When you ASSume – the excise tax on high cost plans

The following excerpt is from a letter sent to President Obama by 23-noted PhD economist from major US universities.  In that letter, they support the President’s health care reform strategy and comment on several elements including the one below.

Excise tax on high-cost insurance plans. 

The Senate Finance Committee’s bill includes an excise tax on high-cost health insurance plans. Like any tax, the excise tax will raise federal revenues, but it has additional advantages for the health care system that are essential. The excise tax will help curtail the growth of private health insurance premiums by creating incentives to limit the costs of plans to a tax-free amount. In addition, as employers and health plans redesign their benefits to reduce health care premiums, cash wages will increase. Analysis of the Senate Finance Committee’s proposal suggests that the excise tax on high-cost insurance plans would increase workers’ take-home pay by more than $300 billion over the next decade. This provision offers the most promising approach to reducing private-sector health care costs while also giving a much needed raise to the tens of millions of Americans who receive insurance through their employers. 

My first reaction to the above was; what are they smoking?  

I have spent the last forty-seven years designing and managing employer health benefits.  I have never heard of any employer that voluntarily provides an overly generous health benefits program. In addition, those employers in the best position to provide such benefit, that is, the largest employers in the U.S. (including state governments) do not use health insurance; there are no premiums to reduce, as these employers are self-insured. These plans cover about seventy million Americans. 

Indeed, no employer with a so-called Cadillac plan in place will leave it that way and pay a 40% excise tax; they will “redesign” their plans.  And what does that mean, it means that the out of pocket costs for plan participants will increase and it also means that it is unlikely that the individual’s premium contribution will decrease as employers look for ways to lower their costs for health care especially in view of the continued increase in costs at well above general inflation. 

Cash wages will increase?  Employers that find a way to manage health care costs after thirty years of trying are unlikely (to say the least) to transfer those savings into wage increases.  

Will the employers who raise the deductible and increase coinsurance and plan to give those savings back in the form of a wage increase, please raise their hands.

“This provision offers the most promising approach to reducing private-sector health care costs…”  Exactly how does reducing the benefits paid by a health benefits plan reduce health care costs?  Changes in plan design, something employers do on an annual basis we should note, do not do one thing to reduce health care costs, what changes do of course is reduce the payment for health care services made by the plan and shift those costs to the plan participants.  Let us also keep in mind that while this is happening, a new cap of flexible spending accounts squeezes the worker further.

It is highly likely that any plans that reach the proposed limits are state governmental plans, union plans such as the plans in place in the auto industry and plans that are in high cost areas of the country.  In any case, lowering the value of these plans is a lot easier (and a lot easier to assume) than done. 

Finally, one has to ask, how many such plans actually exist?  Whatever the number may be it is relatively small after years of cost cutting by employers. 

I guess the old saying still stands, you know what happens when you assume.

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