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The Baucus Bill: Taxing Insurers

The big revenue item in Baucus's bill is the so-called "excise tax" on high-cost insurance plans. The bill envisions a 35 percent surtax on plans costing more than $8,000 for an individual, or $21,000 for a family. According to the Kaiser Family Foundation's 2009 survey of health benefits, the average insurance plan cost $4,824 for an individual and $13,375 for a family. So this is taxing plans quite a bit costlier than the average, and only a small part of them. For instance: Imagine a family plan that costs $23,000. The tax is not 35 percent of $23,000. It's 35 percent of $2,000, or the value of the plan that falls above the limit.

But this hides a couple of things. First, some plans are very expensive because they're more generous. But some plans are more expensive because they're in wildly expensive markets. New Yorkers, for instance, are going to feel the brunt of this tax a lot more than, well, Montanans will.

Second, the plans exposed to the tax cap are going to become progressively less generous over time. According to CBO, the excise tax only raises $219 billion in the first 10 years. But in the second 10 years, the amount it raises grows by 15 percent every year. That's higher than inflation, obviously, but also higher than health-care costs. The reason is that the tax is pegged to the Consumer Price Index, which grows a lot more slowly than health-care costs. Thus, insurance plans will get more expensive faster than the tax cap will rise, and more of them will get hit by the excise tax. That's not going to be popular, but it will raise a lot of money, or barring that, offer an incentive for people to choose lower-cost plans.

Thinking through all that, though, I have trouble seeing this tax survive in the long run. There seems a substantial chance that it will become like the AMT, and Congress raises it year after year to escape consumer backlash. As I've argued before, the excise tax is a way to seem like you're taxing insurers rather than taxing health-care benefits, even as the practical effect is the same. But though the excise tax might prove easier to pass, I wouldn't be surprised if it's harder to sustain than a cap on the tax deduction. Congress will cross that bridge when, and if, it comes to it, I guess.

By Ezra Klein  |  September 16, 2009; 6:07 PM ET
Categories:  Health Reform  
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Comments

If you would take time to read the bill, the $21,000 figure applies to premiums in 2013 not 2009.

Posted by: cautious | September 16, 2009 6:12 PM | Report abuse

^ I am pretty sure that the Kaiser Foundation's survey for 2013 hasn't quite been released yet, though.

Posted by: Mike_Russo | September 16, 2009 6:24 PM | Report abuse

He might have mentioned that the number actually includes at least 3 years of Health Care inflation.

Posted by: cautious | September 16, 2009 6:27 PM | Report abuse

Bob Laszewski had a good post about this too:
http://healthpolicyandmarket.blogspot.com/2009/09/proposed-health-insurance-company-taxes.html

Posted by: eRobin1 | September 16, 2009 6:33 PM | Report abuse

No what is going to happen is that employers are just going to drop down on coverage. Forcing people who are nominally covered to spend money on insurance making insurers happier. Yep the bill forces people who can't afford to get insurance and takes it away from people who do have insurance. Yeah, its a great plan!

Posted by: endaround | September 16, 2009 7:15 PM | Report abuse

If the excise tax is later reduced, who's going to pay for the subsidies?

Let's admit that Obamacare is not financially sustainable. The logical (if not preferred) evolution is to Wyden-Bennett.

Posted by: bmull | September 17, 2009 1:05 AM | Report abuse

Ezra,

Big fan, but you got this one wrong.

From the same source as your $13,375: HC premiums rose 131% in 10 years. That’s about 8.75% per year.

At that pace, in 4 years the average premium would go from $13,375 to $18,700.

Baucus’ cap will be at $21,000 in 2013, and increase by CPI -- as you mentioned. That means that probably 40% of those with employer coverage will get a new tax/increased premiums (depending on the shape of the distribution of premiums).

This is terrible politics! When R's scream about a HUGE NEW TAX, they will be correct. It is hard enough to fend off the lies, and now we'll have the Baucus Caucus to thank for putting this stinker out there. I just spent months telling people to vote D, so they wouldn't tax your health benefits. Now, Baucus is taxing our benefits because he want Grassley to like him. (He may need a shrink.)

I'm not crazy about the policy, either. The basic premise is still rooted in 'some people have it too good -- and go to the dr to much.' We all know that utilization is not the problem, we pay double what others do 'per unit of care'. That's the problem. Our utilization is not out of line.

Most of our spending goes to a few types of conditions, along with end-of-life care. So, we're still going to try to tear apart the benefits that some have managed to keep? Finally, it's an incredibly cowardly way to do things.

Posted by: rat-raceparent | September 17, 2009 9:26 AM | Report abuse

bmull has a good point, saying: "If the excise tax is later reduced, who's going to pay for the subsidies?"

I'd go further. When companies adjust their policies to get under the cap, and they will (not enough union density to stop it), these revenues will dry up. So, baucus-care will be exploding the deficit -- unlike the house bill.

This is a terrible way to finance this bill. It leads to less coverage, not more revenues.

Posted by: rat-raceparent | September 17, 2009 9:36 AM | Report abuse

New York is a high-cost market because it requires community rating and extensive coverage. The Baucus bill would raise costs nationwide in the same way, so we'd all move closer to the tax threshold.

Posted by: tomtildrum | September 17, 2009 1:29 PM | Report abuse

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