A Tax on Working Families Benefits – A Wrong Direction
By Alan J. Kilar
A tax on middle-class health benefits is the wrong way to finance health care reform. The U.S. Senate health care bill, the Patient Protection and Affordable Care Act (H.R. 3590), would tax plans worth more than $8,500 per year for individuals and $23,000 per year for families. (For workers in high-risk occupations and for retirees 55 or older, the bill would tax plans worth more than $9,850 for individuals and $26,000 for families. And in 17 high-cost states, thresholds would be increased by 20 percent in 2013, 10 percent in 2014 and 5 percent in 2015.)
The tax would hurt one in five workers with health benefits and more over time.This would amount to an enormous tax on workers’ health care benefits. The Senate’s benefits tax would affect 19 percent of workers with employer-provided health coverage in 2016, according to the Congressional Budget Office (CBO). The international benefits consulting firm Mercer similarly estimates that the tax would hit a fifth of all employers after it becomes effective in 2013.
More and more workers and employers would be affected in subsequent years because the threshold amount at which the tax applies would rise at a much slower rate than plan costs are expected to rise. The CBO projects that revenues from the proposal would increase by 10 percent to 15 percent over the second decade. So over time, the tax would hit lower and lower cost plans.Whether health benefits are taxed has little to do with generosity of benefits and more to do with industry and geography.
The tax would affect many plans that have relatively high costs for reasons that have nothing to do with the generosity of benefits. According to Linda Havlin, a partner with Mercer, “It’s important to note that not all the plans that would be subject to the tax are particularly generous. There are other factors besides plan design that drive up cost.”
In fact, according to a recent study published by the prestigious journal Health Affairs, only 3.7 percent of the variation in the cost of family plans can be explained by benefit design, and only 6.1 percent can be explained by benefit design plus plan type (HMO, PPO, POS or high-deductible). The same Health Affairs study found that two powerful variables explaining the variation in premiums among plans are industry (which may capture characteristics such as health status) and the cost of medical inputs in particular geographical areas, both of which are beyond a firm’s control.
According to the actuarial consulting firm Milliman, “whether someone hits the [excise tax] ceiling is not so much driven by benefit richness as it is by age, gender, profession, health status and the geography of the covered population.”
The tax would result in increased costs to workers and benefit cuts.
For some workers, the benefits tax would mean higher premiums, as insurers increase premiums by the amount of the tax.
For the majority of affected workers, however, the benefits tax would mean higher out of-pocket costs, as employers avoid the tax by offering health plans that increase cost sharing and cover fewer services.
According to a Mercer survey of 465 health plan sponsors, 63 percent say they would cut covered benefits to avoid paying the excise tax, 23 percent would maintain their current plan and pass along the tax to their employees and only 2 percent would absorb the new tax themselves.
Also according to the Mercer survey, 7 percent of employers would terminate their plans altogether in response to the tax. Of small employers, which typically offer only one health plan, 9 percent would terminate their plans, potentially forcing their employees into the individual market.
Professors Joseph White and Timothy Jost conclude that “the excise tax is simply a fallback cost-control method that targets beneficiaries: If health care costs rise too quickly, the federal government will slash health insurance benefits for people in the employer-based system, even if costs are high because of the need for care.”
The benefits would thus violate the fundamental commitment of health care reform that workers should be able to keep the health care coverage they have now.
One of the principal goals of health care reform is to guarantee quality, affordable health care for working families as health care costs spiral out of control. This benefits tax, by contrast, would raise health care costs for workers, including some of the most vulnerable workers—workers in small firms, workers in firms with sicker employees and workers in firms with older employees.
Advocates for the benefits tax argue that it would be a “win-win” for workers, since employers would replace lost health benefits with increased wages .
However, the Mercer survey found that “less than a fifth of respondents (16 percent) say they would convert heir cost savings into higher pay.” It is especially unlikely that retirees whose benefits are cut to avoid the tax would see any corresponding increase in wages.A benefits tax will not lower health care costs.
Advocates for the excise tax also argue that it is essential to “bend the curve” of health care costs and expenditures. However, a recent report by the Commonwealth Fund found that “there is little empirical evidence that such a tax would have a substantial effect on health care spending.”
The key to reining in health care spending is to get providers to deliver care in more cost effective ways. Increasing out-of-pocket costs for workers may actually lead consumers to forgo necessary care and make counterproductive health care decisions. There are better ways to pay for health care reform. The U.S. House bill pays for health care reform through surtax on the very wealthiest earners, who benefited so much from Bush-era tax cuts, not through a benefits tax. The House bill gets it right.
In short, the Senate’s benefits tax would shift costs onto the backs of workers, it is unnecessary, it would be politically disastrous, and there is very little evidence that it would have a substantial effect on national health care spending.
So what can you do?
Call or email our US Senators and tell them “no tax on our benefits”. Call Senator Debbie Stabenow: 133 Hart Senate Office Building ,Washington, DC 20510 Phone: (202) 224-4822, e-mail:
Sen. Carl Levin; 269 Russell Senate Office Bldg, Washington, DC, 20510, Phone (202) 224-6221, email: levin.senate.gov/contact/