Taxing Health Insurance Companies to Pay for Health Care

The Congress has investigated about every conceivable way to tax people to pay for the health care proposals—a millionaire’s tax, bigger taxes on home mortgages and charitable contributions, and a couple of dozen more ideas.

Now Congress looks to be the most interested in taxing insurance companies to pay for a big chunk of their health care proposals. The new taxes would come in two parts––a 35% excise tax on any health benefit cost above an $8,000 single and $21,000 family annual premium as well as a flat $6 billion annual tax on the industry to be allocated among the companies proportionate to their premium.

There is certain logic to this. Taxing high priced benefits could help deflate the health care economy. Taxing all of the health insurance companies that stand to get more than a $1 trillion in new business—most of it in the from new private insurance and Medicaid subsidies and the rest from the consumer’s share of those new private plan premiums—seems fair at one level.

Calling for a tax on that big rich insurance company also sounds a lot better to the politicians than looking voters straight in the eye and raising their taxes directly.

But what is really going on here is that proponents of these insurance company taxes would just turn the health insurance industry into a new division of the Internal Revenue Service.

To paraphrase Leona Helmsley, insurance companies don’t pay taxes—at least taxes that are directly related to their health insurance policies, as these would be.

I have run a health insurance business. The insurance companies already pay taxes much like the ones being proposed. They are called state premium taxes. They tend to run about 2% of premium on fully insured business.

Do you know what the insurance companies do with these taxes? Since they are tied to premiums they pass them through directly to the policyholder who pays these premiums.

Will the 35% premium tax on high priced benefits apply only to very expensive policies? It will today but the caps would grow with inflation while health care premiums have been growing at about three times that. There is a reason this scheme develops far more revenue in the out-years—because more consumers will be trapped in the new tax not unlike what has happened to the Alternative Minimum Tax (AMT) over the years.

At any rate, whatever the tax, it will be passed through to those who pay the premiums. This is not a theoretical exercise. Taxes like this are what we call a premium load. You can load these costs as long as there are premiums available to load—loadings available.

What’s an “available loading?”


You are available, as the customer, to have these costs passed right straight through as a load on the premiums you already pay. And, that is what the insurance industry has been doing with premium taxes for decades.

And, that is what insurers would do with these taxes. Not like insurance premiums are affordable in the first place.

If this scheme survives, the insurance industry would be a very valuable division of the IRS!

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9 replies »

  1. Your blog is very much good. I am very much impressed by your blog content, i also come across number of sites for the health insurance for the travel insurance and medical insurance, you can also check these are also very much useful for everyone.

  2. Two observations I didn’t see above:
    1. One of the values of a tax on rich benefit plans is that the value of the tax increases as the cost of healthcare goes up. So, if the cost of these plans increases at twice the rate of growth in GDP, so will the value of the tax.
    2. More important, and unlike in the case of the AMT, having the tax go up disproportionately for rich benefit plans if health care costs increase faster than the general rate of inflation will create a pain point to increase the pressure to slow cost growth. Contrast that with the AMT, which doesn’t put a damper on salaries, nor would we want it to, but it just sticks a higher tax rate on the upper middle class than the truly wealthy. I’d agree that a premium tax on rich benefit plans isn’t perfectly designed, but then what is better and realistic for us to pass in 2009?

  3. Worse, facing loss of patients (due to credit drying up)…many providers tend to want to just raise prices (fewer patients? ok, higher prices).
    But this only exacerbates the essential problem: the high prices.

  4. “Taxing high priced benefits could help deflate the health care economy.”
    You used an important word, at this moment in economic time: “deflate.”
    It is a certainty that the ‘health care economy’ will deflate, and few realize this yet.
    The problem is a significant part of the decades long health care inflation was supported by….credit/debt ramping up. In other words, the long, slow, giant credit bubble.
    That bubble is deflating, and health care prices will therefore….
    Just like other industries that have high prices due to easy consumer credit, health care is now going to face a crunch as that consumer credit becomes scarce.
    To avoid massive layoffs and/or bankruptcies, medical providers will need the current reform to be implemented, with the subsidies for lower-income insurance policy buyers….or….face actual *shrinking* revenues.
    Of course, the revenues are likely to shrink before the subsidies arrive, if they do.

  5. Robert have you or anyone actually seen a copy of this? All I can find are summaries of what they intend, I hope it is the people writing the summary and not the people writing the bill but it really sounds like they have no idea how insurance works in the country.
    It is clear they intend to include businesses like mine in the tax, Third Party Administrators. To keep it simple they say I will pay a 35% tax on any plans that cost more then $8000 single. That tax would come to $2800. Depending on what I do I only make $120 to $240 a year per employee. Obviously paying a $2800 tax with $240 in revenue is going to be hard. I can’t legally charge premium so I can’t increase their premium. I don’t have any control over plan design so I can’t cut benefits to fall under this level. It seems my only choice would be to terminate the client and leave the business.
    I also wonder how this is measured, once every 5 years on average a group will have a bad year. If you average $5000 per year for four years then have a bad year where 10 people have high claims the government is going to pile on and tax you 35%?
    I think it is clear from this bill and just about all others being discussed the people in Washington have no idea how things work today let alone how to fix them tomorrow. Unless their goal is just to destroy private insurance and affordable options to large insurance companies, they are doing a great job at that.

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