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Democrats Wrangle Over Taxing ‘Cadillac’ Insurance Plans

January 11, 2010 at 12:00 AM EDT
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Gwen Ifill speaks with economists about the ongoing debate over taxing so-called "Cadillac" health care insurance plans.
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GWEN IFILL: That follows our debate over taxing high-cost insurance plans.

Senate and House Democrats who are hashing out the differences between their health care reform bills behind closed doors have a major disagreement on their hands: how to pay for it. Should high-value insurance plans be taxed, or should high-income households pay the price?

The Senate proposal, which President Obama supports, would raise about $150 billion over six years. The money would come from imposing an excise tax of 40 percent on the portion of any policy that costs more than $8,500 for individuals or $23,000 for families. The Congressional Budget Office estimates that would affect one in five workers by 2016. The White House and some economists argue this approach would rein in health care spending by discouraging excessive insurance coverage.

JOSEPH BIDEN, vice president, United States: The Patient Protection and Affordable Care Act is passed.

GWEN IFILL: Just before the Senate approved its version of health care reform last month, President Obama endorsed the so-called Cadillac tax in a National Public Radio news interview.

U.S. PRESIDENT BARACK OBAMA: I’m on record as saying that taxing Cadillac plans that don’t make people healthier, but just take more money out of their pockets because they’re paying more for insurance than they need to, that’s actually a good idea, and that helps bend the cost curve. That helps to reduce the cost of health care over the long term. I think that’s a smart thing to do.

GWEN IFILL: But House Democrats and labor unions remain steadfast in their opposition to the Cadillac tax, which they argue would harm working people.

Richard Trumka, the president of the AFL-CIO, along with other labor leaders, pressed his argument at the White House today. He also made his case in a speech to the National Press Club.

RICHARD TRUMKA: But, instead of taxing the rich, the Senate bill taxes the middle class by taxing workers’ health plans, not just union members’ health care plans. In fact, most of the 31 million uninsured or insured employees who will be hit by the excise tax are not union members.

GWEN IFILL: House leaders support a plan to raise taxes on families earning a million dollars or more and individuals who earn $500,000 or more.

For more on the pros and the cons of the so-called Cadillac tax, we turn to Jonathan Gruber, a health economist at the Massachusetts Institute of Technology — he is also a paid consultant to the Obama administration — and Josh Bivens, an economist at the Economic Policy Institute, a think tank that receives some money from labor groups.

Welcome to you both.

Jonathan Gruber, why is this a good idea?

JONATHAN GRUBER: Well, thanks for having me on, Gwen.

I think it’s a good idea because we need to look at what happens currently when people make the decision between getting paid in wages or health insurance. If MIT offers to give me a $1,000 raise, I’m only going to take home about $600, because I will get taxed at 40 percent on that raise. If MIT says, here’s $1,000 extra fringe benefit in your health insurance, I get to keep the whole $1,000, because I’m not taxed on that.

That tax subsidy, employer-sponsored insurance, as it’s called, costs our nation about $250 billion a year and leads, by many economists in the Congressional Budget Office’s estimates, to excessive health insurance coverage and rising health care costs.

What this bill would do is slightly scale back that existing tax bias by taxing the most expensive plans on the amount they spend above a certain threshold, and basically scaling back the giveaway we now have to the most expensive health insurance plans.

JONATHAN GRUBER: … scale-back.

GWEN IFILL: Let me just get — get — let Josh Bivens in here now, because he says it’s a giveaway to the existing health insurance plans. What do you say?

JOSH BIVENS, Economic Policy Institute: I don’t know if I would call it a giveaway. I do think it’s not a great idea.

I mean, I think one problem is, it’s often talked — it’s called a Cadillac tax. And the idea is that we’re taxing somehow lavish plans that provide generous coverage. It’s not very well targeted at all. I would be in favor of some sort of well-targeted way to do this, but this is a very poorly targeted policy proposal.

GWEN IFILL: You’re saying the people who benefit from it are people who are just middle-class folks?

JOSH BIVENS: Well, actually, I would say there are reasons why health insurance plans are expensive, and generosity is not necessarily one of them. We have a very dysfunctional health insurance market, and high-cost plans do not equal high-value plans.

In fact, research says that, of the entire spread of health insurance premiums, their cost, only about 4 percent can — of that can be accounted for by generosity of plan. You’re likely to have an expensive plan if you work for a small firm, if you work for a firm with an aging work force. It really is not about Cadillac plans or lavish benefits. It’s just people who happen to work for — in those kinds of workplaces.

So, I think it’s very poorly targeted in that regard.

GWEN IFILL: Jonathan Gruber, are you targeting the right people?

JONATHAN GRUBER: I think you are, Gwen. And I think Josh’s points are right, because I think you need to remember that we’re not talking about a new tax on these people.

We’re talking about saying they currently get an enormous tax break. And we’re going to slightly scale that back and use the money to cover uninsured people.

So, the issue is, are you willing to slightly scale back an existing tax break we give to the most expensive plans to raise $150 billion that makes insurance affordable for the poorest? I think that’s a tradeoff we should be willing to make.

GWEN IFILL: Is a tradeoff? Are we talking about it — let’s get the terminology right first, Josh Bivens. Are we talking about a new tax or are we talking about letting off — relieving someone from a tax break they always were getting?

JOSH BIVENS: Yes, I think that’s a distinction mostly without a difference.

GWEN IFILL: Yes.

JOSH BIVENS: I mean, one way or the other, we’re going to have to finance health care reform with higher taxes on some people relative to what they’re paying today.

GWEN IFILL: But you’re just question — you’re questioning who those people should be?

JOSH BIVENS: And I’m also questioning whether or not this is the best way to do it. I mean, we have a competing proposal in the House reform bill that is a much more progressive tax. It only hits about the top 0.3 percent of income-earners.

This is a much more broadly based tax. The House tax also raises more money, so we need fewer savings from elsewhere in the health care sector. I mean, the one reason why you have got this preference for the excise tax over this House bill, which has a much more progressive surcharge, is the sort of policy virtues that Professor Gruber is talking about.

I just don’t think those policy virtues are anywhere near large enough to justify going with a much less progressive tax.

GWEN IFILL: Jonathan Gruber, when you talk about this tax, when you talk about this so-called Cadillac tax, what is included in it? What actually — what is actually taxed?

JONATHAN GRUBER: Well, what is actually taxed is — is the dollar value of health insurance plans that exceeds that threshold. So, let’s take a simple example. Imagine that my health insurance costs $26,000 a year for my family.

What that means is, I will be taxed on 40 percent of the $3,000 difference between the $23,000 threshold and the $26,000 cost of my plan, or I will pay about $1,200 a year. That is vs. the current tax break I get of about $9,000 a year on that — on that plan. So, it’s scaling back a bit.

And I think the main argument for it — I think Josh laid it out very well, actually. It’s basically a tradeoff between — it is less progressive, although not — not that much less progressive, but somewhat less progressive, than what is proposed in the House.

On the other hand, it’s generally viewed as one of the very few things we know can actually help with health care cost control, which is an important goal of this bill.

GWEN IFILL: Josh Bivens, what if you are a company that has older workers, which so many of these old bricks-and-mortar companies do? Does that mean that you are paying an extra penalty in order to keep them insured?

JOSH BIVENS: Pretty much, yes. I mean, you’re going to have one key reason why you’re going to have health insurance plans that go over this threshold, is if you have got a work force that has a lot of older workers who are more likely to have expensive chronic conditions.

And I think what you’re going to see is — and I think everyone agrees with this — you’re going to see employers scale back on the generosity of their plans to make sure they are not hit by this health insurance tax. When they scale back on the generosity of their plans, you’re going to see higher out-of-pocket costs for people who want to continue consuming the same health care that they were before, and you’re going to see a big risk of sort of exposure to that risk of out-of-pocket costs going on to consumers and households.

GWEN IFILL: There’s a big difference, Jonathan Gruber, right now, in your — the way you add this up, exactly how the money would be saved, how that cost curve would be benefit, and how the money would be saved. You’re saying that, by increasing this tax, you’re basically, in the end, going to increase wages and save money. He’s saying he’s not so sure that will happen.

Am I interpreting that correctly?

JONATHAN GRUBER: That’s exactly right, Gwen.

Basically, when — we agree that one way — the main way employers will react to this tax is by scaling back the generosity of their plans. I would argue that there’s no evidence that that scale-back is actually going to reduce health.

We’re talking about the plans — even at firms with older workers, the plans that exceed this threshold are very, very generous. They will be moved to merely very generous plans. And the result will be higher wages for workers. And those higher wages, 90 percent of those higher wages will go to workers below $200,000 a year in income.

So, it’s basically going to be trading off excessively generous benefits for higher wages for their workers.

GWEN IFILL: Well, let me ask you this, Jonathan Gruber, since you have consulted with the administration on this. A lot of House Democrats think that this is a deal-breaker. What do you do about that?

JONATHAN GRUBER: Well, I think, partly it’s about education. Partly, it’s about getting reasonable conversations, like the ones we’re having here, instead of sort of polemic conversations, which don’t really make the points clear.

I think the other is about compromising. I think the Senate has moved some way — some of the direction of the House with their Medicare tax, additional Medicare tax on the highest income earners. I think it’s about a compromise where you recognize the cost savings potentials of this, recognize the priority of the president, but at the same time move towards the House by having more progressive revenue raising in other contexts, like a Medicare tax on the high earners or a tax — or some small millionaire’s tax.

GWEN IFILL: What about that, Josh Bivens?

JOSH BIVENS: I think some sort of compromise could be useful here.

GWEN IFILL: Like what?

JOSH BIVENS: Well, I mean, one, have the Senate bill move a little bit toward the House on progressivity.

But, then, if you wanted to do some kind of cost-sharing, I mean, one, I think you just have to actually target excessive benefits. And I don’t think the excise tax does it. I mean, one can imagine a way of constructing a tax that goes after plans that are generous in terms of actual actuarial value and actual generosity of coverage, and not just…

GWEN IFILL: What is an excessive — what is an excessive benefit?

JOSH BIVENS: That’s a big problem, too.

I mean, one person’s excessive benefits is another person’s insulation from risk. And you have got people — you know, I’m enough of an economist to actually believe people do trade off wages for these health insurance benefits. And they have kind of voted with their feet. And they clearly value these benefits. And, so, excessive is tough.

But I would say, if we are going to enforce more cost-sharing to bend the cost curve down, which is what this excise tax is all about, we really need to go after costs that do seem to be excessive. And that does not mean expensive. Expensive and generous, in the dysfunctional American health insurance market, they are too very different things.

GWEN IFILL: About — a final point from you, Jonathan Gruber.

JONATHAN GRUBER: Yes. I think this is exactly the kind of conversation we need to have more of in the closing weeks of this debate and recognize the tradeoffs.

I think the key point is, we need the money to make health insurance affordable for low-income people. This is the kind of win-win solution that can raise the money and control health care costs. And I think it’s critical that it be part of the final health care package.

GWEN IFILL: If you can get it passed, right, Josh Bivens?

JOSH BIVENS: Absolutely.

GWEN IFILL: OK.

Thank you both very much.

JOSH BIVENS: Thank you.

JONATHAN GRUBER: You bet. Thanks, Gwen.