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What We Miss When We Talk About Taxing Health Insurance

PH2009061502075.jpgLori Montgomery and Ceci Connolly had a report this morning on the tussle over efforts to tax employer-provided health benefits. In it, they draw from Elise Gould's work at the Economic Policy Institute, which sought to show that workers with costlier-than-average benefits weren't fat cats and limousine users:

[R]esearch shows that those people tend not to be wealthy highfliers with gold-plated insurance plans, as advocates assert, but those who have to pay high premiums just for basic coverage -- the old, the sick, women of childbearing age and residents of high-cost urban areas. Elise Gould, director of health policy research at the liberal Economic Policy Institute, found that a similar cap suggested by a 2005 tax reform panel would have raised taxes mainly on workers with family coverage, many of them in smaller firms with high concentrations of older, female or unionized workers.

Gould's research showed that 32 percent of families making between $17,000 and $30,000 have health-care benefits above $11,500, which is where Gould assumed the exclusion would be capped. But 47 percent of workers making more than $46,000 had benefits above that cap. And though Gould didn't break the data down, I can almost guarantee you that that number would be much higher if you examined workers making more than $100,000. The cap is progressive, and sharply so.

Max Baucus, meanwhile, is only considering taxing benefits above $15,000. Which makes it significantly more progressive than the policy Gould is evaluating.

All that said, this sort of commentary misses a key wrinkle: The interactions between different aspects of health care policy. What Gould's research actually demonstrates is that the price of health insurance varies with demographic characteristics. As the article says, "the old, the sick, women of childbearing age and residents of high-cost urban areas" all pay more. But another key part of health care reform is the imposition of community rating on the insurance industry. Community rating would render it illegal for insurers to price discriminate based on the demographics of the applicant. In the draft bill released by the Senate's Health, Education, Labor, and Pensions Committee, for instance, "premium rates may not vary by health status-related factors, gender, class of business, claims experience." They can vary by age and geography, but the amount they can vary is actually capped.

Obviously, we'll need to make sure that the community rating in the final bill is sufficiently rigorous to make good on that promise. But the bottom line is that other policies in health reform will actually address the problem Gould is concerned about. Assuming community rating is in place, then the cost of health insurance will be more directly related to its generosity than to the history, gender, or age of the buyer. Capping the tax exclusion, in other words, makes even more sense in context of health reform than it does now.

(Photo credit: AP Photo/Pablo Martinez Monsivais)

By Ezra Klein  |  June 15, 2009; 5:45 PM ET
Categories:  Health Economics  
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Wait. I am missing something.

Health insurance that is not employer based is paid with after tax dollars. These policies are rated based on age, gender, health status, geography, etc.

Employer based plans, which are the ones that I presume the cap is to apply to, are group if you are old, it does not matter unless the entire group is old; if you are of child bearing age, it does not matter unless the entire group is of child bearing age, and so forth.

So I think the argument about the inequality of any cap falls apart, with one exception: geography. Any cap would have to (in my opinion) be adjusted for geography. Health care costs a lot more in, Houston than in rural New Mexico. You can phase them into the same cap over time but to slap the same cap on ignores local realities.

Posted by: scott1959 | June 15, 2009 6:26 PM | Report abuse

Yeah, geography becomes the prime determinant in the reformed market (for large businesses the risk pool is usually big enough that variations in age, health, etc. are averaged out, but that's definitely not the case for small businesses). I believe that's why the latest wave of proposals around this (I've seen one from Center for American Progress, but there've been others) have tied the cap to the actuarial value of the plan, so that it's dependant on the relative genorousity of the benefits, not the absolute variation in cost.

Posted by: Mike_Russo | June 15, 2009 6:30 PM | Report abuse

It's not clear how much community rating will address the variation in employer health plan costs, especially for larger firms.

According to EBRI 89 percent of workers employed in firms with 5000 or more employees are in self-insured plans. The HELP bill includes group plans in community rating, and restricts firms with fewer than 250 workers from becoming self-insured. We could see some migration of high cost firms away from self-insurance and low-cost firms towards self-insurance, but that would only serve to drive up costs in the group market. We still have the basic problem that age and geography account for much more of the difference in the price of group plans than actuarial value. I can see how you might vary the tax-deduction based on geography. It is much harder to see how you would do so based on the health status of the group.

Posted by: kjacobs9 | June 15, 2009 7:08 PM | Report abuse

There is significant variation in average employee age and health status by industry. Geography is important, but it doesn't solve the problem.

Posted by: kjacobs9 | June 15, 2009 7:11 PM | Report abuse

Isn't it amazing how complicated it gets when you try to fix something that is really broken. Look at what the Swiss had to go thru to keep private insurers.

Make them nonprofit

Require them all to offer the same basic policy written by the government.

Tell them how much they can charge for this basic plan.

Require physicians to be paid monthly by the insurers.

Require everyone to have at least the basic plan.

And so on.

Their system winds up being the second most expensive and while it gets better results than ours, it doesn't do any better than many single payer systems that cost much less.

Posted by: lensch | June 15, 2009 8:24 PM | Report abuse

the ironic thing about taxing benefits over any set amount they're talking about?

Private insurance company employees won't pay a thing because for the last 5 years their plans have been moved to basically HSA's for all that have had low single digit increases over the years. You want to know how to work the system properly. Watch what they do. They know because they're so entrenched in it.

Posted by: visionbrkr | June 15, 2009 10:53 PM | Report abuse

I think we need to be very careful about mandating too many specifics with respect to community rating. If our goal is to hold down costs, forcing every plan to cover all of the special interests and legislator's pet causes will frustrate the ultimate purpose of health care reform.

Posted by: Dellis2 | June 16, 2009 11:31 AM | Report abuse

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