years; this is why Bush tax cuts go away as default, because they were passed via reconciliation). Under the Senate bill, the tax on high cost insurance starts in 2014. The threshold is $24,000 for a family plan. It is indexed at 1 percentage point above the CPI, meaning much slower than actual health care inflation. Thus, over time, more and more policies will run up against this limit.

Second, a reconciliation bill will be passed that among other things, delays imposition of this tax until 2018 and with a higher value for the tax to apply.

Third, in 10 years, the reconciliation piece and provisions sunset, meaning, go away, cease to exist. The Senate bill, does not. And the tax of $24,000 will have been indexed at 1 percentage point above CPI for 10 years. This tax on high cost insurance will then be in effect, beginning Jan. 1, 2021. We don't know what the value that will trigger the tax will be, because we don't know what inflation will be over the next decade.

Fourth, Congress could pass a new law to do away with the tax on high cost insurance (say in 2020), but in doing so will presumably have to come up with 'pay fors' to offset the revenue that the CBO will say is going to be lost from the imposition of this tax. Read this as something else will have to go from somewhere, and it will be a lot of money.

So, I would prefer to not delay the imposition of the tax. In fact, I would prefer to just severely limit and move toward completely ending the tax exclusion of employer paid insurance, but something that radical would certainly take Republicans and Democrats working together and that seems impossible right now. However, folks saying the effect of the tax on high cost insurance is now essentially completely gone, I think, are incorrect. It is certainly delayed.

In one sense, this could be viewed as conceptually similar to many of the provisions that Rep. Paul Ryan (R-WI) has proposed for Medicare. There is essentially a 10 year warning that says come 10 years from now, things are really going to change. In the same way, 10 years from now a tax on high cost health insurance with a pretty big punch (meaning 40% rate on excess amount, with more and more policies above this limit because of how it is indexed) is coming on line. The point of this tax is to be avoided by folks with insurance having less insurance. The way you avoid it is to have less generous insuarance, which will slow cost inflation. So, this lead time could induce some of this of behavior in the private market as employers and employees negotiate around wages/benefit tradeoffs differently as we approach 2021 because of the coming of this tax. In this way, even the delayed tax could have more impact on cost savings in the first 10 years of the bill than most are saying.

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