"Cadillac" Excise Tax A Bad Means to Health Care Reform End

The goal of the excise tax is to tax excessively generous “Cadillac” employer-provided health insurance plans. Let’s leave aside the fact that this is in direct contradiction to what may be Obama's biggest campaign pledge about health care -- a promise to not tax benefits -- and the questionable assumption that taxing high end plans would substantially “bend the cost curve.” If the stated policy goal is to tax very generous employer-provided health care plans, the excise tax in the Senate bill is a terrible way to achieve this policy goal.

The excise tax in the Senate bill is not structured to tax generous health care plans -- just expensive ones. The problem is that relatively generous health care plans are not necessarily expensive and expensive plans are not necessarily generous. Age, region, and health status of the employee pool are primary determinants of the cost of a group insurance plan.

For example, a snowboard company with all young athletic employees could have an extremely generous insurance policy that costs relatively little, while a bakery with many older employees with health problems could have a very bare bones policy that still costs a lot. The limit should be based on the cost of the insurance if applied to the average demographic makeup of a group plan in the area. This will prevent the excise tax from simply being a tax on older Americans.

The excise tax is a flat tax assessed at 40% on all employer-provided benefit plans above a set dollar amount. This is a very regressive way to cap the tax-exempt status of health insurance. For lower-income or middle- income Americans this is much higher than their marginal tax rate so it will always make sense for them to get less generous plans.

In some areas the very wealthy with high local income taxes the marginal tax rate can be over 40%. It will still make financial sense for this group to get very expensive insurance plans from their employer. The proper way to cap the tax-exempt status of health insurance is to do just that: treat employer-provided insurance over a set value as income and tax it as such. This is a more progressive way to deal with capping the exemption.

Lastly, the excise tax is not indexed to medical inflation. This is a feature not a bug. The eventual goal of the excise tax is to tax all plans, not just high end insurance plans; this is why the sales job for the excise tax has been so dishonest. If the government begins taxing insurance at a rate lower than medical inflation, medical inflation will magically go down thanks to free market economagic.

I believe true cost control is impossible without the government passing reforms like insurance plan standardization, central reimbursement negotiator, drug re-importation, public option, etc. The federal government can prove cost control is possible without these reforms by pegging the excise tax to the average cost of insurance on the federal employee health benefit program. If the largest single employer in the country can't use its market size to bend the cost curve, true reform would still be needed to bring down cost.

If the ultimate goal of the excise tax is to tax excessively generous insurance, the Senate bill provides a poorly designed way to do that. There are better targeted and more progressive way to achieve this policy goal. Instead the excise tax will end up hitting millions of American who don't have "Cadillac" insurance plans. Implementing policy which is in diametric opposition to campaign promises is one thing, but at least this administration should have the decency to do it competently. There is no excuse for such sloppy execution of a policy objective.

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