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Explaining the excise tax: part 2

Sigh. On the same day I publish my long explanation of the excise tax, the Center for Budget and Policy Priorities publishes their even longer explanation of the excise tax. You just can't win against these wonks.

But their report touches on something I meant to address in a follow-up anyway: The excise tax is controversial because it has losers, and some of them are sympathetic. No one sheds a tear for the Goldman Sachs executives who get $40,000 health-care plans. But though extremely high-cost health-care plans are concentrated among the wealthy, they're not limited to the wealthy. Workers in high-risk professions, or workers laboring in high-cost areas (insurance is more expensive in New York than in Montana), have pricier health-care plans. Older workers, or workers who have negotiated really good benefits, also have pricier health-care plans. And unions represent a lot of folks who fit some or all of these boxes.

For the tax's purposes, a high-cost health-care plan is a plan that costs more than $21,000. The average family health-care plan this year cost about $13,375. That's a huge difference. To get a sense of the disparity, the health-care plan chosen by the average member of Congress costs $13,446. So we're talking about plans that are more generous than what most members of Congress get. A recent Boston Globe article actually took a look at a $20,400 plan -- that is to say, a plan that's not quite generous enough to be taxed, but might be by 2013. Among other things, it included money for gym memberships, yoga and nutritional counseling. Surgeries were free, as were MRIs and X-rays and CT scans. Three months of prescription drugs tops out at $30. To avoid the tax, some of these perks would be curtailed.

That's not to attack individuals getting good health-care plans. But remember that the money paying for that plan isn't taxed, while the plan that an unemployed person purchases is taxed. The excise tax essentially repeals the tax subsidy for the highest levels of employer-provided health-care coverage -- a subsidy which is, on average, hugely regressive. And even with the excise tax, $21,000 will still be tax free for the employed, while none of that money will be tax-free for the unemployed.

But what of the workers whose demographics characteristics make their plans expensive? The Finance Committee made a couple of changes to the tax in order to minimize such collateral damage. Workers in high-risk professions or who are above 55 years old, for instance, don't see the tax start until their family's plan reaches $26,000. High-cost states have a three-year transitional period during which they need to get their costs under control, but that's not, in practice, very long.

The other important piece of the excise tax is that the threshold grows more slowly than health-care costs. That means that the affected plans eventually become less generous, at least if health-care spending doesn't slow. That'll make a lot of people very angry, as it will mean employers will begin moving them to something that looks more like the managed care of the '90s. Managed care is one of those weird policy experiments that worked perfectly -- costs came down, wages went up, and there's never been any evidence that health outcomes suffered -- but people utterly hated it.

Like many wonks, I think it's better for us to move toward managed care than to let the nation bankrupt itself over health care. But the choice won't look like that to people who think their employer pays for their health care (as opposed to folks who realize their potential wage increases are paying for their health care). That's why Harvard economist David Cutler says that "if we can't figure out how to make the cost savings work, the thing will blow up." But that's true for the subsidies, for Medicare and for the rest of the health-care system.

The end result is that either the excise tax -- alongside rest of health-care reform -- works in slowing cost growth and making sure most people don't face it, or it doesn't work and creates a backlash against itself. If the policy doesn't work, it won't survive.

By Ezra Klein  |  October 20, 2009; 3:25 PM ET
Categories:  Health Economics , Health Reform , Health Reform For Beginners  
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Next: The case for taxing health benefits


In this opinion, the author makes the statement that "insurance is more expensive in New York than in Montana".

Why IS insurance more expensive in New York than in Montana? Is the per capita cost of health care in New York higher than that of Montana? Conversely, is the lifespan in New York higher than that of Montana? What could New York do to be more like Montana? Finally, if the cost of insurance in New York was more like the cost of insurance in Montana, would we need health care reform?

I am agreeing: health care cost issues are largely State-based, not Federal.

Posted by: rmgregory | October 20, 2009 3:55 PM | Report abuse

"If the policy doesn't work, it won't survive."

That's nice to say Ezra, but we know NOW that its just not going to work.

When you say this (correctly):

"High-cost states have a three-year transitional period during which they need to get their costs under control, but that's not, in practice, very long."

you're being very generous with your word choice. There's no expert around that thinks three years will be sufficient to address the reasons that certain states are higher cost. Which means after the "transitional period"- we'll have an SGR-like exclusion/policy change/etc. We know that now, not in 2015. So when you say "if it doesn't work, it won't survive"-- we know it won't work NOW, so why should it survive, particularly if its being used to claim deficit-neutral reform?

Posted by: wisewon | October 20, 2009 3:55 PM | Report abuse


Demand for health care highly correlates with physician/health provider concentration. If a state has more docs per capita, they have higher costs. Many doctors don't like living in rural states. This is the #1 factor. Supply DRIVES demand under our current system.

Posted by: wisewon | October 20, 2009 3:58 PM | Report abuse

its also more expensive because everything's more expensive in NY. Doctors need to factor in their amount to charge (and in turn accept from) insurers an amount that covers their cost and then whatever profit they make. Rents, wages etc are much lower in Montana than they are in NYC.

I also agree it should be state based. If you do too much of the reforms nationally you end up with either too many reforms set to cover things not needed at all or needed as much in some states.

What if State A has almost no incidence of Autism for example and State B has a great incidence of Autism. If you require high coverage levels for autism then State A is paying for something they'll almost never use and if you conversely don't cover it at all or at too low a level then State B would have inadequate care.

Posted by: visionbrkr | October 20, 2009 4:08 PM | Report abuse

One thing that is getting overlooked: the excise tax isn't determined by the health insurance premium rate. It's determined by the COBRA rates for health plus dental plus vision plus any FSA contributions.

I'll bet that, figured that way, the Federal Employees Health Benefit Program (BCBS Standard) will be considerably closer to the threshold than is stated here.

Posted by: wendellbell | October 20, 2009 4:34 PM | Report abuse

The big reason why insurance is more expensive in New York is because New York already has guaranteed-issue in place, as well as state regulations requiring that most plans be pretty gold-plated.

Posted by: tomtildrum | October 20, 2009 4:45 PM | Report abuse


ditto in NJ and like in NY (and unlike in MA), there's no individual mandate. People drop out in our states in droves because of affordability issues (exascerbated with the mandates that are required to be covered) and when people drop out of the system they're the healthy, not the sick and it makes the problem worse.

Posted by: visionbrkr | October 20, 2009 5:09 PM | Report abuse

Uncap FICA.
Treat capital gains as regular income.
Make everyone pay their fair share -- no more special treatment of the rich.

Ezra -- any comments on This American Life's series? Especially the Maryland bit at the end of the last show.

Posted by: AZProgressive | October 20, 2009 6:18 PM | Report abuse

I do not understand the logic of taxing the policies that include more coverage. It is antithetical to the very notion of personal responsibility. Why should people who are willing to inveest more than their health up front be penalized? It makes more sense to me to eliminate the corporate tax exemption for all employer-paid health insurance then cap the individual maximum deduction for premiums. Someone who wants to pay more can do it without being subsidized by the rest of us.

"its also more expensive because everything's more expensive in NY. Doctors need to factor in their amount to charge (and in turn accept from) insurers an amount that covers their cost and then whatever profit they make. Rents, wages etc are much lower in Montana than they are in NYC."

And yet, medical costs are lower in Hawaii --- where everything costs more than in even NY.

Posted by: Athena_news | October 20, 2009 6:57 PM | Report abuse


Isn't the more likely result to be that employers pocket the amount that they aren't spending on subsidies for their workers as employees choose lower cost plans, which means that the increased income from the excise tax should be premised more on corporate tax revenue based on higher corporate profits and/or on higher capital gains/income tax revenues that stem from increased GDP as those profits are invested in the economy?

Posted by: StokeyWan | October 20, 2009 10:56 PM | Report abuse

What you need is a tax credit for the people that have the high benefit plans to offset some of the increased out-of-pocket costs.

These tax credits would be "means tested" so that only low and middle income people get them.

That would be the smart and fair way to implement a benefits tax.

As it is now in the Senate bill the only Americans paying for the cost of the subsidies for the poor are people with high cost plans, regardless of their income.

Posted by: cautious | October 21, 2009 1:12 AM | Report abuse

I agree with the commenters. I'm also extremely disappointed that Ezra is knowingly using bad numbers that don't take into account medical cost inflation or the fact that the excise tax covers HSAs, dental, vision, etc. He doesn't acknowledge that Congress has a secondary insurance (the OAP) for which they pay a semi-voluntary $500 a year. The true value of the OAP benefits is estimated to be at least $7000 per person per year.

Posted by: bmull | October 21, 2009 4:02 AM | Report abuse

Silly boy, everyone with a brain knows that employers won't pass on the extra money to the employee's, they'll pocket it.

Posted by: obrier2 | October 21, 2009 8:27 AM | Report abuse


You are ignoring the trend rates AGAIN!

To say a plan that costs $20,000 today (I'll assume 2009) MIGHT cost $21,000 by 2013 is misleading, at best. If trend is 8%, you can add another 36% to your figures. Stop measuring 2009 dollars against 2013 dollars!!! Especially for health care dollars... You know better.

The $21,000 will be at about the 60-70% mark, with trend added for the next few years. And, it will creep down from there unless trends change dramatically.

I get that you like this policy, and everyone else hates it (as evidenced by post's recent poll). Free to sell it, but don't mislead about it.

If you want to be honest about it, you should be looking at a plan that costs $21,000 / 1.08^4, or $15,436. I'll bet that plan does not boost your argument, though. In fact, I know it doesn't (unless you can find a plan that covers 20-yr old fitness instructors who are also foodies and sterile).

Posted by: rat-raceparent | October 21, 2009 9:15 AM | Report abuse

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