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The Case for Taxing “Cadillac” Healthcare Coverage

With President Obama’s plan for healthcare reform recently being dealt a tough blow by the Congressional Budget Office over soaring federal deficit projections, I am beginning to wonder if it is time for the President to modify his stance against taxing “Cadillac” healthcare coverage offered by employers.  It’s no secret what Senator Max Baucus, the Democratic Chairman of the Senate Finance Committee and one of the most powerful people in the healthcare reform debate, thinks President Obama should do.  Senator Baucus has been a vocal advocate of taxing healthcare benefits.  He recently told reporters that taxing employer-sponsored benefits is “the best way to raise money for an overhaul of the healthcare system.”  He has also been somewhat critical of President Obama’s decision to not tax healthcare benefits by saying, “Basically, the president is not helping us.”

In recent days, the Congressional Budget Office (CBO) estimated that the House Democratic legislation would add more than $230 billion to the federal budget deficit.  On the Senate side, Senator Baucus, who has been working with Senate leaders to formulate another plan, has pointed out the difficulties his committee has had with funding reform without some other type of significant revenue.

One way that raises enough revenue to cover well over the $230 billion figure projected by the CBO is through taxing employer-sponsored health benefits.  The nonpartisan Joint Committee on Taxation estimates that taxing employer-sponsored benefits above the value of the Federal Employees Health Benefits Plan (FEHBP), adjusted for inflation, would generate nearly $420 billion over the next 10 years, which would easily fund the difference in the budget gap.  Many other estimates place this number considerably higher.  Furthermore, many experts believe that this policy is a key way to reduce costs, because tax-free benefits encourage more spending on health care.

About 18 months ago, as I worked with a committee that I chaired in Tennessee called the Rolling Hills Group to create a structural model for national healthcare reform, I ran into the same problem that President Obama is facing today.  How do you pay for reform?  After considering several options on how to finance universal insurance, our group kept coming back to the same, single solution – the same one that Senator Baucus is a proponent of, taxing “Cadillac” healthcare benefits.

Under our proposal, we created a basic level of coverage similar to what members of Congress are offered today, known as the FEHBP standard option plan.  This plan is very generous and has been successful in holding down costs compared to other plans.  In order to make sure our plan was budget neutral, we decided we would no longer allow what we consider “Cadillac” coverage benefits to be tax free.  For example, in 2009, under our proposal, any individual policy worth more than $5,871.84 or any family policy worth more than $13,445.64 would be subject to a tax.  Anything less than this amount would be tax free.  For individuals, any amount above the base value of the plan would be considered income.  While for companies, any amount above the base value of the plan would no longer be deductible as a business expense.

We had this idea vetted by the Moran Company, who said that our plan is actuarially sound and budget neutral for the federal government once fully phased in.  Just as a note, in our plan we also derive revenue from Disproportionate Share Payments (DSH) and hold down up front costs by phasing in the reform over a 10 year period.  Disproportionate Share Payments is funding that hospitals receive for treating indigent populations.  Thus, it is reasonable to decrease DSH payments as the uninsured population decreases.

If taxing “Cadillac” coverage raises enough revenue to make healthcare reform budget neutral and encourages less spending on healthcare, why has such an attractive option for reform been pulled off the table amidst the President’s insistence on urgency?  As is usually the case with healthcare reform, the answer may be in the politics.

In recent weeks, several articles have outlined strong opposition by labor unions to the taxation of their healthcare benefits. In the Washington Post, the AFL-CIO stated its opposition to taxing “Cadillac” coverage.  Michael Sullivan, the President of the Sheet Metal Workers Union, has also adamantly stated his opposition to taxing healthcare benefits by saying, “Any bill that taxes health care benefits is dead on arrival.” Understanding these political difficulties, but still seeing the taxing of benefits as a viable way forward, lawmakers have demonstrated that there may be room for compromise.  Senator Baucus himself has hinted that he might consider grandfathering in the taxation of health benefits that are part of a collective-bargaining agreement, which would allow union plans to remain tax-free until new contracts can be negotiated.

Labor unions are not the only ones who have come out against the taxation of “Cadillac” plans, as many large corporations have exhibited significant opposition as well.  However, if healthcare reform is going to happen this year, Congress and President Obama may want to take a harder look at taxing “Cadillac” healthcare benefits as a means of raising revenue and achieving their other healthcare priorities.  I think it is fair to say that if Obama explains to the American people that the Government is only going tax the most lavish of benefits, he might find greater support from the American public for the change in health care that he promised to bring and that this nation so desperately needs.

Clayton McWhorter is a former President and chairman of HCA and current chairman of Clayton Associates and the Rolling Hills Group.  He is the founder of the group SHOUTAmerica, a Nashville based organization that uses social networking and other internet-based technologies to push for change in the healthcare system.

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Kevin Flanagandan y.Larry G.Medical  insuranceHealthyAmerica Recent comment authors
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Kevin Flanagan
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Kevin Flanagan

The problem that I see is that the lawmakers, who by the way get their healthcare paid for by their constituents and come to think of it don’t pay into social security either have no good reason to care who gets penalized. None of these laws affect them individually. National healthcare sounds great but what happens when my monthly health insurance goes from $210 / mo to $630/ mo because I’m considered “Cadillac”. I’ll tell you that I won’t be able to afford my mortgage or savings etc. I live modestly and have a tight budget. Where is any of… Read more »

dan y.
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dan y.

This is typical redistributive b s from a lefty progressive. How is that for progress. I work hard for an employee benefit and I get taxed so some do nothing bone head can go to the doctor when he has a tummy ache. How cool is that?? What happened to this country? What happened to free enterprise? The problems in this country started with pointy headed pseudo intellectuals who have never done anything but go to college taking control back around 1900. This Obama guy is a perfect example.

Larry G.
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Larry G.

Biotech Analyst (Aug 4) says somebody else’s health insurance “is my business, because I, as a taxpayer, am subsidizing your choice of health plan. And the more expensive the plan (i.e., the more “Cadillac” it is), the more I subsidize you”.
Please explain because I don’t see it. Are you talking about employer provided insurance? I buy private health insurance and pay a premium each month to an insurance company. How am I getting subsidized by the taxpayer?

Nate
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Nate

“But if you want to keep health benefits untaxed then give me a tax break for buying my own policy or paying for my own care.”
If the tax deduction really bothers you that much spend the $100 and start a business and pay your premium through there. It takes all of 1-2 hours and will pay for itself.

Medical  insurance
Guest

The federal Health Care Financing Administration, which oversees Medicare, is taking a hard look at hospital over billing because they estimate that the government loses 30 cents to every dollar from fraudulent practices in the medical community. The medicare budget for 2010 is $675 Billion so that is more than $200 billion lost to fraud!
If the government is losing 30% of it’s TOTAL medicare budget to fraud, should they be allowed to increase our taxes and take over the whole healthcare system?

Peter
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Peter

“I’m moving my money off-shore.”
You’re a little late, haven’t you noticed out trade deficit.

Margalit Gur-Arie
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MD as HELL, The Earth is Flat now…. They’ll find your money 🙂

MD as HELL
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MD as HELL

I’m moving my money off-shore.

Peter
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Peter

“Within 2 to 3 years after enacting this “tax”, employers will take the premium paid right up to the level to NOT get taxed and only offer the amount of benefits that those premiums will buy.” Common Sense?, I would tax the employee not the company, as with a company car. But if you want to keep health benefits untaxed then give me a tax break for buying my own policy or paying for my own care. Why should there be preferential treament (I know, there always is) for certain taxpayers? Even if companies reduce benefits which causes many more… Read more »

HealthyAmerica
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HealthyAmerica

This plan makes quite a bit of sense. There needs to be a new source of revenue to help ease the fiscal strain healthcare is currently causing the government. Taxing healthcare benefits is very logical, especially when it is done on a corporate level. This way individuals rarely actually experience a change in their premiums.
While some corporations may resist this tax increase, those that are most aware of the crisis at hand will be willing to make the necessary sacrifices. This initiative could potentially save the country from spiraling into deeper debt that–if left uncontrolled–could leave our country in ruins.

Healthcare
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Healthcare

I think people are overestimating the effect that taxing “Cadillac” coverage would have on the average policy holder. As stated in the article, it’s only policies exceeding the norm that are taxed. Chances are, those who have excessive plans are either the ones who incur the most healthcare costs (and should therefore be putting money back into the system), or those who can afford the tax. I know the public tends to be unwilling to accept any new taxes, but the current bills being proposed are lacking sufficient funding, and something is going to have to give if we want… Read more »

Common Sense
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Common Sense

Within 2 to 3 years after enacting this “tax”, employers will take the premium paid right up to the level to NOT get taxed and only offer the amount of benefits that those premiums will buy. This in turn means that the government now collects no additional tax revenue, that lower income indiviuals now have to pay a higher percentage of premium which causes many to opt-out thus increasing the number of uninsured, and finally causes deductibles, coinsurance, and co-pays to increase to a point that they become unaffordable for lower income individuals – kind of like a tax increase… Read more »

BKM
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BKM

To those of you complaining that fixing health care would mean more people trying to access care – would you really rather stick with the current model where we keep demand down simply because some people can’t pay??? That is horrifying. It is rationing of the worst kind. That is how China addresses its shortage of medical practitioners. Do we want to be like China when it comes to medical care, where people abandon handicapped babies in the street because they can’t afford to pay for surgery? Why don’t we instead try to address the shortage of primary care physicians?

Barry Carol
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Barry Carol

MD as HELL – The shortage of primary care can, I think, be attributed to Medicare payment policy, which drives payment policy for the private payers and to the doctors lobby for opposing optimal use of NP’s. It takes a lot less time to train an NP than a doctor, they’re trained to follow rules and use decision support tools, and, at least according to one expert I heard a year or so back, can handle up to 85% of primary care encounters. Of course, we would have to raise the pay for nursing faculty to reduce the bottleneck there.… Read more »

Margalit Gur-Arie
Guest

Barry, I would be content if Congress decides to pass the healthcare buck to an independent, expert commission or board. I don’t think Congress has the required expertise to define all the cost containment measures needed, nor do they have what it takes to resolve the “coverage” conundrum. Maybe an independent body (a.k.a. FHB) would fare a little better.
As to mortgage benefits, Matthew, your suggestion is practically blasphemy in this country, particularly now… 🙂
Since everybody has a pet peeve here, can we seriously do something about global warming too? It’s sort of related to health… and Cadillacs….