Taxing High-End Insurance Plans

Democrats are getting a lot of pressure from unions to eliminate the one provision that would corrode, or at least stop privileging, the inefficient employer-based health care system we have for the majority of this country:

As Democratic leaders prepare to bring healthcare legislation before the full House and Senate for votes this month, they soon must decide who will be taxed to pay for expanding coverage -- the wealthy or the insurance companies.

Legislation emerging from the House would slap a surtax on upper-income people. But many Democrats, especially in the Senate, fear the political fallout over voting to raise anyone's income taxes.

The most prominent Senate bill would impose a tax on insurance companies that provide expensive policies, sometimes dubbed "Cadillac" plans. But labor unions -- a powerful force within the Democratic Party -- bitterly oppose the idea, saying the tax would be passed on to workers in the form of higher premiums or shrunken benefits.

This would have been mitigated greatly by passing the Employee Free Choice Act first, because now it looks like Democrats are just dumping on labor unions. They need to pass EFCA very soon.

But let's be clear what the tax on insurers would do. It would only affect 10% of all insurance plans, and a lower percentage of those are union plans. And it's the only way to take in revenue for health care that extends beyond the cost of health inflation. I don't think the excise tax is entirely well-designed - it isn't adjusted by region based on cost-of-living, and without indexing it will quickly affect the average plan - but the House bill financing is not at all well-designed. It's just a budget-buster, with the effects past the budget window to hide them. That's a recipe for getting the bill dismantled in the future.

In other words, surpluses in the early years make up for deficits in the later years. But since time doesn’t actually stop when the CBO ten-year scoring window expires, what you’re left with is legislation that worsens the long-run fiscal outlook. That’s not really so awful since it basically just means that you’ll need to change the law sometime in the next ten years, and the law will definitely be changed in the next ten years anyway. But I’d say it’s definitely worse than the more robust form of deficit neutrality given by a bill that includes a revenue source which grows over time in line with costs.

To be clear, I think they should impose the surtax TOO, and use that money to expand the subsidies in the exchange. But the real goal here should be getting employers out of the business of providing health care, or at least into the regulated exchange. Taxing high-end plans does this, and does it in a mostly progressive way.