Another Health Care "Stealth Tax" On Small Businesses And The Middle Class

Okay, so with much hoopla and hyperbole, the Senate passed its version of a health care reform bill in the wee hours of Christmas Eve, just in time for Senators to declare victory and get out of town. (And for those keeping partisan score, the total process in both Houses garnered 278 "yes" votes from Democrats, 2 from Independents, and zero votes from Republicans).

Now the process will revert to a conference committee, which will try to reconcile House and Senate bills into a single piece of legislation.

I've been saying for a couple of months that it's been extremely difficult for me to decipher any element of bills passed in either House which suggest there's any hope for reducing the rise in health insurance costs for small businesses and individuals. It's much easier to see where the bills could lead to further and faster increases in the cost of health insurance. Several of the key funding elements of the legislation could easily fall directly on the small business owners and the self-employed.

That thought is echoed by New York Times columnist Bob Herbert, who writes today about the "middle class time bomb ticking in the Senate's of President Obama's effort to reform health care.' Read his column at http://www.nytimes.com/2009/12/29/opinion/29herbert.html?emc=tnt&tntemail1=y

The culprit is the so-called Cadillac tax on high-cost health plans. While the idea was born of grass-roots anger at the bankers and financial speculators who have continued to enjoy big salaries and bonuses even as they trashed the economy, the unintended consequence of such a tax is set up to have a big impact on working people, small business owners and their employees, and on the self-employed.

You may recall that the Senate bill imposes a 40% tax on the "excess value" of health plans which cost more than $8500 per year ($708 per month) for individuals and $23,000 per year ($1916 per month)for family coverage. The tax is projected to raise $150 billion over ten years, so it's a big element of the estimated $870 billion needed to fund the Senate's healrh care reform plan.

The tax has been hailed by numerous economists and talking heads as a cost-containment measure, presumably because companies and individuals would seek to avoid the tax by purchasing lower-cost health plans...which just goes to sow that those economists and talking heads haven't shopped for health insurance lately.

That's because the only way to purchase a lower-priced health plan is to reduce the level of benefits the plans cover. That merely passes a higher level of deductibles, co-pays and other out-of-pocket expenses on to the beneficiaries. And given that much of the health insurance reform fever began to spread due to outrage over higher deductibles and co-pays, this "stealth tax" would seem to run counter to what our political leaders say they want to accomplish with reform legislation.

The Congressional Budget Office estimates that the "Cadillac tax" would effect nearly 20 percent of workers, or some 31 million people. The primary opposition to the tax thus far is organized labor, and a big chunk of those affected by the tax would be union members with generous health plans they've negotiated with their employers. I suspect that those large employers savor the opportunity to place their unions over a barrel, using the tax as a possible means to negotiate benefits concessions from their workers. To them I say, "Let the games begin."

But the folks who will really take it in the teeth will be small businesses and the people they employ. It's taken as conventional wisdom that small companies pay 18-20 percent more for their health coverage than large companies do for comparable coverage. And those higher costs are due to the 25-27 percent of premium costs which have nothing to do with health care: insurer administrative costs.

I wrote a few weeks ago about my own attempt to shop for both group and non-group health insurance coverage. At my age (a factor in setting premium rates)and with my family, the best deal I could find was for a plan with a $3000 family deductible and a 10% co-pay...hardly a "Cadillac plan"...and that was for $1880 per month. That works out to $22,560 per year...in 2008.

Assuming a modest 10% increase per year (and most folks would consider a 10% increase a good deal), that same plan would cost $3027 per month, or $36,330 per year.

So the tax on the "excess value" of the plan, or $13,330, would be over $5,000.

If I raised my deductible to $6,000 per year, my premiums might be reduced by 20% or so...but that's STILL $29,064 per year. So I could reduce the tax liability to a mere $24,300.

And even though the politicians are touting an exemption from employer mandates or payroll tax penalties for nearly 90 percent of small businesses, there's simply no way to exempt small businesses form a "Cadillac tax" and still hope to generate enough revenue to meet their targets.

The geniuses who support this tax have suggested publicly that, in the face of such a disincentive, small businesses would buy less expensive coverage. If that's the case, of course, nobody pays the tax, and there's no revenue. But small business employees would see PLENTY of new expenses in the form or higher deductibles and co-pays.

I see two possibilities: either the policy "experts" are mistaken in their suggestion that the tax would create an incentive to buy cheaper policies, or they know their observation is wrong and are saying it anyway...in other words, they're lying. They know that health costs will be so high that it'll be impossible to avoid a tax on your health benefits, whether they're Cadillac plans, or just Chevys.

Mistaken or lying. Who'll get to the bottom of that Hobson's Choice? You may want to ask your Congressman or Senators.