Taxing Health Care Decisions

Information about the Senate health care bill is trickling in -- word is that coverage provisions will cost $849 billion over ten years and the bill will reduce the deficit by $127 billion. The Joint Committee on taxation has also released its analysis of the bill's $370 billion in taxes.

Compared to the Senate Finance bill, this bill would reduce the tax on high-cost insurance plans so it raises around $150 billion instead of $200 billion, and make up the difference with an increase in the Medicare payroll tax for high earners. At least from a fiscal perspective, this is a big mistake.

We've discussed, before, all of the advantages of an excise tax on high cost plans. For one, since the tax is on health insurance, it grows as fast or faster than health care costs, and therefore makes it a sustainable revenue source.

See for example the growth rates of revenue from the excise tax when compared to the payroll tax increase.

Between 2015 and 2019, revenue from the excise tax is expected to double. Revenue from the payroll tax increase is expected to grow only 30%.

In addition to being a growing source of revenue, the excise tax can actually help to control health care cost growth. As a group of 23 prominent economists wrote to President Obama recently:

The excise tax will help curtail the growth of private health insurance premiums by creating incentives to limit the costs of plans to a tax-free amount. In addition, as employers and health plans redesign their benefits to reduce health care premiums, cash wages will increase... This provision offers the most promising approach to reducing private-sector health care costs.

But there is another reason replacing the excise tax with a payroll tax increase is a mistake: Medicare Part A, which gets its revenue from the payroll tax, is dangerously underfunded.

According to the most recent Trustees report, Medicare Part A (also known as Hospital Insurance, or HI) is underfunded by 3.88 percent of payroll over the next 75 years (currently total revenue is around 3% of payroll, meaning taxes would have to more than double if no spending was cut). By 2012, the program's costs will exceed its revenues (if they haven't already), leading to system bankruptcy by 2017.

Using a Medicare payroll tax increase to pay for expanded health insurance coverage will leave it unavailable to help put Medicare on a sustainable path.

(It is true that because of the way the payroll tax is accounted for, an increase could be counted both as an offset for the health bill and as a contribution to the HI trust fund -- but if this is done it would amount to a budget gimmick whereby savings are double counted).

Instead of financing health care reform at the expense of fixing Medicare, we should do it in a way that actually helps us to fix Medicare. That's why it is so important to hold on to (or better yet improve) the excise tax on high cost insurance plans.