The national health care debate has many moving parts, but most of the friction is over how to pay for it. One of the new taxes proposed by both the Senate and the President is a “high-cost plan” excise tax: a 40 percent tax on the value of health insurance premiums that exceed a certain threshold of “high cost.” The tax would be levied against health insurers, but would very likely be passed on to policy holders.
As passed by the Senate, the annual thresholds were $8,500 for individual coverage and $23,000 for family coverage, beginning in 2013. The President proposed increasing the thresholds – to $10,200 and $27,500, respectively – but also postponed the effective date of the tax until 2018.
The stated purpose of the tax is to discourage “Cadillac” plans that are effectively subsidized by the income tax exclusion for employee benefits. Many conservative economists and elected officials have favored eliminating the tax subsidy for employer-sponsored plans and instead provide a tax deduction for the policy holder to help drive incentives and decision-making to the health care consumer. This proposal gives a nod in that direction by providing the disincentive, but no offsetting encouragement for consumers to take cost comparison into their own hands. In fact, it is nothing more or less than a revenue raising exercise.
But is it, as the President and Senate claim, in fact a tax on “high cost” plans? Only if by “high cost” you mean “above average” cost, because by the time 2018 rolls around, about half of health insurance customers will be paying the new tax.
In California, according to the California Health Care Foundation, average premiums in 2009 were $5,136 for individual coverage and $13,524 for family coverage. Over the past five years, premium increases averaged eight percent. Assuming premiums continue to increase at this rate, then by 2018 when this tax takes effect, coverage above $5,105 for individuals and $13,755 for families (in 2009 dollars) will be taxable – or just about today’s average. Most consumers would consider this health care coverage as serviceable, like a Chevrolet. And come 2018, if this tax ever takes effect, they will be wondering where their luxury package went.