Lawmakers Consider Employer Benefits Tax

JONATHAN GRUBER: Yeah, let me jump in on that one because that's the common argument you'll hear. And it's not really quite right because if in the past, you gave up considerable income to get health benefits, then that's the decision you made and that's passed. We're talking about - any reform we're talking about would happen several years in the future. So we'd be saying any existing - way after existing contracts have run out, et cetera - we'd be saying three or four years from now, if you have an expensive health insurance plan, it will be taxed.

But that implies nothing about past tradeoffs you've made with your wages and other things; this is about future contracts that you make. It's just saying, in the future, you should be conscious as you make that tradeoff. If you still choose to make that tradeoff to have expensive health insurance and lower wages, God bless you; that's the American way. But you have to be conscious that you're making that tradeoff, whereas in the past, we were making it more unconsciously.

BETTY ANN BOWSER: Okay, the next question is from Therese Duarte of Laurel, Maryland. And she is a retired federal employee and she asks: "Is my federal health insurance that I've kept in addition to Medicare A and B considered to be a, quote, 'Cadillac plan?'"

JONATHAN GRUBER: I mean, once again, this is going to depend on - this is a definitional question that will vary depending on how they formulate the legislation. I think that typically the wraparound retiree plans, the type she's talking about, would probably not be included. But I think that, you know, that really is up to the details of the legislation.

PAUL FRONSTIN: But it's a great question because it really gets at the heart of what it means to have "Cadillac" coverage. You know, especially when you think about Medicare and whether it's a retiree health plan through a former employer or a plan you buy on your own, the goal of those plans is to eliminate as best you can any cost sharing associated with getting health care. And ultimately, that's perhaps moving towards a "Cadillac plan" more so than what you see in the active worker market.

BETTY ANN BOWSER: Okay, the next question comes from Donald Borisch of Cincinnati, Ohio. And he says: "Is it realistic to think that what is very likely already a very complex law will include the further complexity of adjustments for age when determining what is a Cadillac plan?"

JONATHAN GRUBER: Well, I guess that should be addressed to me since I was the one who raised that issue. I think that adding adjustments for age is a complication. But relative to the kind of complications we're dealing with in this legislation, it's a pretty trivial one, in that basically insurers know or employers know the age mix of people enrolled in the plan. And it's really just not that hard to quickly compute an age factor that adjusts for the age mix of people in the plan. Yes, it's a complication. But I think in the scheme of things we're dealing with in this legislation, it's a pretty minor one.

BETTY ANN BOWSER: Dr. Fronstin?

PAUL FRONSTIN: Yeah, but I think it needs to be combined. If you have any kind of age adjustment, I think it needs to be combined with some kind of adjustment for how premiums are rated. If states are still allowed to raise premiums and there's large variation in premiums from the lowest to the highest, then you're going to have more of an impact on the age adjustments because older groups will be paying more than younger groups. But if there's very tight rate restrictions, then the age bands or age adjustments won't make as much sense.

JONATHAN GRUBER: No, I think in fact the whole idea is not to stop them. I mean, let's be blunt. It's clear absent politics what we'd like to do here, which is what Paul first described. We'd like to include in people's taxable income the difference between the cost of their plan and some cap value. That would have the advantage of making people more cost-conscious in their decisions to purchase expensive plans as well as, as Paul described, being progressive, because the higher tax rate you have, the more tax you'd pay. Politicians have decided that that's difficult and that it'd be easier to try to say, okay, we're going to impose this tax on the insurer.

But the whole idea is that ultimately, it works the same way - that the insurer takes the tax and passes it on in premiums, thereby once again inducing people not to buy expensive plans. If the insurer didn't pass it on, then it wouldn't have the major beneficial effect we're hoping to see from a policy of this type.

BETTY ANN BOWSER: How much traction do you all think this whole idea has on Capitol Hill?

JONATHAN GRUBER: I think that - which, the idea of taxing the insurers or the general idea of tax-exclusion reform?

BETTY ANN BOWSER: Taxing insurance companies.

JONATHAN GRUBER: I think it's got a lot of traction, because I think that unlike the sophisticated questioner, I think most people just assume that, okay, great; it's a tax on insurance companies. That sounds good to me. It's not on me. I think it's a very sort of clever cover, if you will, for making people pay more for the more expensive plans.

BETTY ANN BOWSER: Okay, here's a question from Cassie Tucker of Crawfordville, Florida. "How does free Cadillac health-care coverage for CEOs, Congress and other people with free health care by their employer fit into this equation? Will they have to start paying like the rest of us?"

JONATHAN GRUBER: Well, I think that there's - I'm not quite sure what the writer means by free. One definition of free is, is there a contribution by employees towards their health insurance? And in fact, there, Congress is more like you and I. People in Congress actually contribute a decent amount towards the cost of their health insurance. CEOs often probably don't. And clearly, one reaction firms might have to this policy is to say, wow, you're now taxed on the expensive plan; you're not taxed on the non-expensive plan. We are going to have you, the employee, bear some of the cost to make sure you have an incentive to choose the less expensive plan. Most firms do that now. But the few firms that don't - I could see a movement in that direction.

BETTY ANN BOWSER: Dr. Fronstin?

PAUL FRONSTIN: Yeah, I guess I would add to that by saying it's easy to go after the CEOs with Cadillac coverage. When you see that Goldman Sachs is spending about $40,000 for their top executives for health reform, people think that's outrageous. Even if those benefits are taxed and others aren't, I don't know that we should expect CEOs to change their behavior when it comes to their health care. When you look at the kind of income that they're making, it means they'll probably continue to use health care at the rate they're using it. But it will be considered taxable income. And you know, if you're talking about a 35-percent tax on $40,000 or some portion of that, it's a drop in the bucket really for those people.

JONATHAN GRUBER: Well, I think, you know, the question that's raised is how much will employers react to this by dropping their coverage. I think, you know, we have pretty solid estimates on this, including ones from the joint tax committee that say that even if you got rid of the entire exclusion, even if you taxed everybody on the entire value of their insurance, there would be a pretty modest drop in employer-sponsored insurance. They estimate about 10 million people, which is a lot of people but a very small share of the 170 million employer-insured.

But with a cap, their estimates are that fewer than a million people would be dropped from their employer-sponsored insurance. It's just a tiny effect on the number of people covered by employer-sponsored insurance. And that was with a cap that was like at the average premium. With a cap in the range they're talking about now, there's going to be a really, really trivial effect on the number of people with employer-sponsored insurance.

PAUL FRONSTIN: Yeah, employers offer coverage because they believe they need to, to be competitive in the labor markets. And if that changes, they'll drop benefits. If they continue to feel they need to offer benefits to be competitive, they will. And it's hard to look at the changes in the tax treatment of health benefits in isolation when there's so many other things that are being proposed in health reform that we're likely to see that would also affect whether or not employers would continue offering coverage.

BETTY ANN BOWSER: Here's an interesting question from Cliff from Washington, D.C. And he says: "Some people who are HIV-positive gear themselves to jobs with good, or at least as good as they can get, health care. How would they be affected by taxed benefits?"

JONATHAN GRUBER: Well, I think this comes to the issue that Paul raised on the television show, which is that benefit costs are high both because individuals have very generous coverage but also because some individuals may be sick. And I think here this is where it ties into the larger context of reform. If you did this cap just as a policy in a vacuum, that would be, I think, a legitimate concern. The notion of doing the context of reform that small businesses will now be buying insurance on a basis where they don't pay more for having sick enrollees, they just pay more based on the age of their enrollees. So with an age adjustment, you wouldn't have a problem based on people having AIDS or other chronic illnesses.

For very large firms, the pools are large enough that this would also not be a concern, because one person with AIDS isn't really going to affect the average cost of the insurance. The issue still arises for middle-sized firms, you know more than 50 but say less than a few hundred. And that is an issue that is there with this tax cap proposal.