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.

Taxes And Taxes Which Aren't Taxes: Plenty Not To Like In Baucus Health Bill

It's actually a pretty good sign that the health reform plan released last week by Senate Finance Committee Chair Max Baucus immediately drew fire from both left and right, from both Republicans and Democrats. It's the sign of a compromise that all parties feel unsatisfied with the result.

What the release of the plan really triggers is the beginning of serious horse-trading, as the Finance Committee's bill is debated against a bill reported out earlier in the summer by the Senate Health, Education, Labor, and Pensions Committee, which is considerably more liberal than the Finance Committee's version. And once the Senate has agreed upon a bill, then the action will move to the House, which must reconcile four different health reform bills. Then House and senate members will form a Conference Committee to reconcile House and senate bills into the final piece of legislation.

The point here is that we're a long, long, way from knowing what the final version of health reform legislation will look like. So if you're part of the insurance industry, it's way premature to be celebrating that the Finance version doesn't contain a "public option." And if you're a manufacturer of pharmaceuticals or medical equipment, it's too soon to panic over the imposition of billions of dollars in fees meant to cover the cost of insuring the uninsured via a means which would not add to the federal deficit.

But for small businesspeople and other taxpayers, it ISN'T too soon to be concerned that whatever comes out of the legislative sausage-maker will make health insurance more expensive for you, unless cooler heads prevail along the way...which isn't likely.

Republicans have virtually invited themselves out of the debate, which means that they've abandoned their role as negotiators on behalf of limited government and lower taxes in favor of mere obstreperousness. And Baucus has already made clear his willingness to increase tax subsidies to assist middle-income Americans to buy coverage, and to raise the ceiling on his spurious proposal to tax "gold-plated" health plans.

There's plenty in Baucus' bill to give taxpayers pause. Here are a few:

...A 35% excise tax on insurers which offer generous benefit plans. Setting aside for a moment the notion of on what basis such a tax might be calculated (actual premium cost vs. some sort of "actuarial value" calculation), insurers are likely (indeed, they'll lobby furiously for the right) to pass the cost of the excise tax on to the consumers who purchase these generous benefits plans. And while they've been characterized as punishing the white-collar tycoons who run big banks and insurance companies, these benefits plans are really enjoyed mostly by union workers. The idea won't fly unless it's seriously watered down, but since it's one of the biggest keys to generating revenue to pay for other stuff, watering it down will require either cutting benefits for some or raising revenue some other way;

Taxes which aren't taxes: In similar fashion, the Baucus plan proposes imposition of $13 billion in fees on insurance companies, drugmakers, and equipment manufacturers to cover part of the cost of insuring the uninsured. These fees have also been cooked up to generate revenue in a way that doesn't look like a tax. But the costs would be passed straight back to consumers as well.

I don't know about you, but when my costs go up, it doesn't matter much whether the extra costs goes to the government or my insurance company, it feels like a tax to me.

Tomorrow, I'll try to take uo the upside and downside of the Baucus bill's insurance reforms.

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...