A Clunker, Not a Cadillac

Posted on Sep 21, 2009

By Marie Cocco

Finally, a health care proposal George W. Bush could love.

Well, maybe not love, but certainly like—especially since the draft plan by Senate Finance Committee Chairman Max Baucus takes its cue about how to pay for expanded health insurance from a tax policy that Bush and other Republicans pushed for years.

Baucus’ idea is to tax “Cadillac” insurance plans—policies that supposedly are so costly and generous they are luxuries—in an effort to raise about $215 billion over the next decade, or roughly a quarter of the $800 billion the Baucus proposal would cost. The words Goldman Sachs are often tossed around by those who support this tax, along with the eye-popping assertion that a handful of top executives at the financial firm have health insurance policies that cost about $40,000 a year.

But there’s a reason Goldman Sachs is intoned as a mantra—and it’s not to use health reform to exact revenge on Wall Street. It is to create a false impression about who would really pay this tax. The intent is to dupe the public into thinking it soaks the rich. In truth, it would stick it to millions in the middle class.

“High cost doesn’t equal high value,” says Elise Gould, a health economist with the Economic Policy Institute who has long studied proposals to tax currently tax-exempt health insurance premiums.

“A plan could be expensive for reasons other than that it’s the most comprehensive. It could be expensive because you are working for a small employer, and small employers have to pay a lot more than large employers even for the same plan,” she says. “The same thing happens if you are in a firm that has a lot of older workers in it. Their premiums are going to be higher not because they have a high-value plan, but just because they’re more costly to insure.”

Then there are workers in high-risk occupations—firefighters, police, mineworkers—who have negotiated comprehensive (and necessary) insurance plans through union contracts.

And then there are people in Wyoming. Average insurance premiums vary widely from state to state. And it’s not only the well-known, high-cost states such as New York that would see residents run over by the “Cadillac” provision. Maine, Alaska, New Hampshire and, yes, Wyoming are among the states where average premiums are unusually high. 

The Baucus proposal—a watered-down version of an idea floated by the Bush administration in 2005—calls for an excise tax of 35 percent on health insurance policies worth $21,000 or more for family coverage. The current average annual premium for families is $13,375, according to the Kaiser Family Foundation. Though the tax would be levied on insurers, the industry already has indicated it would be passed on to consumers.

Baucus’ plan initially exempts 17 high-premium states from the effect of the tax. But that, too, is misleading. The proposal is structured so that the threshold amount for an insurance plan to be taxed would rise with the consumer price index—but not with inflation in health costs, which have been rising much faster than the cost of everything else. Family insurance premiums have risen about 5 percent in the past year, while the price of goods measured by the CPI has been flat or falling.

The mismatch amounts to another hidden tax, because over time, the price of more and more policies would escalate into the “Cadillac” range. The congressional Joint Committee on Taxation, for example, shows the amount to be raised from the premium tax exploding from $5.4 billion in 2013 to $53.7 billion in 2019.

Baucus, who still lacks the votes to pass his measure through the Finance Committee, has said he’s open to suggestions on how to change it. He should drop this tax scheme and find another revenue source.

If the goal is to tax the rich to pay for health reform, the House has at least done this in a straightforward fashion, with its income tax surcharge on the highest-income Americans. If the intent is to promote healthier living, then consideration of the tax on sugary sodas—abandoned after intense industry lobbying—should be reconsidered.

A tax that hurts older workers and the companies that employ them, harms those in dangerous jobs and makes it harder for small businesses to offer insurance is not targeting the luxury market. It’s a clunker that deserves to be junked.

Marie Cocco’s e-mail address is mariecocco(at)washpost.com.

© 2009, Washington Post Writers Group

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