Excise Fix: If You Want to Tax Cadillac Plans, then Only Tax Cadillac Plans

I'm not a fan of the proposed excise tax on health insurance policies for a variety of reasons. First, like the actuaries at the CMS, I believe the excise tax's ability to “bend the cost curve” on national health expenditures is almost nonexistent. I share their belief that it holds down “premiums,” but not really overall national health expenditures. The money not spent on premiums is mainly cost-shifted in the form of higher out-of-pocket spending (due to higher co-pays and deductibles).

The other big problem is that the excise tax is not properly indexed. At first, it would be a true tax on “Cadillac” plans, but as premiums grow higher than inflation, the excise tax would start hit millions of middle class health insurance plans. Future Congresses might not allow this to happen, but you could then end up with endless sets of yearly patches like the alternative minimum tax.

I will accept the argument for a real tax on just “Cadillac” plans. It does not make sense to provide a completely unlimited tax deduction for any employer-provided health care plan regardless how high. If Goldman Sachs wants to give its CEO's fully paid-for face lifts that should not be done tax free. But if you are are going to tax “Cadillac” plans, you need to index it to make sure it only ever taxes actual “Cadillac” plans.

My solution is to index the cap to roughly 165% of the average premium on the Federal employer health benefit (FEHB) exchange. (I would also use risk-adjusted calculations to avoid the limit hitting “chevy” plans at companies that just happen to have disproportionately high numbers of older employees.) I will fully admit that any insurance plan that is 65% more generous than what federal employees get is a high-end “Cadillac” plan, and a tax deduction is not needed to encourage employers to provide something even more generous than that.

By indexing the excise tax to the FEHB exchange you get two important benefits. First, you make sure that it is truly just a tax on “Cadillac” plans, and will remain only a tax on “Cadillac” plans. (I understand it was not properly indexed by design because Obama and Baucus wanted it to start hitting “Chevy” plans in a few years.)

Second, you create a huge incentive for the government to start using the FEHB's huge market size to really do cost control. So far, it has been a failure at seriously controlling cost, and it needs to do better. The FEHB is the largest employer-provided insurance plan in America. If the government can't control cost with its huge employer-provided insurance plan, it has no right to demand better performance from other employer insurance plans. The government (and members of Congress) need to lead by example on the issue of cost control, and indexing the excise tax to the FEHB is the perfect incentive.

I do not like the employer-based health care system or this excise tax. If you are not going to replace the employer system putting in place a poorly indexed cap of premiums and hope for free market economagics to produce cost savings seems misguided. If you want cost control, you should actually implement proven cost control ideas. Since Obama is dead set on including the excise tax, I think this is good redesign for which labor should be advocating. If Obama wants to sell this idea as a tax on “Cadillac” plans, it should actually be only a tax on “Cadillac” insurance plans.