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Tax Feud Emerges Over Health Insurance Mandates

September 21, 2009 at 12:00 AM EDT
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A key feature within health care proposals emerging from Congress and the White House is a mandate for all Americans to purchase insurance. But is a mandate a tax? Two experts discuss the topic with Gwen Ifill.

GWEN IFILL: As the health care debate rages, one key common feature has emerged in plans emerging from the House, the Senate, and the White House. All would require Americans who are not covered by employers to purchase insurance on their own, in some instances with government help. Those who don’t would pay a penalty.

Under the Senate version being hashed out in Senator Max Baucus’ Finance Committee this week, uninsured individuals with incomes of between 100 percent and 300 percent of the federal poverty level — up to about $32,000 a year — would be subject to up to $750 a year in penalties. Families of four earning up to roughly $66,000 could be fined up to $1,500 a year, if they remain uncovered. Higher earners could be fined $950 a year for individuals or up to $3,800 a year for families.

The House version would penalize uninsured individuals and families 2.5 percent of their adjusted gross income, topping out at about $4,800 for an individual. Both measures would offer subsidies to low- and moderate-income Americans to offset the cost.

In a round of Sunday morning interviews yesterday, ABC’s George Stephanopoulos asked President Obama, who supports the insurance mandate, whether the new proposed penalties amount to a new tax.

U.S. PRESIDENT BARACK OBAMA: Here’s what’s happening. You and I are both paying $900 bucks on average — our families — in higher premiums because of uncompensated care. Now, what I’ve said is that, if you can’t afford health insurance, you certainly shouldn’t be punished for that. That’s just piling on.

If, on the other hand, we’re giving tax credits, we’ve set up an exchange, you are now part of a big pool, we’ve driven down the costs, we’ve done everything we can, and you actually can afford health insurance, but you’ve just decided, “You know what? I want to take my chances,” and then you get hit by a bus, and you and I have to pay for the emergency room care, that’s…

GEORGE STEPHANOPOULOS, anchor, “This Week”: That may be, but it’s still a tax increase.

BARACK OBAMA: No. That’s not true, George. For us to say that you’ve got to take a responsibility to get health insurance is absolutely not a tax increase. What it’s saying is, is that we’re not going to have other people carrying your burdens for you any more than the fact that right now everybody in America, just about, has to get auto insurance. Nobody considers that a tax increase.

GEORGE STEPHANOPOULOS: But your critics say it is a tax increase.

BARACK OBAMA: My critics say everything is a tax increase. My critics say that I’m taking over every sector of the economy. You know that. Look, we can have a legitimate debate about whether or not we’re going to have an individual mandate or not, but…

GEORGE STEPHANOPOULOS: But you reject that it’s a tax increase?

BARACK OBAMA: I absolutely reject that notion.

GWEN IFILL: But at least one Democrat sees it differently. In the Max Baucus proposal, the penalty provision is explicitly and repeatedly referred to as an “excise tax.”

So how essential is it to require individuals to purchase insurance, and would that be a tax? For that, we turn to Jonathan Gruber, a health economist at the Massachusetts Institute of Technology. He supported a 2006 Massachusetts health reform law that includes a mandate.

And Michael Cannon, director of health policy studies at the libertarian Cato Institute.

All right, let’s start with the pros and cons, Jonathan Gruber, of mandating health coverage. What do you think?

Weighing the benefits of reform

JONATHAN GRUBER, Massachusetts Institute of Technology: Well, I think the major pro is it allows you to undertake the insurance market reforms that are so essential to health care reform.

Right now, for most individuals in America, if they're sick or become sick, they can be denied insurance or be charged exorbitant prices. You can't fix that problem until you get everyone into the insurance pool, so the mandate allows insurance market reform to be possible.

The second pro is that we're now spending a lot of money on those who don't have health insurance who choose not to buy it through uncompensated care. You end those costs by having insurance coverage.

The third benefit is that, quite frankly, the number of individuals who would be better off with low-cost insurance coverage who are choosing not to take it and we help them move towards what would be better for them.

On the other hand, the cons are the mandate only works if it's affordable. That's one con. A second con is the mandate only works if it's administrable. I think in that one we have strong evidence from Massachusetts that it is. And the third is more of a philosophical issue, as the president said, between whether it's appropriate or not for the government to impose this mandate.

GWEN IFILL: Well, Michael Cannon, let's start with the cons and then the pros for you. How's that?

MICHAEL CANNON, Cato Institute: Well, this really is the most sweeping element of all the bills before Congress. Never before has Congress made it compulsory to purchase a particular product just to live in the United States.

And rather than liken this mandate to auto insurance, the Congressional Budget Office has said the closest analog in federal law is actually the draft, rather than anything else in federal law. So it is the most sweeping...

GWEN IFILL: Because if you're a driver, you don't have to have a car.

Choosing to purchase insurance

MICHAEL CANNON: You can avoid the health -- I'm sorry, the auto insurance mandate by divesting yourself of a car. It's much harder to divest yourself of a body, which is what you would need to do to avoid the health insurance mandate.

Now, Jonathan raised an important point which is the philosophical problems that people have with this. People will essentially lose their freedom not to purchase health insurance. Now, that doesn't matter to a lot of people. A lot of people want to purchase health insurance. But even those who want to purchase health insurance will lose their freedom to choose what type of health insurance to purchase.

And we've seen what happened in Massachusetts where they have compulsory health insurance is the government has to say -- or it has to define a minimum level of coverage you have to purchase so that you know if you're complying with the mandate. And what happens is that power is inevitably captured by health care providers who want to force you to purchase coverage for their services.

So since mandate has -- I'm sorry, since Massachusetts has enacted its mandate, it's required residents to purchase 16 additional types of coverage. It has limited the amount of cost-sharing that they can have, which increases their premiums by making them purchase more coverage. And the legislature has 70 bills that are on the docket right now that would require residents to purchase even more coverage. So premiums actually go up when you have compulsory health insurance rather than down.

GWEN IFILL: Let me ask Jonathan Gruber in Massachusetts if that's the way you see the way the bill has become law.

JONATHAN GRUBER: Actually not. In fact, in Massachusetts, we had some of the most generous insurance in the coverage voluntarily -- in the country voluntarily before this law. What we mandated -- and to be fair, I'm on the board that set up these minimum standards -- what our board mandated was an insurance package which was less generous than virtually anyone in the state had. And we carefully designed the insurance package so that it would minimize the number of people who would actually have to buy up.

Moreover, what we've seen is for individuals the cost of buying health insurance has fallen dramatically. It's not gone up. It's fallen, because by mandating insurance we fix the problem with our insurance market.

Here's the key issue.

GWEN IFILL: Go ahead. Go ahead.

JONATHAN GRUBER: The key issue is, a number of states have tried to reform their insurance markets without a mandate, and they've universally failed. I think both Mr. Cannon and I would agree on that, which is they've ended up with incredibly high prices and very small markets. The mandate is the only way to make insurance market reform effective and therefore to lower prices.

A health insurance tax?

GWEN IFILL: How about this discussion that the president was having over the weekend in which obviously Max Baucus doesn't necessarily agree with him on about whether this constitutes a tax. When you fine people for not buying something they're required to buy, is that a tax?

JONATHAN GRUBER: Max Baucus would not disagree with the president. Let's be clear. The mandate itself is not a tax. Now, you can take -- Mr. Cannon and I can debate the linguistics of that, but there's only one authority that matters here, which is the Congressional Budget Office. The Congressional Budget Office decides whether or not this qualifies as a tax, and they've explicitly said this is not a tax.

GWEN IFILL: Let me ask Mr. Cannon. Is this linguistics we're talking about?

MICHAEL CANNON: Well, first, if I could respond to something that Jonathan said previously...


MICHAEL CANNON: ... health insurance premiums in Massachusetts are growing 20 percent to 40 percent faster than in the rest of the country. They are not falling. There are projections that came out recently that premiums will grow by 10 percent in Massachusetts in 2010, next year, whereas they're going to grow by about 5 percent to 7 percent, it's projected, for the rest of the country, so health insurance premiums are not falling in Massachusetts. The opposite is happening.

Now, as for whether a mandate is a tax, the president -- what the president actually said was nobody thinks it's a tax. Actually, I think most economists would agree that it is a tax. The president was overlooking the writings of Princeton health economist Uwe Reinhardt, his own adviser, Larry Summers, who has written that mandates are like a benefits tax -- or, I'm sorry, public programs financed by a benefits tax.

His own appointee to the assistant secretary for planning and evaluation at the Department of Health and Human Services, Sherry Glied, has written that mandates are like a tax. And the Congressional Budget Office has said that the penalties for not complying with the mandate are a tax.

Controlling the cost of a mandate

GWEN IFILL: Professor Gruber, let me ask you about -- a little bit about how this would work. If, for instance, you don't make enough to qualify -- if you make too much to qualify for a subsidy, but not enough to buy private health insurance on your own, where do you fall? Is this universal coverage if you fall into that gray area?

JONATHAN GRUBER: Well, this comes to the number-one issue with a mandate, which is affordability. And basically, what could happen is you come up with a range of people who do not make enough to afford insurance, who have high enough income they can't get subsidies, and that's why the Baucus bill would have a mandate exemption at 10 percent of income. Individuals who had to spend more than 10 percent of their income to get insurance would be exempt from the mandate. So as in the state of Massachusetts, there would be some uninsured individuals exempted to make it affordable.

But the result in Massachusetts is, we've covered about 85 percent of the uninsured. About 85 percent are subject to the mandate. It's true it's a shame we've left out 15 percent, but the victory of covering the other 85 percent I think compensates for that.

GWEN IFILL: Are some of those 15 percent people who've simply decided, just like some drivers decide to drive uninsured, that they're just not going to abide by any of the rules? Is it enforceable?

JONATHAN GRUBER: Oh, it's absolutely enforceable. Most of the people who remain uninsured are people who are exempt under our rules, which allow people who have to spend more than a certain amount of income to be exempt. But many are people who are simply paying the penalty rather than face the mandate.

Individuals have that choice. If they would rather pay the penalty, the $1,000 a year under the Baucus bill rather than have health insurance, that's a choice they can make. Let me be clear...

GWEN IFILL: What about that, Michael? I just wanted to turn to Michael Cannon before we run out of time here to respond on that.

MICHAEL CANNON: They don't have a choice to avoid the mandate and avoid the penalty, which is what they have right now, which is why a compulsory health insurance scheme amounts to a tax. And Professor Gruber mentioned that no one will have to pay more than 10 percent of their earnings in health insurance premiums. Actually, under the Baucus bill, you could pay up to 13 percent or more.

And because the mandate is itself a tax and because the amount that you would have to -- you would be required to spend on health insurance rises with income, you get these strange tax effects called marginal effective tax rates under the Baucus bill which, combined with current law, would give you tax rates of 60 percent or more -- marginal effective tax rates at 60 percent or more for some middle-income families.

GWEN IFILL: And that's just the part of this argument which is about what individuals have to pay. We'll talk at a later date about what corporations would have to do. Jonathan Gruber at MIT in Massachusetts and Michael Cannon from the Cato Institute, thank you both very much.


JONATHAN GRUBER: You're welcome.