The American Alligator

Last week, I wrote about the tax on “Cadillac plans”.  This past week, BHO reached an agreement with labor unions, the primary voice of the opposition to taxing so-called “Cadillac plans”.  The tax is still there.  My suggestion didn’t seem to make it into the discussion.  I was busy dealing with alligators.  That’s my day job.

One of our carriers had a computer glitch (a nice euphemism) that disrupted coverage for many people.  Here is a typical example of the kind of fires we had to put out – a woman went to the doctor’s office and the doctor could feel a lump in her breast but would not order a mammogram because the office had contacted the insurance carrier and had learned (incorrectly) that she had no coverage.

These incidents prompted me to wonder.  If we had a single payer health care system, couldn’t we have the same problems?

After all, we will certainly still have computers.

But we won’t have people moving from plan to plan because they changed jobs.  We won’t have people losing coverage because they lost their job, or because they got sick, lost their paycheck and therefore could not afford their health insurance premium.

Doctors and hospitals will know who is paying their bills and therefore might show a bit more patience with administrative errors.  After all, if a computer error like that should occur in a single payer system, it likely would affect a high percentage of their patients.

There would hopefully be a sense of shared crisis, not one that abandons people in a time of acute need.

Oh, and the tax compromise reached recently.  It is still a bad idea.  Now it is just an acutely complicated bad idea.

And it will do absolutely nothing to make our health care system less fragmented, less chaotic, and more humane.

It just lets in more alligators and stops up the drain even more.

Is President Obama about to follow the ignominious example of GB I, George Bush, The Elder?

Remember, “Read my lips.  No new taxes!”?

Remember, “John McCain will tax your benefits!”

Well BHO seems about to cave on his campaign pledge.

At least GB I could argue that the campaign promise was bad policy and the flip-flop was forced by economic realities.

Oh that BHO could make the same argument!

I have often railed against the taxation of benefits in this space.  I think it is bad politics, bad economics, and bad health policy. I am certainly not the only one.  Frankly, I think President Obama’s capitulation on this issue demonstrates profound political weakness and an astounding ignorance of health insurance.

A new idea.

But in the spirit of compromise, I want to offer a new idea.  It may not be the best suggestion for financing health care reform, but it builds on at least one stated goal of the tax my benefits people – containing costs.

But instead of penalizing people whose only control over costs is to use fewer services, my idea targets the folks who actually have some impact on the health care market – the insurance companies.

Tax the insurance companies

Wait, you say, we are already taxing insurance companies, and those just get passed along to consumers.  But alas, I say, let’s build on the “Cadillac” idea of an excise tax.  Tax the increase in the total cost of a Plan’s  book of business.  By imposing an excise tax on increases over a base level of costs, it could provide an incentive for insurance companies to manage their provider contracts and book of business costs.

This table illustrates how that would work.

The tax would be imposed on gross premiums and not on profits.  It would be payable just as any other cost of doing business, but would not be deductible as a business expense.  Space doesn’t permit me to dwell on the negatives of taxing benefits at the individual level.  I encourage you to click on the category “tax policy” to the right to see my earlier thoughts on this subject.

Taxing insurance companies achieves several objectives that taxing individuals does not.

As an employee benefits professional who has spent a career trying to “manage health care costs,”  I often find criticisms of insurance companies unjustified.  After all, they are only trying to do what we hire them to do.

An excise tax on total premiums could do what individual employers have failed to get their carriers to do – negotiate better prices with providers and manage utilization.  They are the only ones in the private market space who can do that.  Employers, despite many innovative efforts, have not succeeded.  And individuals are absolutely powerless.

Equally important, imposing the tax on a carrier’s (or a TPA’s) book of business, avoids the inequities inherent in smaller group pricing.  The myth of taxing “Cadillac” plans is that these are “rich” plans.  An employer’s cost is impacted first and foremost by the age and illness burden of its population, then by cost sharing and benefit provisions.

An excise tax on insurers and third party administrators (a phenomenon that BHO and Congress seem oblivious to)  is simpler, more equitable and is focused on entities that can actually impact the total cost of health care.

It would be payable even when the company otherwise made no profits.

Because it is focused on fewer entities, it would be less of an administrative burden on the system and easier to enforce.

The alternative – taxing individual plans – is an unforgivable political and policy blunder.

Your thoughts?

By Michael O’Brien – 12/07/09

The Hill’s Blog Briefing Room

The AFL-CIO’s new TV ad is set to take aim at centrist Democrats over the Senate healthcare bill’s taxes on insurance plans.
The ad, which pushes the Senate to remove the so-called “Cadillac tax” on high-value insurance policies, will begin running Monday in Delaware, Indiana, and Virginia.

Those states are home to centrist Democratic Senators Tom Carper (Del.), Evan Bayh (Ind.), Jim Webb (Va.), and Mark Warner (Va.), whose votes on the taxes in this bill are subject to pressure from the labor group and other organizations with a stake in the healthcare fight.

AFL-CIO aims at centrist Dems over ‘Cadillac tax’ – The Hill’s Blog Briefing Room

Jonathan Cohn, a writer I generally admire, gives high praise to a new report by the Center for Budget Priorities, arguing that this report should prompt people like me to rethink our opposition to the idea.

So perhaps their latest message will get through to liberals and liberally inclined interest groups that oppose tinkering with the tax exclusion for health benefits. The title of their new report says it all: “Limiting the Tax Exclusion for Employer-Sponsored Insurance Can Help Pay for Health Reform: Universal Coverage May Be Out of Reach Otherwise.”

I recently detailed  the devils that I was concerned about.  The CBP attempts to address some of them.  So let’s take a closer look at their arguments, using the reports own headings.

The Exclusion is the nation’s costliest tax subsidy.

Duh?  Health care is one of the fastest growing expense items in the federal budget.  It is also one of the fastest growing cost items for private business.  Which costs less, the loss of tax revenue or paying the full freight for the health care now provided by the private sector?

Am I missing something?  A tax subsidy is how the federal government provides incentives to the private sector to do what it doesn’t want to do itself.  The real issue is this.  Does the private sector do a good job of providing health care to the public?  If yes, continue the subsidy.  If no discontinue the subsidy and let the government take over that responsibility.  But don’t take away the tax subsidy and expect the private sector to continue their responsibility for providing health care.  That’s a bit like getting off the toilet, and then, well you get my drift.

The exclusion is poorly targeted. It increases health care spending

Yes, it is poorly targeted.  Go back to item one.

The point that it increases health care spending is an argument that appeals to some.  But to support it you would have to show that the rich with health insurance use more health care than the poor with health insurance.  And also show that somehow that difference is explained mostly by the preferential tax treatment.  I don’t see that argued at all; let alone successfully.

Exclusion Can Be Reformed Without Eroding Employer-Sponsored Insurance

Very doubtful.  But this is a topic all by itself.  But what about eroding the income of middle class tax payers?   Where is that discussion? After all, where is this pot of money coming from?

Our experience and the experience of others with the taxation of domestic partner health benefits tells us that taxing the benefits of just one person, not the family, of a middle class ($30k – $50k) wage earner reduces take home pay by $30 to $50 dollars per week.  Let me repeat that.  Taxing health care benefits of middle class tax payers will reduce take home pay by at least $30 to $50 PER WEEK.

Some writers dismiss this argument without even describing it.  Just an off hand comment that “labor hates it.”  It seems no one else is sticking up for the middle class on this point.

Structuring a limit on tax exclusion

This section goes part way to addressing some of the arguments I raised in my previous post.  But the CPB arguments step through the looking glass, as do their arguments about eroding employer sponsored insurance, with this statement:

If properly designed, a limit on the tax exclusion could be administered equitably and without large compliance burdens for employers or workers.

Perhaps I have just a bit too much experience with the phrase “without large compliance burdens.”  Or maybe I just feel that our health care system spends far too much on administrative expenses.  We should find ways to spend less, not dismissing ever mounting marginal increases in administrative “compliance burdens” that have absolutely nothing to do with the delivery of health care.

Charley James of the LA Progressive offers the best response.

The Kennedy plan is relatively simple; the emerging Baucus plan sounds as if it is being written by Jackie Mason.

First, you take health plans that are tax free now and you make some of them taxable, but not all of it, and not for everybody. But who? We don’t know who! Then, a new tax deduction puts money in the pocket of the people who we don’t know who they are so they can take it out again and buy what they had for free in the first place. Next, the money the states use to pay for medical care for people who don’t have health insurance could be used to pay for people who don’t have health insurance which means they can’t get good health care. But we don’t know who they are, either. Well, maybe we know, but we’re not sure, so we won’t say. Then, three million people who don’t have any health insurance will have money from the tax deduction they didn’t want, to buy health insurance on their own if they have enough income to take advantage of a $15,000 deduction and can actually can buy a policy that provides coverage. There might be six people in America who can do this. So we’re taking money from here, and moving it over there, and then back to here, which where it was in the first place and now let’s have some tuna because I’m exhausted.

Taxing health care benefits is a bad solution on top of a bad idea – employer sponsored health care.  Give the money currently spent on health care by employers to the employees, then tax it.  Then let the governement provide health care.

This is not a rhetorical question.

This is not an anxious question from an employee benefits professional.

This is not wishful thinking by a single payer advocate.

In the Call to Action by the Senate Finance Committee,  Chairman Senator Max Baucus (D-MT) calls for “Strengthening the Employer-based system.  We must ensure the continued viability of the employer-based system – the principal source of health coverage for most Americans.”

Fine words.  But the weak point in the statement is the phrase “continued viability”.  It is fair to ask whether the current system is viable and whether it can continue.

Both the percentage and the number of people covered by employer provided health insurance and the percentage of firms offering health insurance has declined over the last two decades.

There are fundamental contradictions in the commitment of conservatives and employer groups to employer based health care plan.  And the two are not entirely in sync.

Conservatives for ideological reasons cling to things “private” and abhor government intervention, even when it makes markets work better.

Employers are a bit more practical in their approach.  But for the most part don’t seem able to see their way out of the box they are in.  They may have an ideological aversion to government action, or they may just not be willing to give up their current way of doing things.

But some employers are willing to question the current system.  Jonathan Weber, CEO of New West, challenges the assumption that employers should have a responsibility to pay for the health care of their employees.

He writes:

Why is this my responsibility?

Quality health care is a societal good, so why should it be the obligation of private-sector entities to provide it?

A recent Reuters article by Andy Sullivan describes how “job lock” inhibits entrepreneurs, an argument also made here.  He quotes Todd Stottlemeyer, former CEO of the National Federation of Independent Businesses (NFIB).

“There are lots of factors that go into why somebody starts a business or doesn’t start a business: Do I have a good idea, do I have capital, do I have risk tolerance?,” said Stottlemeyer, now an executive at a hospital chain. “Being able to get health insurance … should not be one of those determinant factors.”

But even if they acknowledge the box they find themselves in, employers are schizophrenic about their way out of the box.  Few employers would go as far as Jonathan Weber.

A 2007 article in USA Today by Julie Appleby observed discussions in Congress at that time to de-couple health insurance from employment.

The measures can be lumped into differing philosophies about the direction the USA should move: either toward a health insurance market in which people buy policies on their own while armed with tax credits or deductions, or one in which people are able to buy insurance through group-like “exchanges,” with some government oversight. Some of the plans likely would encourage employers to drop coverage because the employers would lose all or part of their ability to write off insurance as a business expense.

Noticeably absent is a public plan alternative, either the single payer proposal or the public plan option.

Employers also speak by their actions.  Two very clear trends indicate what employers really think about their obligation to provide for the health care of their employees.  The first is cost shifting to employees in the form of increased out of pocket expenses at point of service and increased deductions from pay for health care premiums.

The second trend is toward something resembling a defined contribution approach to health care financing.  This is characterized by High Deductible Health Plans and Health Savings Account, a favorite concept of conservatives in the last administration.  The theory behind the practice is that by giving employees cash instead of benefits, they will become wiser shoppers for health care services and thus help to constrain health cost inflation.

What is the conclusion?

Employers don’t want the responsibility for the health care of their employees.  They occasionally admit this.  They will concede that it is not good for small and new businesses.  Their practices clearly tell the true tale.

They just won’t admit it.  The just can’t get past old practices and ideological constraints.

But employers need to let go.  Health care needs to be de-coupled from employment.

Julie Appleby quotes Sara Horowitz, founder and director of the Freelancers Union whose members are independent workers in finance, non-profits, domestic services, publishing, advertising and health care – says something needs to change, because the working world has.

“The nature of work is changing: Jobs are much more short-term and flexible,” Horowitz says.

Employers need to catch up.  Maybe Congress will catch on.

Small Businesses

Many small businesses are acutely aware of the inequity in the tax code when it comes to health care.  A small business that files as an individual entrepreneur, files an individual return.  Like you and me, he or she must meet the 7% test.  Only health care costs that exceed 7% of adjusted gross income are exempt from taxation.  For most people with decent employer sponsored health care, that’s a tough threshold to meet.

For small businesses, it means that the they are paying taxes on the 7% of their income that they pay for health care.

But there is another even more relevant example of wage earners who pay taxes on their benefits.

Domestic Partner

As a consequence of the Defense of Marriage Act, the IRS under the Bush Administration approved regulations on the taxation of health care benefits for domestic partners.  I will let others, like the Human Rights Campaign, take up the issue of the inequity of a tax that clearly entitles a married spouse to tax free benefits, but an unmarried spouse (same or opposite gender) is not.
Instead I want to use their situation as a warning for the rest of us when policy wonks start talking about taxing benefits.

The Human Rights Campaign offers the following example of a low wage worker (by DC standards) who adds a domestic partner to his or her coverage.

Human Rights Campaign

For this individual it is a 50% increase in taxes.  Are politicians serious about a 50% increase in taxes for someone earning $32,000 per year.  Not included in this example or the next example is the extra tax burden on the employer.  When benefits become taxable, the employer is required to pay the employer portion of FICA taxes or 7.65% of the value of the benefits.

At our plan, I used a real example to pose a similar example, plugging real numbers into our QuickBooks payroll module.

Our employee is withholding considerably more in taxes, so the percentage increase is less.  But $2,482 is real money.  $48 per week is real money.  What are politicians thinking or smoking?

Our Plan Example

Caution – Entering Wonk Territory

These examples illustrate the conservative point of view that the tax exclusion for employee benefits costs the US Treasury lots of money.  But they do not go nearly far enough to illustrate the added burden on wage earners if employee benefits were  taxed.  The tax on domestic partner benefits only taxes the additional value of adding the domestic partner to the plan.

The astute reader may have noticed that the imputed income is calculated differently in the two examples.  These methods are both permitted by the IRS which has provided little clear guidance on this topic.

If the full value of the benefits were taxed the additional tax burden would be off the charts.

What is a “Rich Plan”?

But there is another cautionary note in this example.  Policy makers hedge the discussion on taxing employee benefits by arguing that they may only tax “rich plans.”  But how do you define “rich plan”?  Will they take into account regional differences in health care costs?  Cities like Philadelphia and Boston are very high health care cost cities.  So how do you tax the employee benefits of employees of a Philadelphia employer.  Does the employer pay the same rate for its employees in Philadelphia as it does for its employees in Scranton or the employees in Danville?  Maybe, maybe not?  If the rate is the same for all employees, is it fair to tax the Danville employees who are subsidizing the  Philadelphia employees?  How will these cities market themselves with this additional tax burden to clear?

Most large employers are either experienced rated or self insured.  That means that the costs they pay reflect the actual medical claims incurred by the group.  So an employer who has an older population will generally pay more than an employer with younger employees.  Is it fair to tax employees simply because they work with an older work force?

Our plan provides benefits to retirees.  The rate for active employees subsidizes the costs for retirees.  This is the only way it can work when Taft-Hartley plans provide benefits to retirees.  Is it fair to tax an employee for benefits that are being received by someone else?

I have commented on this topic before, and I have also criticized federal policy makers for their preference for the complex over the simple.

Here is a policy that is simple and comprehensive.  Tinkering with it raises all sort of issues that accomplish very little other than tax those little able to afford it.  It will alienate the base of the Democratic Party who will be the source of that revenue.  Don’t change it!

Unless! Unless there will be a policy similar to one suggested in a proposal by Senator Ron Wyden. Pay to employees the money that employers now pay for health care.  Allow that income to be taxed.  And let the government provide the health care.

Admittedly, in my last post I offered a knee jerk reaction to the idea of taxing health care benefits.  I distrust the motives of those who single out the income tax exclusion for health care benefits.  Yes, it is a big number, but not compared to the alternative of footing the entire health care bill.

Why a tax exclusion for health care benefits?

The objective of any tax relief or penalties is (or should be) to promote a larger social purpose.  Providing health care coverage certainly meets that test.

Most of those touting an end to the tax exemption for employer sponsored insurance are more interested in raising revenue at the expense of working people than they are in expanding health insurance coverage.

In weighing the merits of the tax policy, at least two questions need to be addressed:

Is the goal achieved?

Is it cost effective?

Given the 40+ million uninsured in this country, the answer to question one has to be an emphatic “no”.

According to CMS national health expenditure data, employers, including government employers, paid 532.4  billion for health insurance premiums in 2007.  If the tax exemption cost the US Treasury $170 billion (OMB) that is better than a 3:1  return.  That should be an acceptable answer to the second question.

But as the cost of health insurance spirals out of reach even for employers, it is reasonable to ask whether that  tax investment is accurately targeted.

Are there other ways to get there?

That brings me to Senator Ron Weyden’s (D-Oregon) Healthy Americans Act.  I am not a big fan of an individual mandate to purchase health care insurance.  But his proposal contains some interesting ideas.

His most intriguing idea is to convert what employers now pay for health insurance into wages.  More important, I like his rationale – “modernize the employee-employer relationship regarding health insurance”

The major issue discussed by those who study workforce demographics is longevity.  Young people are delaying their entry into the workforce.  Middle age people are taking breaks from work to return to school to upgrade or learn new skills or simply to pursue a business venture idea.  Older people are staying in the workforce longer but not as full time workers.  Tying health care benefits to employment is a major impediment to maximizing a 21^st century workforce.  Does Sen. Weyden get it?  I hope so.

Another idea in Weyden’s plan that has some merit is that health insurance plans would have to meet certain standards.

Jonathan Cohn, perhaps my favorite health care journalist,  describes variations on “exclusion reform” put forward by Jonathan Gruber, an MIT economist.

He suggests maintaining the exclusion for those below a certain income level and gradually phasing it out over higher income brackets.

A modest proposal

Could we combine these ingredients into a plan that:

• Gives employers the option of converting their current payments for health insurance into payments for a national health plan, with any balance converted to taxable wages.
• Taxes those not currently providing health insurance
• Allows employers and unions to “opt out”, but any benefits provided above what would otherwise be a payment for the national plan would be taxable.

In addition:

• Any benefits offered as supplements to the national plan would be taxable.
• The cost to individuals not employed would be based on income and would be affordable even to the most indigent.

This last item is the most critical for me.  The benefit plan that I administer offers generous provisions that allow employees to continue on the group benefit plan during periods of extended illness.  Yet employees’ struggle to make their premium payments – about 10% of the total cost.  The threat of eviction is more urgent than the threat of illness or disease.

Any reform proposal needs to guarantee continuity of health care coverage in spite of discontinuity of earnings.  Ideally that should be administratively and financially seamless.

If taxing some benefits is part of that proposal, fine.

Short letter.

Dear President Obama:

Taxing benefits is a bad idea!

It is bad politics

It is not just that you thought it was a bad idea during the campaign and now you have flip flopped.  You are allowed to flip flop on some issues.

Far more important, you told us that 95% of Americans would not see a tax increase.  And now you want to tax our benefits.  Did you misspeak?  Were you just plain wrong?  Or misguided?

I realize not everyone has employer provided health care benefits, so it is a little bit like taxing the rich.  Is that how you see it?  Is that how people in Montana see it?  I don’t think those of us with employer provided benefits would think of ourselves as rich.  Lucky perhaps, but not rich!

It’s not that this goes against my interest.  It goes against your interest.  I do not believe that you have an interest in betraying the American people on the issue of taxes.  Aren’t working people upset enough already? I suggest you wave your veto wand and make this curse go away.

It is bad economics

Someone has to pay and you know it is not the employers.  How will depressing worker wages help the economy?

It is bad health policy

I have made the point here frequently that the current system distorts domestic and international competitiveness.  Taxing benefits will aggravate the problem.  It will make benefits and compensation more expensive forcing some employers to abandon or cut back on employer provided health benefits.

So your idea to pay for those without health insurance is to cause more people to be without health insurance.  So you fix that problem by raising the tax on those with insurance causing more employers to give up health insurance.

I imagine a man in a boat who sees water come in at one end and decides the solution is to drill a hole at the other end for the water to leave.

Bad idea!  Unless…but that is a topic for the next post on Wednesday.

We have seen one cost control fad after another.  More and more employers are dropping health benefits in order to stay afloat.  In this game of Old Maid, those employers who do provide benefits struggle to maintain their social compact with their employees without footing the bill for the rest of the world.

The rest of the world? How does that occur?  In a number of ways.

They pay more than their fair share. Doctors and hospitals complain that the compensation they receive from public programs like Medicare and Medicaid is inadequate.  Hospitals complain about the cost of providing uncompensated care.  How do these entities survive?  Because private payers, read employer plans, pay more than the cost of care.

They pay for other firms’ employees. Thursday morning (Jan 29th) there was a story on NPR’s Morning Edition about the high cost of COBRA coverage.  Almost overlooked in the story was that the woman’s employment based insurance supported her husband’s small business.  My church employs three people, all of whom have health insurance through their spouses’ employment.  We  do appreciate that support, but is that fair to those employers?

They pay for ineligible dependents. One of the latest trends for cost control is an eligibility audit.  Employees must provide proof through birth certificates and marriage certificates that the dependents on their plan are eligible dependents.  Our plan has always been fairly strict about providing documentation for new dependents.  But for years we didn’t question the dependents of new hires.  I don’t know whether to laugh or cry when the occasional employee contacts our office to add a new spouse.  We inform him (usually a him) that before he can add a new spouse he has to provide documentation that the previous spouse is either deceased or divorced.   That’s when we learn that he was never married.

They pay for retirees. There are still plans thatoffer coverage to retirees – mostly government plans.  Often those retirees work for other employees or are self-employed.  Why should their former employer pay for the  cost of their health care.  The auto and steel industries illustrate how those legacy cost distort the market.

But there are other arguments that point to a less pivotol role for employers in the provision of health care.

It skews the competitive playing field. Firms that provide health insurance are at a competitive disadvantage  against firms that do not.  Firms that also provide retiree health insurance are at an even greater compettve disadvantage.

It reduces employment flexibility. Health insurance is a fixed cost per employee.  That  economic fact goes against the grain of recent employment trends such as more part time work, less overtime, job sharing, and phased retirement.

Some employment plans and employer coalitions have been voices for change within the health care system.  Much of the current emphasis on pay for performance and quality measurement got its big push form employers and unions.  Many employers have aggressive Wellness initiatives at their work places.

The ideal reform effort will relieve big businesses of the disproportionate share they now pay for health care and make health care more affordable for small businesses and non-profits, while preserving that positive voice advocating for employee health and the welfare of health care.