Despite repeatedly hammering Senator McCain during the 2008 election campaign over the possibility of taxing health benefits, President Obama and Senate Democrats have produced a health care bill that is financed by doing just that. While supporters of the benefit tax have asserted that it will only be leveled on so-called "Cadillac plans," conjuring images of investment bankers with coverage for acupuncture and massage therapy, two recent reports suggest that the tax will actually hit middle class workers with fairly standard plans as soon as it goes into effect.
The Senate health care bill, in its current form, levels a 40% excise tax on employer-provided health care plans exceeding a certain price ($23,000 for a family and $8,500 for an individual in 2013). The threshold for the tax would then increase at an annual rate of inflation plus 1%.
Supporters of this funding mechanism, such as Ezra Klein portray the tax as a cost-cutter that will simply encourage employers and employees to forgo unnecessary coverage while replacing benefit coverage with wage increases:
It will encourage employers to purchase cheaper plans for their employees and divert money they've saved into wages, which are taxable income. That means that a number of very generous plans will become more like middle-range plans. They'll have deductibles if they don't already, tighter networks, tiered drug formularies and so forth. Any plan that's lavish enough to even near the tax is going to remain a very generous plan, but it will become less so on the margin.
While Klein and others repeatedly use terms such as "lavish" to describe the plans that would be taxed, a new report from the Communications Workers of America (CWA), finds that fairly standard health care plans will likely be eligible for the tax soon after it is leveled.
The report looks specifically at the Federal Employee Health Benefits (FEHB) program and finds that the exchange’s most popular plan, the Blue Cross Blue Shield (BCBS) Standard plan, which covers 48% of federal workers (about 3.8 million Americans including retirees and dependents), would be eligible for the excise tax in the first year for some workers.
Those with single coverage that includes dental and vision benefits would be taxed in the first year, while family coverage with dental and vision benefits would begin being taxed in the third year. Those who forgo dental and vision benefits under the BCBS Standard plan would still be taxed relatively quickly. Single coverage without dental and vision would begin being taxed in the second year, while family coverage without dental and vision would be taxed by the fifth year.
Moreover, these taxes will quickly become burdensome as the plan costs are expected to grow at triple the rate of the taxable threshold. While the threshold for taxable benefits will likely increase roughly 3% each year (inflation + 1%), the cost of the BCBS Standard plan has increased an average of 9% per year over the past 11 years. As the taxes become punitive, federal employees will be forced to pick cheaper plans with worse benefits.
A second report, prepared for the Office of Personnel Management(OPM) by the Association of Federal Health Organizations examined 11 FEHBP plans covering 75 percent of all federal employees. It found that:
For individual coverage, 5 of the 11 FEHBP plans would face the Senate excise tax within the first three years and that for those with family coverage, 4 of the 11 plans would face the tax in the first six years.
Some may argue that the FEHBP plans are indeed "Cadillacs" and deserve to be taxed.
But in a typical FEHBP plan, federal employees pay 30 percent of the premiums, and out-of pocket costs can raise the employees' share of health costs up to between 33 and 50 percent with the out-of-pocket maximum a relatively high $5,000 to $7,000 – depending on whether in network or not –in the family plan...[Additionally], the average premiums for the BC/BS Standard plans are roughly comparable to the costs of other large employers.
As someone covered under the BCBS standard plan, I can say that while I am thankful that I have such coverage, I certainly wouldn't consider it to be, as Mr. Klein said, "lavish."
Moreover, the benefits offered through the FEHB program are exactly what have been promised to Americans for years, as politician after politician has proclaimed that every American "should have access to the same quality of health care as Congress." Indeed, a FEHB-like exchange (which may have another FEHB-like exchange within it) is one of the center-pieces of the current reform effort.
Now, I am willing to pay higher taxes to provide health care to more Americans. But this should be done through a progressive income tax, not a punitive tax on the health benefits of middle and working class Americans. The health benefit excise tax, as currently imagined, will simply be another blow to the middle class. Passing such a tax would send the message that the days of enjoying decent quality health care coverage on a middle class salary are over. Such luxuries will now be reserved exclusively for the rich while the rest are left to choose among lower cost, low quality health plans.
As Representative Gerry Connolly has said, "Throughout this year, we and Members of the Administration, have assured the public, including more than two million federal employees, that if individuals or families like their current coverage, they will not have to change it. The current excise tax proposal in the Senate could undermine that tenet of health insurance reform,"
So Senate Democrats and President Obama, given that the health care reform bill is going to require all of us to buy insurance from private corporations without having a public option to provide competition or hold down costs, can we at least pay for it without shifting the costs onto the backs of workers?