What's Wrong With Taxing Health Plans?

The New York Times reported on Wednesday that the Senate Finance Committee "has become intrigued by a version of a health care tax being pushed by Massachusetts Democrat John Kerry that comes dressed in a whole lot of lipstick. It doesn't fall on workers. It doesn't even fall on employers. It falls on everyone's favorite villain: health insurance companies."

The tax would be levied against health plans costing more than a certain amount. The NYT example is plans costing more than $25,000 per year. Insurers offering plans costing more than that would be taxed, and the proceeds would be used to cover the cost of the uninsured. Insurers would presumably pass the cost onto their customers, who would then have an incentive to offer less generous health plans.

There are a whole bunch of things wrong with this idea. But here are just two of them.

Keep in mind that, for small employers and individuals, insurance administrative costs can run as high as 25-40 percent of the premium dollar.

What kind of "silver plated" health plan costs $25,000?

Late last year, our family lost its health coverage when My Charming Wife was laid off from her job. We couldn't afford COBRA continuation coverage under her plan, which would have cost us $1300 per month (that would've been $15,600 per year that we didn't have).

She worked for a large employer, and her benefit plan was very generous. So I went shopping. We raised the deductibles by a factor of ten, dropped the dental and vision coverage, and priced a plan through Cleveland's Council Of Smaller Enterprises (COSE), which makes a big deal about saving small businesspeople money on their health care coverage.

COSE's offer to us: they'd sell us the plan we wanted...for $1880 per month (that's $22,500 per year).

So we shopped further. We raised the family deductible to $3000 per year, and sought coverage through the individual market.

The best cost we could find: through COSE's insurer, Medical Mutual of Ohio, we were quoted $1860 per month (that's $22,300 per year). Assuming we'd have bought that plan (we didn't) and experienced a ten percent rate increase, out hardly silver plated health plan would have cost us nearly $25,000.

The folks in Washington don't get that the price small businesspeople and individuals pay for health insurance is only indirectly related to the cost of health care. On average, small companies pay 18 percent more for health insurance coverage than big companies do.

So taxing a health plan based on its cost would create still more pressure on small business owners...whom I'm told the Government wants to help...and create even more challenges to maintaining a small group health plan.

That's problem #1.

Here's Problem #2. Insurers would readily accept the "responsibility" of taxing those "generous" health plans they offer to small businesses and individuals. As a senior health insurance official said of another recent scam, it'd be "all about shared responsibility, and that's what needs to happen."

But billing for the tax would require effort and expense. So would collecting the tax, accounting for it, and paying it to...whoever. So insurers would insist that it'd be only fair that they be able to recover the administrative costs entailed in collecting, processing, and paying the tax.

That would raise their administrative costs still further, AND enable insurers to treat the new tax as a revenue source. And of course, it all just adds to the cost of health insurance.

Make sense to you?

Me, either...