In the healthcare debate, a long list of ways to pay is considered

Kaiser Health NewsJuly 26, 2009 

WASHINGTON — Scrambling for additional money to pay for a health care overhaul, Senate Democrats are eyeing the insurance industry for as much as $100 billion over 10 years.

But the ideas they're exploring, including taxing companies that sell costly policies and imposing a "windfall" tax on profits, all have drawbacks and could have unintended consequences.

"The biggest problem is, at the end of the day, these taxes will be passed on to consumers in form of higher premiums," said Dan Mendelson, president of the consulting firm Avalere Health in Washington.

The debate over taxing insurers comes amid increasingly harsh rhetoric from Democratic lawmakers and the White House about insurance premiums and industry profits. They question whether the insurance industry, which is likely to gain millions of new customers from a health overhaul, has contributed enough to help pay for it.

Insurers say they are doing their share by promising to stop rejecting applicants with medical conditions if health reform legislation also includes a requirement that almost every American carry insurance.

Here are some of the ideas under consideration:

- Taxing insurers for selling policies with high premiums:

In theory, proponents say, taxing high-cost "Cadillac" policies should dissuade sales of plans with overly generous benefits, which some economists say encourages overuse of medical services.

But not all premiums are high because the plans offer overly rich benefits, said Paul Fronstin of the Employee Benefit Research Institute. Sometimes they reflect that employers have disproportionately more older or sicker workers, or are in a more expensive part of the country.

In addition, lawmakers haven't yet defined a "Cadillac" plan. One idea calls for taxing insurers that sell policies costing 30 percent to 60 percent more than a popular policy offered to federal workers. Such premiums would be nearly $19,000 and $23,000, respectively. Another possibility is using $25,000 as the threshold.

About nine percent of workers have family coverage premiums of $17,000 or more, according to the nonpartisan Kaiser Family Foundation. (KHN is a program of the foundation.) Less than one percent have premiums of $25,000 or more.

To avoid taxation, employers or insurers might tinker with the benefits to drive the premium down just low enough to miss the threshold. That would achieve one goal — reducing premium costs — but would reduce the tax take, Fronstin said.

Unions oppose the idea. "A tax on insurers is going to be passed on to workers, either by increased premiums or some other way," John Sweeney, president of the AFL-CIO, said Friday.

But others say that some insurers won't pass the increased cost along to consumers, but will instead tout their lower premiums as a way to pick up new customers.

Another complication involves companies that don't buy insurance coverage for their employees but instead pay the medical bills directly _ these are deemed "self-insured."

Just over half of workers with insurance are covered by policies that are partially or fully self-funded by employers. If such employers are taxed on their coverage, or can't fully deduct the cost of providing benefits as a business expense, "they are done" providing the benefit, Fronstin predicted.

- Taxing insurers' profits:

Sen. Charles Schumer, D. -N.Y., last week decried growth in health insurance industry profits over the past decade and suggested a tax on profits that could garner as much as $100 billion over 10 years. Profits for the 10 largest companies grew fivefold since 2000, said Schumer, who said the industry need to pay its "fair share" toward reform.

Robert Zirkelbach, spokesman for industry trade group America's Health Insurance Plans, said the focus on industry profits is misplaced, and that for every dollar spent on health care nationally, about a penny goes to insurers' profits.

Insurers' profit margins - or the amount left over after companies pay for medical services, taxes, salaries and other expenses - averaged 7.1 percent in 2005; 5.8 percent in 2006 and 6.2 percent in 2007, but fell last year to an average of 2.2 percent, according to Fortune magazine.

- Taxing each new policy sold:

Dubbed 'pay-for-volume,' the idea is to "ensure that those who are actually benefitting from reform would also be funding it," said Mendelson of Avalere Health.

In theory, if everyone in the U.S. were required to have insurance, the industry might pick up more than 47 million new customers.

But imposing such a fee could prove be tricky. Mendelson said it would be hard to know which new customers signed up as a result of the health overhaul legislation, thus triggering a fee on the insurer.

- Ending some tax-free coverage:

This idea would set a threshold for premium increases, said Robert Laszewski, an industry consultant who has promoted such an approach. Insurers whose premiums rise faster than a specific rate would no longer be able to sell products that are tax-free for workers. For example, if the economy grows by 3 percent a year, the premiums could grow no more than 6 percent to retain the policies' tax-exempt status.

That could prompt workers and employers to switch to less expensive policies and would encourage doctors and hospitals to work with insurers to keep costs down, Laszewski said. But others are skeptical that the change would give insurers much leverage over providers.

- End or cap the tax exemption for employment based insurance.

While President Obama and leading congressional Democrats have said they don't like this idea, it's still in the mix, according to some lawmakers.

Currently, workers with such job-based insurance don't pay taxes on the value of those benefits, a loophole that costs the U.S. Treasury about $226 billion a year. Sen. Kent Conrad, D-N.D., said this week that one of the options still being debated is taxing workers on the value of any policy worth more than $25,000 a year.

Such a tax is strongly opposed by unions, who often have negotiated policies with generous coverage and higher premiums. Obama also has said he prefers other ways to raise money to pay for health reform, saying it's not the time to burden the middle class with a new tax.

(Kaiser Health News is an editorially independent news service and is a program of the Kaiser Family Foundation, a nonpartisan health care policy research organization that's not affiliated with Kaiser Permanente.)

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